Adding instability to instability, not sure if is the right time to expand the euro

NEW YORK - June 5, 2013 - PRLog -- Why Latvia to the Euro in 2014? Adding Latvia to the unstable euro mix doesn’t bring stability to the table, it adds to the instability. As an analyst that had a front seat view in watching and opining on the recent global financial crisis, European banks, and the severe recession in the Baltic region, the European Commission’s confirmation that Latvia will become the 18th country to use the Euro, while not unexpected, still causes pause. "After all, in my view, adding another recovering, economy to the unstable single currency zone does not build confidence in the eurozone. Indeed, it may suggest just the opposite, which is the eurozone is set on growth despite a three-year sovereign debt crisis and growth despite significant instability" said Steve Picarillo, lead analyst at Creative Advisory Group, Inc. in a statement.

Entrepreneurs would not consider adding a weak, struggling company to another struggling enterprise and expect it to flourish, unless the combination helps eliminate the instability. Adding Latvia to the euro mix doesn’t bring stability to the table. "To me it looks like its ‘growth for growth’s sake’ and adding Latvia, at this time is just an attempt (not sure if it’s a successful) to show a vote of confidence in the shared currency and disproves predictions that the eurozone might break up." continued Mr. Picarillo. "I'm not buying it. The timing is not right, its either too early or too late."

It is true that economic activity in Latvia is recovering, but it remains 12% below its pre-crisis peak. Unemployment, while improving, remains high at 12.4%, despite significant outward immigration. Positively, it does have low inflation, interest rates and low long-term and public debt.  Latvia is looking to strengthen ties with Western Europe and reduce its dependency on Russia. All three Baltic countries are enthusiastic about integration with the EU in part due to fear of domination by their neighbor Russia. Latvia, Lithuania and Estonia were forcibly incorporated into the Soviet Union during the Second World War and only regained their independence in 1991.

Latvia’s downturn and recovery program was particularly painful. The country experienced the downside of being in a currency union. During its most recent financial crisis, it remained true to its policy of fixing its exchange rate against the Euro. Latvia did not seek to regain lost competitiveness by devaluing the currency, which many countries have done in past financial crises. But instead, it followed the course of distressed countries such as Greece and Ireland and went for so called  "internal devaluation", restoring competitiveness through austerity. In reality, the country acted as if it was a eurozone member, and accepted the constraints that membership would have imposed. It was an agonizing exercise as the austerity program cut the country’s GDP by 20%.  While the economy js seeing strong growth, it will likely be a long-term struggle to fully recover the loss in GDP.

Furthermore, Latvia’s banking sector has a considerable reliance on non-resident deposits as a source of funding. While this is not a new phenomenon but add to the risk mix. In fact foreign deposits are rising and add a key risk to financial stability. Experience has shown a general lack of “stickiness” to these deposits. As such, another economic hiccup could lead to a significant outflow of deposits. This could undermine the stability of the banks, which was a problem during the recent rescue of Cyprus, the latest eurozone member to receive a bailout. "The potential increase in prices that may accompany the introduction of the Euro in 2014 may be the spice that causes the hiccup," Mr. Picarillo concluded. "Hopefully this will be a non-event and will prove opposite of what is discussed above. So, I guess its time to retool ATMs, parking meters, and vending machines, assuming they even take cash."


Creative Advisory Group, Inc.  was founded by Steve Picarillo to house his various advisory efforts. Mr. Picarillo’s credentials can be found at www.stevepicarillo.com.

Steve Picarillo is an internationally known financial executive and author. Steve has spent most of his career on “Wall Street” as a lead analyst covering global financial institutions. Mr. Picarillo recently launched several businesses, including consulting services to large financial institutions, a cost savings consulting services focusing on small and mid-sized companies, and a franchise consulting business. Steve is also a branding expert, an expert on the global economic environment, and a motivational speaker.

Steve publishes several blogs with topics that include discussions on the economic environment and operating a business in this still uncertain economic environmen. These newsletters will be distributed on a “ by request only” basis.

To receive Steve’s blogs and articles, email steve@creativeadvisorygroup.com with OPT IN as subject.

Related websites include www.stevepicarillo.com, www.creativeadvisorygroup.com and www.creativefranchisegroup.com.