Race to the Euro: Why Latvia Joined Earlier Than Lithuania?

How can we explain different dates of euro adoption in Latvia and Lithuania? Latvia joined the euro area in 2014, while Lithuania will only become a member in 2015. The diverging experience is surprising because Lithuania was initially expected to join first. Furthermore, Latvia suffered a more pronounced economic crisis in 2008-10 which created higher challenges for euro adoption in terms of meeting fiscal criteria. The paper also reveals that the willingness to adopt the euro varied in these countries over time. This willingness was higher in Lithuania during the first couple of years after joining the EU. Nevertheless, during the last economic crisis Latvian politicians’ resolve to adopt the euro increased substantially, while no such change could be observed in Lithuania.

This paper aims to explain the variation across the two countries and over time by looking at these potential theoretical explanations: economic-structural factors (the degree of satisfaction of optimum currency area criteria), societal opinion, interest group preferences, identity issues as well as domestic political processes (electoral processes, influence of political parties and political leaders). It is found that a satisfactory explanation cannot be achieved relying on economic-structural factors, societal opinion, interest group preferences or identity issues. Instead, it is argued that the explanation lies in domestic political processes related to elections and continuity of economic programs pursued during the economic crisis combined with the perceived vulnerability which grew in Latvia due to the higher shock induced by the economic downturn.