6%, the hypothetical differential with EMU 17 nominal interest rates required by Latvia to accompany its economic convergence over the next quarter century
+ 6: That’s how many countries have joined the European Monetary Union since 2007. At the rate we’re going, the EMU could expand from 18 to 25 members within ten years, or even more—unless, of course, it sheds a few and actually shrinks. But who’s to know, and how to know, where such a deeply dysfunctional currency bloc is heading?
We’d love to share the enthusiasm (however perfunctory) that customarily surrounds the addition of a new eurozone member. We’d rather not be criticizing what looks like a mad scramble to glue together a steadily rising number of countries that stand next to no chance of functioning properly under the same interest rate—the ECB’s. Unfortunately, we can’t help sensing that Latvia will eventually be going the same road as Greece, Ireland, and Spain. If it does, it won’t be due to mismanagement, as some pundits may fear. It will happen because even with the best of intentions, the Latvians will be powerless to offset the impact of a monetary policy that is inherently unsuited to their situation.
Latvia’s EMU membership offers a good opportunity to step back and focus on a crucial underlying issue often overlooked by economists: fast-tracking insufficiently developed economies into the currency bloc is irresponsible policy (for a slightly different treatment, see our article of July 2012, “From High Hopes to Despair: The Missing Metric in the European Monetary Union”).
Why such a harsh judgment? Because the record shows that economies can’t converge after joining the EMU; they have to do it beforehand.