Benefits and risks of the Eurozone

The paper aims to analyse the main factors leading to the present eurozone crisis, evaluates the measures taken to overcome the crisis, and weights the benefits and risks of the euro adoption in Latvia on 1st January 2014. By applying the analytical research method, the author scrutinises the solutions to the crisis proposed by the EU institutions, including European Stability Mechanism, the Treaty on Stability, Coordination and Governance, the proposals for a banking union, and the European Central Bank’s intervention in the secondary bond markets to evaluate them and to conclude whether these decisions and proposed steps have been adequate crisis solutions. The article concludes that among other conditions for restoring the confidence to the eurozone, its member states have to comply with a strict budget discipline and rational public sector financing which must be the lesson learned for the future. The paper illustrates that it is difficult to establish a clear causal link between the euro adoption and the changes of the main economic indicators. The economic indicators are linked to the macroeconomic conjuncture and therefore it is hard to distinguish the impact of the euro on the economy from cyclical changes of the economy itself. After looking at the possible risks and costs associated with the euro adoption in Latvia, the author concludes that joining the eurozone will have, in general, a positive impact; yet the exact extent of the impact will depend on the eurozone’s capacity to manage the present risks and future challenges. However, in the case of Latvia, the key advantage of euro adoption is the geopolitical aspect, that is, integration within the eurozone will limit Russia’s ability to increase its economic and political influence and to bring Latvia back to the core of the European integration processes