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Latvia heads for euroland in 2014

Latvia is one of EU's smaller members with a population of just over two million, but its decision to join the euro has a symbolic impact since the country has become a poster child for the successful application of austerity.

Latvia euro zone crisis 2013 06 05Enlarge
A woman counts her Latvian lats at a currency exchange office in Riga on June 5, 2013. Unfazed by the eurozone's lumbering debt crisis, Latvia -- an ex-Soviet nation of two million people -- has requested EU approval for entry as the zone's 18th member on January 1, 2014. A majority of Latvians oppose their government's drive to join the eurozone and do not favour the currency switch. AFP PHOTO / ILMARS ZNOTINS (Photo credit should read ILMARS ZNOTINS/AFP/Getty Images) (ILMARS ZNOTINS/AFP/Getty Images)

BRUSSELS, Belgium — The embattled euro-zone looks set to receive reinforcements after Latvia got the green light Wednesday to become the 18th member of the currency zone on New Year's Day 2014.

"Latvia's desire to adopt the euro is a sign of confidence in our common currency," said Olli Rehn, the European Union's economic affairs commissioner. "It is further evidence that those who predicted a disintegration of the euro were indeed behind the curb and simply wrong."

Latvia is one of EU's smaller members with a population of just over two million, but its decision to join the euro has a symbolic impact since the country has become a poster child for the successful application of austerity.

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It suffered the sharpest recession of any European country in 2009 when the economy contracted by over 17.7 percent in 2009. After applying rigorous austerity measures, it has bounced back with the EU's fastest growth rate, hitting 5.6 percent last year.

Given it current economic health numbers, some are asking why it would want to join the crisis-ridden currency bloc.

The Latvian government sees membership as confirming its re-entry into Europe's political and economic mainstream following the grim decades of Soviet rule that ended in 1991.

Although many Latvians cherish their currency, the lat, as a symbol of hard won independence, the center-right government of Prime Minister Valdis Dombrovskis believes adopting the euro will boost stability, protect the country against speculative attacks and give it a stronger voice within Europe.

The lat has long been pegged to the euro and Dombrovskis resisted calls to devalue during the downturn, arguing that breaking the link would risk greater instability. Neighboring Estonia adopted the euro in 2011 and the third Baltic republic, Lithuania, hopes to join in 2015.

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Underlying the drive for euro membership is the deep rooted desire of the Baltic states to cement their departure from the Russian sphere of influence.

Latvia's continued close economic ties with its giant eastern neighbor where underscored by a word of warning from the European Central Bank even as it backed the euro-zone membership bid.

In its assessment, the ECB highlighted the potential risks to financial stability stemming from "the reliance of a significant part of the banking sector on non-resident deposits as a source of funding."

Deposits from outside the EU total $9 billion - or a third of Latvia's gross domestic product - much of that is believed to come from Russia.

To join the euro-zone, nations need the approval of the European Commission and the ECB based on hitting targets of on low inflation, budget deficits and debt. The national governments of EU member countries and the European Parliament, still have to give their backing, but they are unlikely to block Latvia's entry.

 

http://www.globalpost.com/dispatch/news/regions/europe/130506/latvia-euro-zone-economic-crisis-2014