Latvia to become 18th eurozone member from 2014

from BBC News…

June 5, 2013

Latvia will become the 18th country to use the euro after being approved for membership by the European Commission.

In a report, the Commission confirmed that the Baltic state had met the criteria for joining the single currency.

Latvia is keen to strengthen ties with western Europe and reduce its dependency on Russia.

Officials said the eurozone had defied those who predicted it would collapse under the sovereign debt crisis.

Latvia has already experienced the downside of being in a currency union.

It has had a financial crisis of its own at a time when it had a policy of fixing its exchange rate against the Euro. It chose to stick with that policy. Latvia did not seek to regain lost competitiveness by devaluing the currency, which many countries have done in past financial crises.

Instead, it followed the path of troubled countries such as Greece and Ireland already using the Euro and went for what’s called “internal devaluation”, restoring competitiveness through austerity.

Although not a Eurozone member, Latvia in effect accepted the constraints that membership would have imposed. It has been very painful.

Economic activity is recovering but it is even now 12% below its pre-crisis peak. Unemployment is also moving in the right direction but it remains high at 12.4%, despite significant emigration.

‘Widespread enthusiasm’

The country will start using the currency at the beginning of 2014 after meeting the criteria for membership, including low inflation and long-term interest rates, as well as low public debt.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Latvia’s desire to adopt the euro was a sign of confidence in the single currency.

“Those who predicted a disintegration of the euro…were simply wrong,” Rehn told a news conference.

The BBC Brussels correspondent, Matthew Price, said that unlike some established members of the zone, Latvia was well within the economic limits set by Brussels for joining.

“In much of Eastern Europe there’s widespread enthusiasm – certainly among policy makers – for joining the single currency,” he noted.

“However, polls suggest that many in the country are worried the switch could drive prices higher.”

Anti-euro parties won more than half of the vote in elections in the capital, Riga, last weekend.

Financial risk

Latvia underwent one of Europe’s toughest austerity programmes after the 2008-2009 financial crisis knocked a fifth off its GDP.

Euro entry criteria:

  • Low inflation
  • Low long-term interest rates
  • A stable exchange rate
  • Low public debt
  • Low public deficits

It received a 7.5bn euro bailout in 2008, but it has now repaid the loans.

The membership still has to be approved by EU leaders and the European Parliament, but that is seen as a formality.

EU finance ministers are expected to sign off the accession in July.

The European Central Bank (ECB) also gave its blessing to Latvia on Wednesday ahead of the Commission’s announcement, but warned high foreign deposits in its banks were a risk to financial stability.

“The reliance by a significant part of the banking sector on non-resident deposits as a source of funding, while not a recent phenomenon, is again on the rise and represents an important risk to financial stability,” the ECB said.

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