Bye-bye lats, hello €uro

RIGA -  Latvia looks set to become the 18th EU member state to join the eurozone, giving much needed confidence to the troubled single-currency at a time when the future of the monetary union is being threatened by the bloc’s economic fragility.

The Baltic country announced on March 4 that it had formally applied to join the euro by January 2014. This move comes after Latvia successfully met key financial conditions, including low levels of inflation and fiscal debt.
After he signed the application, Latvia’s Finance Minister Andris Vilks informed reporters that, “This is a day that will enter Latvia’s history.” Latvia’s domestic currency has been pegged to the euro since 2004.

However, despite the center-right government’s enthusiasm for the euro, recent polls in Latvia suggest that about two-thirds of the country’s 2.2m population is opposed to joining the single currency. Latvia’s Prime Minister Valdis Dombrovskis admitted in an interview with the Financial Times last week that the political uncertainty in Italy was hardly the ideal backdrop for Latvia’s euro entry, but he said that it still made economic, political and geopolitical sense for Latvia to join.

“It will serve as a positive sign of the financial and political stability of Latvia. It was clear from when we gained independence that we belong to Europe, not to the grey zone in between Europe and Russia,” he said.
Dombrovskis, who led one of Europe’s toughest austerity programs as part of an effort to keep Latvia on track to enter the euro, insisted that a sceptical public – only 36 percent of people support euro entry according to a recent poll – would be won over.

“I would say gradually the situation is improving, it is improving from low levels. It is not the euro as a currency crisis but a financial and economic crisis in certain countries, a bit like we had in Latvia,” he said.
The European Commission and the European Central Bank, which will have to approve Latvia’s entry, are likely to view its application favorably, as the Baltic country is seen as a poster child for the effectiveness of tough austerity measures prescribed by Brussels during the crisis.

Moreover, the sovereign debt crisis that has engulfed the eurozone over the past three years has led several analysts to bet on the collapse of the euro and has given rise to populist demands in several countries, including Italy, France and Greece, to exit the currency.

However, there are some objectors to Latvian membership, particularly France. But eurozone officials say French objections are more political than substantive, worried that the country could become a close German ally.
Latvia’s entry to the eurozone would make it the fourth former communist Eastern European state to join the single currency after Slovakia, Slovenia and Estonia. Lithuania is expected to apply in the not too distant future with a real goal of obtaining membership in 2015.

The Czech Republic and Poland are also scheduled to apply in the next few years, although they are taking their time as they fear that the eurozone’s troubles could have a stronger contagion effect if they joined the troubled currency.
All new EU member states are required to join the euro once they have met key financial requisites. Ollie Rehn, the EU’s economic chief, said his office would produce a report on Latvia’s prospects by the end of May or June, but he declined to say whether he believed the country was ready to join. “Let’s not jump to conclusions,” Rehn said. “Let’s first draft the report.”