Latvia gets clearance to become 18th euro member from next year

Wednesday 05 June 2013 19.13
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Latvia to join euro zone from next January
Latvia to join euro zone from next January
ECB says Latvia has met all the criteria to join the euro zone
ECB says Latvia has met all the criteria to join the euro zone

Latvia is ready to become the 18th country using the euro from the start of next year, the European Commission said today.

The decision will be formally approved by European Union finance ministers on July 9.

"The Commission considers that Latvia fulfils the conditions for the adoption of the euro," the Commission, the EU's executive, said in a report on the country's preparations.

Latvia was one of the non-euro member states, along with Romania and Hungary, to receive an EU-IMF financial assistance programme after the 2008 economic crisis.

The Commission said that satisfying the conditions for joining the euro in 2013 was a major achievement.

It said that following painful adjustments, supported by the EU-IMF programme, Latvia is now forecast to be the fastest-growing economy in the EU this year. It also said that the excessive deficit procedure for Latvia can be closed.

“Latvia’s experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger,'' commented Economic and Monetary Affairs Commissioner Olli Rehn.

''Following the deep recession of 2008-9, Latvia took decisive policy action, supported by the EU-IMF-led financial assistance programme, which improved the flexibility and adjustment capacity of the economy within the overall EU framework for sustainable and balanced growth,'' he added.

The euro, launched as notes and coins on January 2002, is now used by around 330 million people.

Earlier, the European Cental Bank issued its own positive recommendation for the Baltic state to join the single currency from next January.

In its convergence report, the euro zone's central bank said Latvia had met all the criteria to join the common currency. These include low inflation and long-term interest rates, a stable exchange rate and low public debt and deficits.

But it expressed concerns about the high proportion of foreign deposits held in the small Baltic country's banks.

"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.

At the end of the first quarter, deposits in Latvian banks from outside the European Union totalled just under €7 billion, or about one-third of the country's GDP, ECB data showed. The data does not show where the deposits come from, but given the country's close ties to Russia, most are believed to come from there.

Large foreign deposits can be a risk to financial stability, as they can be quickly moved away. Latvia's foreign deposits are much smaller than was the case in Cyprus, whose economy is of similar size and where such deposits accounted for more than one and a half times GDP prior to its bailout earlier this year.

Before the debt crisis, EU member states that were not yet part of the currency union were queuing up to join, but interest has since waned.

Of the countries reviewed in the convergence report, only Latvia and Lithuania have been part of the exchange rate mechanism II (ERM II) for more than two years - a pre-requisite for joining the euro.

The ECB also said Latvia must keep prices in check. "Maintaining low inflation rates in Latvia will be challenging in the medium term," the ECB said. "It may be difficult to prevent macroeconomic imbalances, including high rates of inflation, from building up again."

Latvia should also clarify its national law on central bank supervision by the parliament, the ECB added.