Tiny Baltic country would be 18th member of troubled European currency union

FRANKFURT – Tiny Latvia has won approval to become the 18th country to join the troubled euro currency union — despite doubts among many Latvians and international concerns about the country’s banking system.

European Union officials say Latvia’s willingness to join next year is a strong vote of confidence for the shared currency. At the moment, the current 17-strong group of EU countries that use the euro is struggling with a crisis over too much government debt, a stubborn recession, and 12.2 per cent unemployment.

Olli Rehn, the EU’s top economic and monetary official, said Wednesday that Latvia’s membership bid was “further evidence that those who predicted the disintegration of the euro area were wrong.”

The commission gave thumbs-up Wednesday after an official review. A final decision will be made by eurozone finance ministers July 9 — following further consultation among EU leaders and Parliament — and Latvia is expected to introduce the euro on Jan. 1, 2014.

To join the eurozone, Latvia had to show to inspectors from EU and the European Central Bank that it could control inflation, deficits and government debt, and keep its currency, the lat, in a narrow exchange rate range with the euro. Compared to heavily indebted euro countries such as Greece, Portugal and Italy, its government finances are currently in excellent shape.

Still, many among the Baltic seacoast country’s 2 million people are skeptical of the need to join in the midst of the eurozone’s debt troubles. Anti-euro parties won more than half the vote in local elections in the capital, Riga, last weekend.

Latvians suffered through several years of enforced government austerity cutbacks in order to fulfil the requirements to join the euro. The country also went through a profound recession after a credit-fuelled real estate boom collapsed. The economy shrank by around 25 per cent in in 2008-2010 but has now returned to strong growth.

European officials expressed lingering concerns about the country’s banking system due to its high percentage of deposits from non-residents, mainly Russians. Non-resident deposits are regarded as more likely to flee in case of trouble than domestic savers. This could undermine the stability of the banks — a problem that was at the centre of the recent rescue of Cyprus, the latest eurozone member to receive a bailout.

In a separate assessment, the European Central Bank said that Latvia would need to exercise continued vigilance to make sure inflation stayed under control and that its banks were strong enough. It called non-resident deposits “an important risk to financial stability.”

Latvia committed to join the euro in 2004 when it joined the European Union. Under the EU’s treaty, all EU members must adopt the euro eventually although it can take years to meet the tough requirements. The only exceptions are Britain and Denmark, which were given opt-outs.

All three Baltic countries are enthusiastic about integration with the EU in part due to fear of domination by Russia. Latvia, Lithuania and Estonia were forcibly incorporated into the Soviet Union during World War II and only regained their independence in 1991.