EU's Rehn: Latvia could join euro zone in 2014

BRUSSELS Thu Oct 18, 2012 12:16pm EDT

BRUSSELS (Reuters) - The small Baltic state of Latvia could become the 18th member of the euro zone in 2014 if it continues on its current economic course, EU Economic and Monetary Affairs Commissioner Olli Rehn said on Thursday.

"It is possible that they could join in 2014. The review (of whether the country meets the criteria) will be done in spring next year as was done for Estonia in 2010," Rehn told Reuters.

Latvia, which on Tuesday said it would aim for 2014, would be the second Baltic state to join the single currency bloc. Neighboring Estonia adopted the euro in 2011.

To join the euro zone, a country has to meet criteria on low inflation, debt and budget deficits as well as currency stability and long-term interest rates.

Latvia's budget deficit is forecast to fall well below the threshold of 3 percent of GDP this year and even further in 2013.

The European Commission expects the country's debt to be between 43 and 45 percent of GDP this year and next - also well below the 60-percent ceiling.

A candidate country also has to hold its price growth down to no more than 1.5 percentage points above the average of the three lowest inflation rates in the European Union.

The most recent EU data, released on Tuesday, put that target at 2.94 percent, while the inflation rate in Latvia was 2.90 percent, the Latvian finance ministry said in a statement. The ministry forecast the rate would stay below the EU threshold until next spring.

Despite the sovereign debt crisis that has spread through the euro zone's weaker economies over the past 3 years, Latvia sees the euro as a more stable currency than its lat.

Public opinion is firmly opposed to euro entry, but the government does not intend to hold a referendum on the issue. Latvia, unlike Britain and Denmark, does not have an opt-out from the euro. This means that, as a member of the European Union, it is obliged to adopt the currency once it meets the criteria.

The Baltic nation carried out tax hikes and spending cuts after the global financial crisis hit, helping it overcome debt problems with the goal of adopting the euro.

The center-right government of Prime Minister Valdis Dombrovskis this year cut the rate of value added tax to 21 percent from 22 percent as part of efforts to bring inflation within the euro criteria.

"Latvia is recovering from its very deep economic crisis, growth prospects for Latvia are in the scale of 4-5 percent next year," Rehn said. "Even more importantly, it is much more sustainable growth than in the past and the Latvian financial sector has been restructured and is now healthy."

He said new Commission economic forecasts, to be published on November 7, will show what prospects Latvia has of meeting the numerical criteria for membership.

"My assessment for the moment is that it is possible, even quite likely, that Latvia would be able to meet the convergence criteria," Rehn said.

"Apart from the quantitative criteria we will make a qualitative assessment of the sustainability of the economic policy of Latvia, as we did in the case of Estonia," he said. "Latvia has pretty good prospects of joining the euro if it maintains momentum and I would encourage Latvia to meet all the conditions." (Reporting by Jan Strupczewski; editing by Rex Merrifield and Sebastian Moffett)

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