Latvia caps years of austerity with euro zone membership
* Latvia becomes 18th member of euro zone
* The second ex-Soviet state to adopt euro
* Recovers from the worst recession in the EU
* Praised as an example of successful austerity
By Aija Krutaine and Nerijus Adomaitis
RIGA, Jan 1 (Reuters) - Latvia joins the euro zone on Wednesday, banking on its experience of self-imposed austerity to bring it prosperity in a currency union where other economies have floundered.
The Baltic country of just two million people was set to become the bloc's 18th member at midnight (2200 GMT), taking a step further out of the shadow of neighbouring Russia a decade after joining the European Union and NATO.
The euro, which was launched 15 years ago, will now be the official currency of 333 million Europeans.
Even so, neighbouring Lithuania is the only remaining EU country showing much enthusiasm for euro admission after the temptations and strains of sharing a currency forced Greece, Ireland, Portugal, Spain and Cyprus to seek international bailouts for their government finances or their banks.
Among the ex-Communist EU countries that have yet to adopt the euro, Croatia is stuck in recession while bigger economies such as Poland, the Czech Republic and Hungary have become reticent about currency union.
But Latvia's acting Prime Minister Valdis Dombrovskis, who led his country through its worst economic crisis since it left the former Soviet Union in the early 1990s, was keen to mark the currency change by withdrawing the first euro banknote from a cashpoint after midnight.
"It's sad (to see the lat go), but we will get used to the euro, which marks our return to Europe," former central banker Einars Repse, who led the introduction of the lat currency in 1993, told Reuters.
Latvia, which becomes the fourth smallest economy in the euro zone after Malta, Estonia and Cyprus, expects the euro to lower its borrowing costs and encourage investors by eliminating currency risk.
Both Standard & Poor's and Fitch have raised the country's credit ratings in anticipation of its euro entry.
But opinion polls show ordinary Latvians are divided on the euro's merits, with many worried that its adoption will be an excuse to raise prices.
"In all other countries which had switched to the euro, prices rose. Most likely, they will rise here as well, which is bad," said Oleg Bachurin, 62, a pensioner.
Latvia's central bank expects euro zone entry to lift consumer prices by 0.2-0.3 percentage points in 2014, taking inflation to 2 percent.
"I'm not worried (about euro adoption). I believe it's progress. We should not look back, we should go forward," said Anita Linde, 57, a retailer.
Latvia won praise from EU policymakers for emerging with strong economic growth and relatively low debt levels from a deep recession after it slashed spending and wages and hiked taxes to keep the lat pegged to the euro during the global financial crisis.
Its economy shrank by a fourth during 2008-2010, but then grew at the fastest pace in the EU, expanding by 5.6 percent in 2012, with public debt well within the official ceiling.
"Thanks to these efforts ... Latvia will enter the euro area stronger than ever, sending an encouraging message to other countries undergoing a difficult economic adjustment," European Commission President Jose Manuel Barroso said.
While Latvia has worked hard to shake off its Soviet past, the European Central Bank sees risks in the high level of foreign deposits in Latvia's banks which, as in Cyprus, have been a magnet for Russian money.
Latvia's financial supervisor FKTK rejects the comparison, saying its financial sector accounts for a much smaller share of gross domestic product than Cyprus and holds fewer risky assets.
Latvia enters euro zone without a permanent government after Dombrovskis resigned in December, taking political responsibility over a supermarket collapse in Riga that killed 54 people.
President Andris Berzins has given the parties in parliament until Jan. 7 to present a new candidate.
Of the other ex-Soviet Baltic republics, Estonia joined the euro zone in 2011 and Lithuania aims to join in 2015.
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