RIGA (Reuters) - Latvia decided on Monday to apply to adopt the euro next year despite three years of crisis in Europe’s currency zone, in a move that will distance it further from former master Russia.
Worries about the euro zone have flared up again after Italy’s inconclusive election but Latvia asked Europe to assess its readiness for the euro.
Requesting such a report is generally seen as the first step towards joining the euro. If Latvia meets the entrance criteria, the Baltic state would become the eighteenth member of the single currency.
“This is a day that will enter Latvia’s history,” said Finance Minister Andris Vilks when he, Prime Minister Valdis Dombrovskis and central bank chief Ilmars Rimsevics signed the request for an assessment from the European Central Bank and European Commission.
The application will be handed over in Brussels on Tuesday and then finance ministers are expected to take a final decision in July.
The request marks the end of a 15-month preparation period. Latvia says it meets all the entrance criteria including on debt, deficit, inflation, long-term interest rates and having a stable peg to the euro.
Latvia pegged its lat currency to the euro after joining the European Union in 2004. It stuck with the peg through two years of turmoil after the 2008 financial crisis which saw its economy shrink by up to a fifth and sent it to the EU and International Monetary Fund for a bailout in 2009.
It kept the peg despite some economists saying a devaluation would have eased the downturn and could have spared the government painful wage cuts and tax hikes.
Latvia’s southern neighbor, Lithuania, which pegged in 2002, faced similar economic upheaval and both countries have now recovered. Lithuania is considering adopting the euro in 2015 or 2016. Estonia joined the eurozone in 2011.
Latvia posted the fastest growth rate in the EU with 5.1 percent year-on-year and 1.3 percent quarter-on-quarter in the last three months of 2012 but it is still one of the poorest countries in the European Union along with Bulgaria and Romania.
Latvian officials are keen to join the euro because many mortgages are denominated in the single currency which they see as less risky than the lat in the longer term.
Latvia also wants to strengthen its links with western Europe and be less dependent on Russia. Trade links with Russia are still strong but relations between the two countries can be complicated.
Moscow often accuses Latvia of violating the rights of the large Russian-speaking minority in the Baltic state while Riga wants Russia to recognize the 1940 Soviet invasion as occupation.
“Just after we regained independence (in 1991), we clearly set our course to accession to the EU and NATO, we clearly said to ourselves we belong in the Western world ... Euro zone accession is just a logical next step,” Dombrovskis told Reuters.
While officials are keen on the euro, polls show much of the population is worried a switch will drive prices higher and the country will lose power to Brussels.
But Dombrovskis said the euro would boost investment, lower currency exchange costs and help ease social ills. He expects opinion will swing behind accession and is not planning a referendum.
Financial markets have reacted positively to Latvia’s progress. The cost of insuring against a debt default has fallen from more than 1000 basis points in 2009 to about 104 now, below that of Ireland, Spain and Italy.
“In the long term it is a probably a good idea for Latvia, which has had its fair share of market turmoil in the past four or five years,” said Nordea Markets analyst Annika Lindblad.
“It is probably good from the euro area point of view that at the moment there are countries that want to join.”
Enthusiasm for the euro waned across much of eastern Europe after Greece’s problems emerged in 2009 and drove the currency bloc into a series of sovereign bailouts which has split its members economically and raised questions of its viability.
But the ECB calmed nerves with a promise last summer to do whatever was necessary to save the euro and membership has inched back onto the agenda in Poland, eastern Europe’s largest economy.
The Czechs and Hungarians are less enthusiastic while Romania and Bulgaria are still far from meeting the euro criteria.
Reporting by Aleks Tapinsh, writing by Patrick Lannin; Editing by Alistair Scrutton and Anna Willard