By Aija Braslina RIGA Latvia got the go-ahead on Wednesday to adopt the euro from 2014, crowning its emergence from an economic crisis and signaling to investors that the euro zone is set to expand rather than disintegrate.
The small Baltic state will become the 18th European Union country to use the single currency from the start of next year after EU finance ministers formally endorse the European Commission's positive recommendation at a meeting on July 9.
The euro, launched as notes and coins on January 1, 2002, is now used by around 330 million people and has become a major reserve currency.
"We have concluded that Latvia is ready to adopt the euro on January 1, 2014," EU Economic and Monetary Affairs Commissioner Olli Rehn told a news conference.
After three years of a sovereign debt crisis that cast doubt on the very survival of the euro and forced member governments to agree on fundamental changes to the way economic policy is formulated, Latvia's bid to join is politically welcome.
"Latvia's desire to adopt the euro is a sign of confidence in our common currency. Those who predicted a disintegration of the euro ... were simply wrong," Rehn said.
To adopt the euro, Latvia had to meet five entry criteria: low inflation and long-term interest rates, a stable exchange rate and low public debt and deficits.
The European Central Bank, which does not have any formal say on whether a country can join, but has to issue an opinion, also gave Latvia a positive assessment. But it warned that high foreign deposits in its banks were a risk to stability.
TOUGHEST IN THE EU
Latvia, with just 2 million inhabitants, was plunged into economic turmoil when the 2008 global financial crisis popped a real estate bubble and toppled one of its leading banks. It lost about a fifth of economic output and was forced to take a bailout from the International Monetary Fund and European Union.
The centre-right government hiked taxes and cut wages in one of Europe's harshest austerity programs, which foreshadowed measures imposed on crisis-hit euro zone states.
Latvia kept its lat currency pegged to the euro throughout the crisis, although some economists, including Nobel Laureate Paul Krugman, said a devaluation would have eased the pain.
"Latvia's experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger from the crisis with a solid recovery," Rehn said, noting that it will have the strongest economic growth in all of the 27-nation EU this year.
Latvian Prime Minister Valdis Dombrovskis told a news conference switching to the euro from the lat currency will foster economic growth, bringing increased foreign investment and upgrades of its sovereign credit ratings.
Dombrovskis has pressed on with euro entry even though polls show most Latvians are opposed to switching currencies.
"Latest polls show 38 percent support for euro adoption," Dombrovskis told reporters. "We believe we might reach a majority supporting euro adoption at the moment when Latvia introduces the euro. Government has to work on that."
Neighboring Estonia adopted the euro in 2011, while Lithuania has said it hopes to join the bloc in 2015.
All three Baltic states regained their independence from the Soviet Union in 1991 after spending 50 years under Moscow's domination. Entering the euro zone is part of a process of shifting away from Russia's orbit after Latvia's entry into the European Union and NATO in 2004.
(Reporting by Aija Braslina, writing by Jan Strupczewski and Patrick Lannin; Editing by Catherine Evans)