Latvia becomes 18th member of eurozone

Latvia joined the eurozone on Wednesday, banking on its experience with austerity to bring it prosperity in a currency union in which other economies have foundered.

The Baltic country of just 2 million people became the bloc's 18th member at midnight, a decade after joining the European Union and NATO.

Latvia's acting prime minister, Valdis Dombrovskis, who led his country through its worst economic crisis since leaving the former Soviet Union in the early 1990s, said euro adoption was an opportunity but not a guarantee of wealth, and the country should not relax its fiscal policy.

"There's no excuse for failing to pursue a responsible fiscal and macroeconomic policy," he said after withdrawing the first euro banknote after midnight from a cash machine in Riga.

The euro switchover ceremony took place at the site where Latvia's crisis began - the former headquarters of the collapsed Parex bank, now headquarters of state-owned Citadele bank, which emerged from the wreckage of its predecessor.

Parex, the country's second-biggest bank by assets, went bust near the end of 2008, forcing the Baltic state to seek an international rescue to keep its currency, the lats, pegged to the euro at the same rate.

Its economy shrank by one-fourth from 2008 to 2010, but then grew at the fastest pace in the EU, expanding by 5.6 percent in 2012, after the government slashed spending and wages and raised taxes in one of the harshest austerity programs in Europe.

Latvia's efforts have won praise from EU policymakers, who point to the Baltic state as proof that austerity can work.

European Commission President Jose Manuel Barroso said, "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."

Still, a few concerns remain. The European Central Bank has warned Latvia that the high level of foreign deposits in Latvian banks, mostly from Russia, is a risk factor.

Latvia also enters the eurozone without a permanent government after Dombrovskis resigned in December in the wake of a supermarket collapse in Riga that killed 54 people.

Latvia enters as the single-currency bloc marks its 15th anniversary. The euro is now used by 333 million people in Europe.

Neighboring Lithuania is the only remaining EU country showing much enthusiasm for admission after the temptations and strains of currency sharing forced Greece, Ireland, Portugal, Spain and Cyprus to seek international bailouts for their governments or banks.

Estonia joined the eurozone in 2011, and Lithuania aims to do so in 2015.

Among the Eastern European EU countries that have yet to adopt the euro, Croatia is stuck in recession, while bigger economies such as Poland, Czech Republic and Hungary have become reticent about currency union.

Latvia, the fourth-smallest economy in the eurozone after Malta, Estonia and Cyprus, expects the euro will reduce 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 that switched to the euro, prices rose. Most likely, they will rise here as well, which is bad," said pensioner Oleg Bachurin.

Latvia's central bank expects eurozone entry to raise consumer prices by 0.2 to 0.3 percent in 2014, taking inflation to 2 percent.

"I'm not worried. I believe it's progress. We should not look back, we should go forward," said retailer Anita Linde.

Reuters

Latvia's acting prime minister, Valdis Dombrovskis, withdraws the first euro banknote on Wednesday from a cash machine in Riga. The country became the 18th member of the eurozone. Guo Qun / Xinhua

(China Daily 01/02/2014 page11)