Latvia poised to join euro despite popular reluctance

Latvia won a resounding vote of approval from the EU executive Wednesday to become the 18th eurozone state, though ordinary Latvians seem fearful of ditching their national currency as the euro area struggles in recession. Commending the Latvian government for successfully steering the country out of crisis in 2008-2009, the European Commission said in a report: "Latvia is ready to adopt the euro in 2014." The report will be handed to the European Parliament for approval, with finance ministers from the 17 euro nations to formally hand down a decision July 9 on Latvia joining. Shrugging aside strong popular opposition to the move, Latvian Prime Minister Valdis Dombrovskis welcomed the news, saying in Riga that "joining the euro will benefit Latvia's economy by removing currency conversion costs and raising Latvia's credit rating." "Latvia is a small, open economy," he said. "We think euro membership will increase investment activity. We need only to look at the Estonian example where investment in the non-financial sector doubled." Latvia joined the European Union in 2004. But given the eurozone's protracted crisis, a majority of Latvians question the wisdom of abandoning the lats for the euro on January 1. The most recent opinion poll, a May survey from TNS, said only 36 percent of Latvians favoured switching, with 62 percent against, though this was far less than a few months ago. The Brussels report said the country of two million people satisfied the economic conditions to join, due to its price stability and sound public finances. Its national legislation too was compatible with the rules of the Economic and Monetary Union (EMU), it said. It also lavished praise on the government for its handling of the 2008-2009 crisis. "Latvia's experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger," said EU Commissioner for Economic Affairs Olli Rehn. Saying Latvia was expected to be the fastest-growing EU economy this year, Rehn added that its willingness to adopt the euro "is a sign of confidence in our common currency and further evidence that those who predicted the disintegration of the euro area were wrong." But even as Riga awaited the report, protests continued in Latvia. "People don't want the euro. Parliament should listen to the people's wishes," Girts Mazurs, who launched a petition that has gathered more than 10,000 signatures, told a parliamentary committee. On a commuter train to Riga, Inga Svagrova, a 32-year-old fashion firm director, said: "I'm against joining the euro at the present moment. It seems strange to do so when there is still so much uncertainty." The Latvian premier said however that evidence has shown that once the currency is adopted "public support will rise." "For three years all people have heard are stories about a crisis in the eurozone," he said. "There is no euro crisis, there are crises in some parts of the eurozone." The Commission report said that Latvia's average inflation over the 12 months to April 2013 -- 1.3 percent -- was well below the required 2.7 percent. But it warned that "Latvia will need to remain vigilant to keep inflation at a low level, including by maintaining a prudent fiscal policy and keeping domestic demand on a sustainable path." The European Central Bank in a separate report Wednesday also warned the eurozone entrant that it faced challenges keeping prices in check long-term. There were "concerns regarding the sustainability of inflation convergence," the ECB said. The European Commission report commended Riga for bringing its budget deficit down from the equivalent of 8.1 percent of gross domestic product (GDP) in 2010 to 1.2 percent in 2012. It is projected to remain at that level in 2013, well below the EU three-percent limit, according to the Commission's latest forecast. Analysts were mixed on the Commission decision, questioning whether Latvia might be joining the euro bloc before it has put its economy fully back on track. "It is still unclear whether Latvia's (economic) adjustment has been completed," Capital Economics said in a research note, expressing reservations in particular about the country's export competitiveness.