Euro zone embraces Latvia as 18th member

Latvia, a small Baltic state and a member of the former Soviet bloc, has become the 18th member of the euro zone adopting the euro as its currency starting 1 January 2014, amid concerns of a possible price rise by the majority of the country's population.

The country's finance minister Andris Vilkas, who has been striving to effect the change, said in a news conference: ''Today is a very important day for Latvia, difficult to imagine three or four years ago, Everything is just beginning for Latvia.''

Latvia, surrounded by Estonia, Russia, Belarus and Lithuania, has a population of 2 million and an area of about 64,600 sq.km. It is one of the least populous countries of the European Union (EU).

Latvia is the fourth nation from the former Soviet bloc after Slovakia, Slovenia and neighbouring Estonia to join the euro zone.

The country, which gained independence from the Soviet Union in 1991, was undeterred by the euro zone crisis and other issues in the region in scraping its own currency lat in favour of the euro.

According to latest opinion polls, about half of the population is against swapping of the currency, and two-thirds of the respondents told last month that the switch would result in price rise.

Latvia, with a gross domestic product (GDP) of about $28 billion, registered one of the highest growths in Europe since 2000, up to the onset of the global financial crisis in 2008. Following the turmoil, the Latvian economy reported the steepest contraction in the European Union (EU) with an 18-per cent slump in GDP in 2009.

The EU and the IMF bailed out the troubled nation by providing a three-year, $10-billion rescue package, which helped the country to come out of its deep recession.

It posted a GDP growth of 5.6 per cent in 2012, after reporting 5.5 per cent growth in 2011 and a 0.3-per cent contraction in 2010.

According to latest data, Latvia's GDP grew 4.5 per cent in the third quarter compared to a year ago, the highest rate in the EU, and according to the Latvian central bank's forecast, the economy is expected to expand 4.5 per cent in 2013.

Latvia's public debt stands at around 41 per cent of GDP at the end of 2012, while the budget deficit is about 1.2 per cent, well below the EU ceiling of 3 per cent.

The country has a low inflation rate, which is projected at around 0.7 per cent in 2013. The central bank expects the inflation level to rise by 0.2-0.3 percentage points after its entry into the euro zone.

The unemployment level has come down to 11.9 per cent in the third quarter, close to half of the peak value of 21.2 per cent in the first quarter of 2010.

Through the entry into the common currency bloc, the government expects more foreign investment and higher exports, which will boost economic growth.

Euro is Latvia's fourth currency after the country's independence, changing from Russian roubles to Latvian roubles in 1992 and to lats in 1993.

Currently, Latvia is run by a caretaker government led by prime minister Valdis Dombrovskis and the situation is likely to continue until the October elections. 

Neighbouring Lithuania is determined to qualify to join the currency bloc next year, anticipating that the move would bolster economic growth, investor confidence and regional trade.