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Latvia Wins Final EU Approval to Become 18th Euro-Area State

Latvia Wins Final EU Approval to Become 18th Euro-Area State
Buildings and rooftops sit in the old quarter of Riga. Photographer: Ilmars Znotins/Bloomberg

Latvia’s bid to become the 18th country in the euro area won final approval from European Union finance ministers, ensuring that the former Soviet republic will start using the single currency on Jan. 1, 2014.

The ministers set the conversion rate for the lats at 0.702804 per euro, the last hurdle in Latvia’s euro push after the government in the capital Riga met budget-deficit, government-debt, interest-rate and inflation targets.

Latvia’s inflation rate may be 2 percent to 2.5 percent next year after the introduction of the euro, Finance Minister Andris Vilks told reporters in Brussels after today’s decision. Latvia will contribute 40 million euros ($51.4 million) a year for five years to the European Stability Mechanism, the euro zone’s backstop fund, with its payments later increasing to a total of about 320 million euros.

“It is clearly for Latvia a choice of being a part of the core, the economic and political core, of Europe,” Olli Rehn, the European Union economic and monetary affairs commissioner, said at a press conference. “The experience of Estonia shows that a country can benefit from further economic and monetary stability and can gain foreign direct investment, which is good for employment and growth.”

Aid Loan

Latvia’s currency switch comes after it was forced to seek a 7.5 billion-euro loan from the EU and International Monetary Fund after its second-biggest bank needed a state rescue, threatening its currency peg to the euro. The country’s economy, which shrank by more than a fifth in 2008-2009, is now the bloc’s fastest growing.

Latvia “should stick to the core European decisions and those decisions are coming from the euro-zone members today we can see,” Vilks said in an interview with Bloomberg Television late yesterday. “The euro zone is much more important than it was maybe some years ago.”

The yield on Latvian dollar bonds due 2020 fell 14 basis points to 4.02 percent as of 2:15 p.m. Riga time. Latvian credit-default swaps were little changed at 143.6 basis points yesterday, the highest level since June 21.

Much has changed since Latvia’s recession. Austerity measures equivalent to 16 percent of output helped the government narrow last year’s budget gap to 1.2 percent of gross domestic product from 9.8 percent in 2009. The IMF’s portion of the bailout was repaid almost three years early.

About 53 percent of Latvians oppose adopting the euro, compared with 59 percent a year ago, pollster Arnis Kaktins told Latvijas Radio today. Some 22 percent support switching currencies and 21 percent have a neutral view, according to the mid-June poll, Kaktins said.

“We are seeing since we launched an additional campaign, public support is gradually improving,” Latvian Prime Minister Valdis Dombrovskis told reporters in Brussels. “I think its realistic that by the time we join, the majority of the population will support this decision.”

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