Latvia's application to join the euro in 2014 was expected – but is good news nonetheless. Should it eventually be accepted, as it likely will, membership will improve the Baltic country's economy. On top of a much-needed a confidence boost, the euro zone could also see it as opening the way for stronger members to join soon.
The approval process should go smoothly as Latvia meets the requirements for membership. Its budget deficit was at 1.5 per cent of gross domestic product in 2012 and will fall further, according to European Commission forecasts, and debt will peak in 2013 at 44.4 per cent of GDP. This compares to euro zone averages of 3.5 per cent and 93 per cent, respectively. Inflation, meanwhile, is in line with the rest of Europe.
Latvia is the fastest growing economy in the EU, expanding by 5.5 per cent in 2012. Its quick economic rebound has turned the Baltic state into a poster child for austerity. After receiving a €7.5-billion ($1-billion) bailout in 2008, the country has returned to growth – even repaying its IMF loans before their due date.
This hasn't come without pain. GDP shrank by over a fifth between 2008 and 2010. GDP this year will still be 10 per cent below its 2007 peak. Latvia kept its currency pegged to the euro throughout the crisis and chose the route of internal devaluation, complete with lower wages, tax hikes and job cuts. Despite the economy's recent performance, the unemployment rate, although declining, is still at 15 per cent.
Joining the euro will strengthen Latvia's recovery. It will help exports, provide greater liquidity and financial stability. Banks will be able to rely on ECB funding, and no longer fear the type of liquidity crunch they experienced in 2008. Moreover, membership will encourage foreign investment and help reduce the economy's borrowing costs.
The monetary union stands to gain as well. A new member, however small, will help prove doomsayers wrong. Should the adhesion succeed, it can be used as a case study for larger countries that remain unenthusiastic, or aren't yet ready to join the bloc. The one condition is that euro zone governments don't act in a way that will make Latvia regret its choice.