Far from breaking up, the Eurozone is on the verge of welcoming a new member. Latvia has become the eighteenth country to win approval from the European Commission to officially enter the joint currency group.
The news is good press for the Eurozone, after so many bad headlines. Olli Rehn, the EU’s economic and monetary affairs commissioner, was quick to capitalize on it at a news conference, where he said, “Those who predicted a disintegration of the euro … were simply wrong.” He touted the country’s determination to become a member as a sign of confidence in the euro.
Latvia has walked a very hard road to get the green light, conferred in early June. Bailed out in 2008 to the tune of 7.5 billion euros ($9.9 billion), the country followed a strict austerity policy and chose not to devalue its currency, which had already been pegged to the euro for some ten years. Instead, it stuck to tough measures that included cuts to spending and increases in taxes. It was so enthusiastic about embracing cuts to public spending that the International Monetary Fund said it had gone too far and risked the country’s social safety net.
Such tight controls over what money it had—its GDP shrank by 20% when the financial crisis hit—enabled Latvia to woo investors in December with a bond issue that brought in $1.25 billion. That boost in funds allowed Latvia to pay off its bailout in January, faster than any other country and three years ahead of schedule. Now the eastern European nation has its sights set on Eurozone membership by January 1 of 2014, and it’s expected that the July meeting of EU finance ministers will see approval granted. Even though EU leaders and the European Parliament still have to give the go-ahead, no problems are expected.
The Latvian people aren’t as happy about the coming union as their leaders are. Polls show that membership in the Eurozone is nowhere near as attractive to those who have been enduring all those austerity measures as it is to the politicians determined to bring it about. The opposition to the monetary union runs about two to one against.
Peter Fitzpatrick at Fitch Ratings pointed toward the company’s expectation that final approval will be given, since “Latvia comfortably meets the Maastricht criteria on government debt, the budget deficit and long-term sovereign bond yields, inflation and exchange rate stability in the Exchange Rate Mechanism. No country that has met the quantitative criteria has had its euro application rejected.”
Fitch also said that final approval to enter the Eurozone “will trigger a sovereign rating review. Our position remains that euro adoption would deliver net benefits to the Latvian economy, and would be likely to lead to an upgrade.”
That said, there is another consideration.