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Latvia To Embrace Euro Amid Lukewarm Reaction To Changeover


Latvia will join the Eurozone as the single currency bloc's eighteenth member on January 1, 2014, after more than five years since the former Soviet state plunged into an acute financial crisis in the wake of the collapse of the country's once thriving easy credit market.

For the Eurozone, the expansion of the bloc is a fitting reply to those who predicted the death of the currency during the peak of the debt crisis. However, the reaction the euro is set to receive in Latvia is far from positive, with nearly half of the locals still against joining the crisis-hit union.

Reports suggest that the initial response to the changeover is rather lukewarm as the public seemed to be either indifferent or against the membership. Polls indicate that nearly 50 percent of the people opposed the move.

Latvians fear a sudden uptick in prices after the adoption of euro, though the authorities have given repeated assurances that such arguments are unfounded.

Latvia's financial crisis during 2008-09 was effectively a byproduct of the Global Financial Crisis. The country received a EUR 7.5 billion bailout in 2008 after the banks' easy credit business imploded, leading to a collapse of the property market.

A period of tough austerity followed, pushing up unemployment rate and quashing economic growth. After the crash, however, Latvia chose not to devalue its currency, an option which, many critics argue, might have alleviated the austerity pain.

Had the government opted to devalue the lat rather than cutting wages, it would have delayed its euro entry further.

The exchange rate has been set at 0.702804 lats to one euro. There will be a two-week period when both currencies are in circulation, with the change normally provided in euro. The lats will cease to be the legal tender on January 15, 2014.

The country has met the convergence criteria for euro membership, including price stability, exchange rate stability, long-term interest rates and low public debt.

The Latvian authorities are yet to name a new Prime Minister after Valdis Dombrovskis resigned from the post owning responsibility for a supermarket mishap in November. However, President Andris Berzins has assured that this will not affect the country's euro entry.

Lithuania is set to join the euro area in 2015. Estonia, another Baltic state, adopted the euro in 2010. Of the EU member states outside the euro area, Denmark and the U.K. have opted out of euro for reasons of economic sovereignty.

by RTTNews Staff Writer

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