Latvia Is Ready to Jump Aboard Euro Zone

LONDON â€" Joining the euro zone in its current state of economic turbulence may appear about as sensible as jumping aboard a sinking ship.

But the small Baltic state of Latvia is about to do just that, after waiting in line for approval from its European neighbors to join the single currency from the start of next year.

The European Commission, the executive body of the European Union, is expected to report on Wednesday that Latvia meets all the criteria to jump aboard as the 18th member of the currency union.

The former Soviet republic, barely larger than West Virginia and with a population of little more than two million, is the poster child for proponents of tough austerity measures to cure the Continent’s debt-fueled financial ills.

The Latvians have succeeded in meeting the criteria for euro zone membership with an economic performance that other members of the euro zone might envy.

The country’s budget deficit, at 1.2 percent of gross domestic product, is well below the required European ceiling of 3 percent, and public debt amounts to a little more than 40 percent of G.D.P., compared with almost 82 percent in even fiscally prudent Germany.

It has even managed to pay off a €7.5 billion, or $10 billion, international loan, secured during the depths of an economic slump after the 2008 financial crisis in order to cope with a bank collapse.

However, success has come at a price. In response to the 2008 collapse, when the economy shrank by 20 percent and unemployment spiraled, a new coalition headed by Prime Minister Valdis Dombrovskis imposed a ruthless regime of austerity.

Government programs were slashed, a third of state employees were fired, and those who survived the cull had their wages cut by a third. Latvia also opted to endure the pain of keeping its currency, the lats, pegged to the euro rather than devaluing.

As my colleague Andrew Higgins wrote during a trip to Riga, the Latvian capital, “In just four years, the country has gone from the European Union’s worst economic disaster zone to a model of what the International Monetary Fund hails as the healing properties of deep budget cuts.”

Christine Lagarde, the head of the I.M.F, has referred to the Latvian experiment as “an inspiration for European leaders grappling with the euro crisis.”

However, critics have said that is to ignore the heavy price paid by ordinary Latvians for the economic turnaround.

Mark Weisbrot, a Washington-based economist, noted a year ago that about one in 10 workers in the labor force had left the country, perhaps never to return. Unemployment was still brutally high, he wrote, and the I.M.F. itself acknowledged it would take another decade to restore economic activity to its pre-crisis levels.

The Latvian austerity program has not provoked the kind of unrest seen in struggling euro zone countries like Greece and Spain.

But there are indications that, when it comes to embracing the euro, ordinary people are less enthusiastic than either their government or euro zone policy makers, who see Latvian membership as a signal to markets that the currency zone is growing rather than disintegrating.

On many levels it makes sense to join the euro. According to David Moore, the I.M.F.’s country representative, the financial system is already highly “euroized.” People earn wages and pay day-to-day bills in lats but save, borrow and pay for mortgages in euros. “The economic case for euro adoption is strong,” he wrote in January.

However, an opinion poll last month indicated that almost two-thirds of Latvians opposed abandoning the lats, rejecting the government’s argument that joining the euro zone would help the economy by easing trade and boosting investor confidence.

David Cronin, writing for New Europe, a Brussels-based newspaper that reports on the European Union, lamented the fact that the austerity-battered Latvians would have no say in a decision to join the euro in the absence of a referendum.

He noted that only two electorates in Europe had ever been offered a referendum on whether to adopt the single currency. “Those polls were conducted in Denmark and Sweden. In both cases, a majority rejected the euro,” he wrote. “History has shown they were right to do so.”