Auteur: Benjamin Fox
BRUSSELS - Latvia is set to become the 18th member of the eurozone after the European Commission gave its application the green light on Wednesday (5 June).
"Latvia douze points is my message to Riga," Olli Rehn, the bloc's economic and monetary affairs commissioner, said while delivering his report, by reference to the scoring system in Europe's annual pop music competition, Eurovision.
He welcomed what he described as "a high degree of sustained economic convergence with the euro area."
In a nod to the eurozone's critics, Rehn described Latvia's membership bid as "a sign of confidence in our common currency and further evidence that those who predicted the disintegration of the euro area were wrong."
EU finance ministers will give their verdict in July.
They are expected to rubber-stamp Latvia's bid, paving the way for it to join the single currency at the start of 2014.
The commission report found that Latvia had met eurozone requirements on a range of criteria including price stability, exchange and interest rates.
The country has one of the lowest levels of government budget deficit and debt in the EU at 1.2 percent of GDP and 40.7 percent of GDP, respectively.
But for its part, the European Central Bank (ECB), which also released a convergence report on Wednesday, offered more qualified support.
In a clear allusion to the Cypriot banking crisis, the ECB warned that "the reliance by a significant part of the banking sector on non-resident deposits as a source of funding, while not a recent phenomenon, is again on the rise and represents an important risk to financial stability."
Latvia's banks hold deposits worth around €8.4 billion from foreign savers, just shy of half its total deposits, most of which is believed to come from business people in Russia and Ukraine.
Its Baltic neighbours, Estonia and Lithuania, hold €2.5 billion and €560 million of non-resident deposits, respectively.
Rehn played down any comparison between Cyprus and Latvia.
He pointed out that the size of Latvia's banking sector relative to GDP was under 150 percent compared to an average of over 350 percent across the eurozone.
"Latvia has a long tradition in servicing non-resident banking clients," he said, adding that "neither their share of banking assets or non-residents is particularly high."
Latvia's private banks are also required by national law to keep higher capital requirements and a 60 percent liquidity requirement for non-resident funds, compared with a 30 percent liquidity ratio for local depositors.
In contrast, the assets and liabilities of Cypriot banks were worth over 800 percent of GDP prior to the Mediterranean Island's €10 billion bailout package.
Toms Veidemanis, President of the Latvian Private Bank Association welcomed the commission report, describing it as providing "recognition of our efforts to create a safe and sustainable non-resident banking business."
While the Latvian government has put significant political capital into joining the eurozone, public opinion remains hostile to joining the currency union.
Political parties sceptical about joining the single currency performed well in local elections held last weekend.
Meanwhile, a TNS opinion poll in May found that 62 percent of Latvians oppose switching to the euro, while only 36 percent want to go ahead.