Latvia joined the eurozone yesterday, banking on its experience of self-imposed austerity to bring it prosperity in a currency union where other economies have floundered.
The Baltic country of just 2mn people became the bloc’s 18th member, taking a step further out of the shadow of neighbouring Russia a decade after joining the European Union and Nato.
The euro, which was launched 15 years ago, will now be the official currency of 333mn Europeans.
Even so, neighbouring Lithuania is the only remaining EU country showing much enthusiasm for euro admission after the temptations and strains of sharing a currency forced Greece, Ireland, Portugal, Spain and Cyprus to seek international bailouts for their government finances or their banks.
Among the ex-Communist EU countries that have yet to adopt the euro, Croatia is stuck in recession while bigger economies such as Poland, the Czech Republic and Hungary have become reticent about currency union.
But Latvia’s acting Prime Minister Valdis Dombrovskis, who led his country through its worst economic crisis since it left the former Soviet Union in the early 1990s, was keen to mark the currency change by withdrawing the first euro banknote from a cashpoint after midnight.
Latvia, which becomes the fourth smallest economy in the eurozone after Malta, Estonia and Cyprus, expects the euro to lower its borrowing costs and encourage investors by eliminating currency risk.
Both Standard & Poor’s and Fitch have raised the country’s credit ratings in anticipation of its euro entry.
But opinion polls show ordinary Latvians are divided on the euro’s merits, with many worried that its adoption will be an excuse to raise prices.
Latvia’s central bank expects eurozone entry to lift consumer prices by 0.2-0.3 percentage points in 2014, taking inflation to 2%.
Latvia won praise from EU policymakers for emerging with strong economic growth and relatively low debt levels from a deep recession after it slashed spending and wages and hiked taxes to keep the lat pegged to the euro during the global financial crisis.
Its economy shrank by a fourth during 2008-2010, but then grew at the fastest pace in the EU, expanding by 5.6% in 2012, with public debt well within the official ceiling.
While Latvia has worked hard to shake off its Soviet past, the European Central Bank sees risks in the high level of foreign deposits in Latvia’s banks which, as in Cyprus, have been a magnet for Russian money.
Latvia’s financial supervisor FKTK rejects the comparison, saying its financial sector accounts for a much smaller share of gross domestic product than Cyprus and holds fewer risky assets.
Latvia enters eurozone without a permanent government after Dombrovskis resigned in December, taking political responsibility over a supermarket collapse in Riga that killed 54 people.
President Andris Berzins has given the parties in parliament until Jan 7 to present a new candidate.
Of the other ex-Soviet Baltic republics, Estonia joined the eurozone in 2011 and Lithuania aims to join in 2015.