By Jan Strupczewski
BRUSSELS (Reuters) - The European Commission will give Latvia on Wednesday the go-ahead to become the 18th member of the euro zone from the start of next year, European Union officials said on Monday.
The EU executive will publish a report on whether the small Baltic state meets all the criteria for membership of the single currency, which include low inflation and long-term interest rates, a stable exchange rate and low public debt and deficit.
Latvia, which underwent one of Europe's toughest austerity programs after a 2008-2009 crisis wiped a fifth off its GDP, meets all the requirements, the Commission will say.
"The decision on Latvia is positive," one EU official said.
Policymakers hope the accession of Latvia will send a strong signal of confidence to investors that despite three years of a sovereign debt crisis, the euro zone is set to grow, rather than disintegrate.
The European Central bank will also publish its view on whether Latvia should be allowed to join, but it is only the Commission that has the right to make a legal recommendation.
Latvia's membership will have to get the approval of EU leaders at their summit in late June, and the European Parliament will also have to be consulted, before EU finance ministers make the accession formal in July.
Latvia's Baltic neighbor, Lithuania, is likely to become the next euro zone member after Latvia from 2015, a senior euro zone policy-maker said earlier in May. The third Baltic country, Estonia, joined the euro zone in 2011.
To adopt the single currency, Latvia reduced its budget deficit to below the EU ceiling of 3 percent of gross domestic product last year, cutting it to 1.2 percent.
Its public debt is around 41 percent of GDP, well below the EU ceiling of 60 percent and its currency has been pegged to the euro since it joined the European Union in 2004.
To keep the fixed peg to the euro throughout its economic crisis, Latvia underwent a painful internal devaluation, slashed public sector wages, cut spending and hiked taxes.
Latvia posted the fastest economic growth in the EU with 5.1 percent year-on-year and 1.3 percent quarter-on-quarter in the last three months of 2012 but it is still one of the poorest countries in the EU, along with Bulgaria and Romania.
Latvian officials are keen to join the euro because many mortgages are denominated in the single currency which they see as less risky than the lat in the longer term.
Latvia also wants to strengthen its links with western Europe and be less dependent on Russia. Trade links with Russia are still strong but relations between the two countries can be complicated.
Moscow often accuses Latvia of violating the rights of the large Russian-speaking minority. Riga wants Russia to recognize the 1940 Soviet invasion as occupation.
While officials are keen on the euro, polls show much of the population is worried a switch will drive prices higher and the country will lose power to Brussels.
(Reporting By Jan Strupczewski; Editing by Robin Pomeroy)