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Latvia meets the convergence criteria, however, there are several areas where sustainability of economic convergence in Latvia in the long term causes concern, says the ECB.

"In the past, Latvia has experienced major boom-bust episodes, which were also visible inter alia in domestic prices and long-term interest rates," the ECB says in the report. "Economic sustainability is thus conditional on a permanent willingness, on the part of both the authorities and the public at large, to adjust and to introduce the necessary reforms and policy measures to safeguard macroeconomic stability and the competitiveness of the economy."

"Achieving and maintaining an environment conductive to sustainable convergence in Latvia requires the conduct of economic policies geared toward ensuring overall macroeconomic stability, including sustainable price stability," says the report.

Regarding macroeconomic imbalances, the ECB notes that "given monetary policy's limited room for maneuver owing to the lack of nominal exchange rate flexibility, it is imperative that other policy areas provide the economy with the wherewithal to cope with country-specific shocks and avoid the possible re-accumulation of macroeconomic imbalances. The authorities should, therefore, consider avenues to further strengthen the alternative counter-cyclical policy instruments at their disposal, in addition to what has been done since 2009. Specifically, progress in the areas below will help to achieve an environment conductive to sustainable price stability and promote competitiveness and employment growth."

"It is necessary for Latvia to continue along a path of comprehensive fiscal consolidation in line with the requirements of the Stability and Growth Pact, and to implement and to adhere to a fiscal framework that helps to avoid a return to pro-cyclical policies in the future. Furthermore, it is important to lock in the competitiveness gains achieved in recent years by avoiding a renewed increase in unit labor cost growth," says the report.

It is essential to implement further structural reform measures that focus in particular on improving the functions of the labor market, in which high unemployment coincides with skill mismatches and labor shortages in some sectors.

While Latvia's business environment is regarded as particularly positive, its relatively weak overall performance in terms of governance suggests that a stronger institutional environment is desirable.

The convergence report also says that the shadow economy, although declining, is estimated to still be relatively large in Latvia.

"These weaknesses not only entail public revenue losses but also distort competition, harm Latvia's competitiveness and reduce the country's attractiveness as a destination for foreign direct investment, thus hampering longer-term investment and productivity," says the report.

The ECB also warns about the large proportion of non-resident deposits in the banking sector.

"The reliance of 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. Moreover, a potential renewed emergence of domestic imbalances or excessive credit growth could pose additional risks to financial stability," believes the ECB.

It is crucial that a comprehensive policy toolkit is available, emphasizes the ECB. "This should include macro-prudential measures, national balance sheet analysis and stress tests, proper funding mechanisms for the deposit insurance scheme, effective resolution and recovery tools, strengthened monitoring of any build-up of macroeconomic imbalances that could threaten financial stability, with readiness to adopt additional measures if warranted, and the highest standards possible in the implementation of international anti-money laundering rules," says the report.

The ECB says that financial stability should benefit from Latvia's participation in the Single Supervisory Mechanism, which is expected to enter into force in 2014.

European Commissioner for Economic and Monetary Affairs Olli Rehn, commenting on Latvia's readiness to join the eurozone, said today that the introduction of the euro in Latvia is a hard-fought achievement.

''Latvia has achieved high-level economic convergence with the eurozone, and I am pleased today that we have come to the conclusion that Latvia is ready to join the eurozone from January 1 of next year,'' the commissioner said.

The commissioner also added that Latvia's desire to introduce the European single currency show that predictions some made of the collapse of the eurozone were wrong.

Rehn said that the European Commission has evaluated all the concerns and achievements in regard to Latvia, and came to the conclusion that Latvia has achieved an adequate and sustainable convergence level to join the eurozone. ''This does not mean the Commission will be satisfied what Latvia has achieved. Latvia must continue to work to maintain its economic capabilities,'' Rehn added.

''Latvia's eurozone membership will be a strong signal for the region, the eurozone and global markets as a whole. Latvia has shown that policies orientated towards achieving stability, as well as implementing reforms, can pay off,'' Rehn emphasized.

As reported, today, the European Commission officially expressed support towards Latvia's desire to introduce the euro. The European Commission has given Latvian the green light to join the European single currency.