Almost 14 years ago to the day, I visited the Latvian capital, Riga. The name of the hotel where I stayed was Roma. I was struck by the name of a Latin Mediterranean capital for a Baltic hotel. Little did I imagine that, some years down the road, in the wake of a Latvian financial meltdown, the sunny Latin name would have more ominous connotations.

Within the European Union, Latvia is, with Hungary, probably the country hardest hit by the financial crisis. Its troubles are so deep that last December the International Monetary Fund approved a €1.68 billion rescue loan.

The total financial package that Latvia has so far been granted, however, is almost seven times that amount. The €7.5 billion package has contributions from the European Union, the World Bank and other countries.

This will allow the country to continue to peg its currency to the euro. However, the package has meant that cuts in public sector salaries and spending will have to be made. Even VAT has been increased from 18 to 21 per cent. The financial meltdown has come with public overheating, as protests followed the increase in tax.

Latvia, while it has an enormous coastline, has a small population of only some 2.3 million people. The country is itself beautiful and I count myself unlucky that during my official visit the weather was too overcast to enable the full appreciation of sights such as the churches of St John and St Peter, together with the main palace and castle.

Back in 1995, the country was looking forward to fulfilling its potential. For many of the decades of the 20th century it had been held back. During the Nazi occupation, it was associated with several concentration camps, the most notorious being that of Salapils. The impact of the Soviet period could still be felt even some years after independence.

It was in the restaurants, the best of them in taverns, that a visitor passing through could sense an older, indomitable, cheerful popular spirit. Indeed, 14 years ago Latvia was trying hard to attract foreign investment and even then I knew a Maltese businessman who had invested in one of the best port facilities.

There followed years of booming economic success. Since last year, however, there has been a series of terrible economic news.

After being the fastest growing economy in Europe up till the middle of 2008, Latvia saw one of the sharpest downturns. By the end of the year, GDP had shrunk by over 10 per cent. By the end of this year, it will probably have contracted by 12 per cent.

Unemployment over the last few months rose by 2.5 per cent - bringing the total of unemployed up to 9.5 per cent. That is a nine year high, but by the end of this year the figure may be as high as 15 per cent, while salaries are likely to fall.

After the nationalisation of the country's second largest bank, the credit agency Standard and Poors gave Latvia a non-investment rating. "Junk status", to put it cruelly. The worst-ever investment scenario for Latvia. So far, at least...

No wonder that early this year Latvia experienced the largest popular protests since the Soviet period. No wonder that in February the government collapsed.

This frightening economic contraction occurred for two reasons, mainly.

They are the ones made classic by the US case: A period of extended credit-based speculation and highly unrealistic inflation of real estate values. Meanwhile, in 2007 the deficit was running at 22 per cent of GDP while inflation had reached 10 per cent.

Writing about the smaller European economies, the 2008 Nobel prize winner for economics, Paul Krugman, has made a striking comparison. Their crises, he says, are reminiscent of the economic crises undergone in Latin America and Asia a few years ago: "Latvia is the new Argentina."

Malta has an even smaller economy. Thankfully, we do not have such a crisis on our hands. Therefore, is there no need for concern?

Of course there is. Moreover, a vigilant eye is needed not just at the national level but also at the European one.

For, as the economic crises continue to bite into countries like Latvia and others in central Europe, a certain pressure is building on the eurozone.

The countries in trouble, which are outside the eurozone, are requesting greater flexibility on the conditions of joining. The reason is the eurozone would provide added protection.

Of course, however, it would also increase the vulnerability of the existing members of the eurozone, like Malta.

So far, eurozone leaders like Germany have resisted such calls for greater flexibility in the application of membership rules. Even so, it is important for Malta's representatives in the European Parliament to be hawk-eyed on more subtle requests that could increase Malta's vulnerability.

Dr Attard Montalto is a Labour member of the European Parliament.