Today, the European Commission (EC) published its 2013 Convergence Report on Latvia, concluding that Latvia has achieved a high degree of sustainable economic convergence with the euro area and proposes that the Council decide on Latvia’s adoption of the euro as from 1 January 2014.
„The positive assessment of the EC and the European Central Bank (ECB) is the recognition of changes made to the Latvian economy, which have been implemented largely thanks to the Latvian entrepreneurs, citizens and society as a whole. It provides an opportunity for Latvia to make the next step and join the single European currency”, says Prime Minister Valdis Dombrovskis, assessing the Convergence Reports of the EC and the ECB, which were released today, and which conclude that the economy of Latvia meets all the Maastricht criteria and is ready to join the euro area.
„Nine years after Latvia’s accession to the European Union, our economy has stabilized and reached a healthy structure. To ensure further development, we need a stable, internationally reliable currency. The accession of Latvia to the euro area will be a sound additional impetus for economic growth of our country that will enable the improvement of well-being and living standards of citizens,” says V.Dombrovskis.
„Public support for this step is an important factor that we follow closely, and we also appreciate the public support for the introduction of the euro that we have received so far. I am pleased that the most important social and cooperation partners of the government – the Employers’ Confederation of Latvia (LDDK), the Latvian Chamber of Commerce and Industry (LCCI) and the Free Trade Union Confederation of Latvia (FTUCL), as well as many NGOs have expressed their support for the introduction of the euro. More than two-thirds of entrepreneurs recognize correctness of this step. The public support is gradually increasing; however, a qualitative dialogue with the society is still very important, communicating the pragmatic issues associated with the introduction of the euro, and ensuring the maximum support during the euro changeover process,” confirms the Head of the Government of Latvia.
Olli Rehn, Commission Vice-President responsible for Economic and Monetary Affairs and the Euro said, „Latvia’s experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger. Following the deep recession of 2008-9, Latvia took decisive policy action, supported by the EU-IMF-led financial assistance programme, which improved the flexibility and adjustment capacity of the economy within the overall EU framework for sustainable and balanced growth. And this paid off: Latvia is forecast to be the fastest-growing economy in the EU this year."
He added: "Latvia's desire to adopt the euro is a sign of confidence in our common currency and further evidence that those who predicted the disintegration of the euro area were wrong.”
At the request of the Latvian authorities, the ECB today published its assessment of the economic and legal convergence of Latvia. The ECB’s Convergence Report examines whether a high degree of sustainable economic convergence has been achieved in the country under review and gauges compliance with the statutory requirements to be fulfilled by national central banks to become an integral part of the Eurosystem.
Over the reference period from May 2012 to April 2013, Latvia recorded a 12-month average inflation rate of 1.3%. This was well below the reference value for the criterion on price stability, which was 2.7%. The reference value was calculated by adding 1.5 percentage points to the unweighted arithmetic average of the rates of HICP inflation over these 12 months in Sweden (0.8%), Latvia (1.3%) and Ireland (1.6%).
More recently, after peaking in mid-2011, inflation in Latvia has declined to low levels, reflecting in particular the effects of lower global commodity prices and a lower rate of VAT as of July 2012.
In the reference year 2012 the general government budget balance showed a deficit of 1.2% of GDP, i.e. well below the 3% reference value. The general government gross debt-to-GDP ratio was 40.7%, i.e. below the 60% reference value. In 2013 the deficit ratio is forecast by the European Commission to be unchanged at 1.2% and the government debt ratio is projected to increase to 43.2%.
The Latvian lats has been participating in the exchange rate mechanism (ERM II) since 2 May 2005, with a fluctuation band of ±1% as a unilateral commitment on the part of the Latvian authorities. Over the two-year reference period from 17 May 2011 to 16 May 2013 the lats has remained close to its central rate.
Long-term interest rates in Latvia were 3.8% on average over the 12-month reference period from May 2012 to April 2013. This was below the reference value of 5.5%, as calculated by adding 2 percentage points to the average of the long-term interest rates on government bonds over these 12 months in Sweden (1.6%), Latvia (3.8%) and Ireland (5.1%).
Latvian law complies with all the requirements for central bank independence, the prohibition on monetary financing and legal integration into the Eurosystem.„All in all, Latvia is within the reference values of the convergence criteria,” the report concludes.