05 June 2013

Commission concludes that Latvia is ready to adopt euro in 2014

The Commission concludes 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. (Includes VP Rehn's speaking points.)

Today, the European Commission publishes its 2013 Convergence Report on Latvia, together with a citizen's summary that briefly explains the report and the rationale behind it. The Commission concludes 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.

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 macro-economic 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".

The Convergence Report concludes a positive assessment of Latvia's economic performance against the convergence criteria set out in the EU Treaty as follows:

Inflation

The average inflation rate in Latvia in the 12 months to April 2013 was 1.3 per cent, well below the reference value of 2.7 per cent, and it is likely to remain below the reference value in the period ahead. While short-term factors (notably the VAT cut last July) have contributed to the particularly low current level of inflation, the analysis of underlying fundamentals and the fact that the reference value has been met by a wide margin support a positive assessment of the fulfilment of the price stability criterion. Latvia will need to remain vigilant to keep inflation at a low level, including by maintaining a prudent fiscal policy and keeping domestic demand on a sustainable path.

Public finances (deficit and debt)

The general government deficit-to-GDP ratio reached 8.1 per cent in 2010, but decreased to 1.2 per cent in 2012 and is projected to remain at 1.2 per cent in 2013 according to the Commission's latest Spring Forecast. The general government debt stood at 40.7 per cent of GDP at end-2012. The Commission considers that the excessive deficit has been corrected in a credible and sustainable way and has recommended that the EU Economic and Financial Affairs Council (ECOFIN) close the excessive deficit procedure for Latvia (see MEMO/13/463). If this is done, Latvia will fulfil the criterion on the government budgetary situation.

Interest rates

Latvia’s average long-term interest rate over the year to April 2013 was 3.8 per cent, below the reference value of 5.5 per cent. The spreads vis-à-vis euro area long-term benchmark bonds have been declining markedly since 2010, which reflects market confidence in Latvia.

Exchange rate

The Latvian lats has participated in the Exchange Rate Mechanism (ERM II) since 2 May 2005, which is considerably more than the minimum two years. When it joined ERM II, the Latvian authorities committed to keep the lats within a ±1 per cent fluctuation margin around the central rate. During the two years preceding this assessment, the lats exchange rate did not deviate from its central rate by more than ±1 per cent and it did not experience tensions.

Other factors have also been examined, including balance of payments developments and integration of labour, product and financial markets. Latvia's external balance adjusted significantly during the crisis, supported also by improvements in its external competitiveness. Latvia's economy is well integrated within the EU economy through trade and labour market linkages, and it attracts sizeable levels of foreign direct investment. The integration of the domestic financial sector into the EU financial system is substantial, mainly due to a high level of foreign ownership of the banking system.

Finally, Latvia's legislation in the monetary field is compatible with EU legislation.

This assessment is completed by the European Central Bank's (ECB) own convergence report, also published today.

Press release

FAQs

Convergence report

ECB-Convergence report

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At the press conference, VP Rehn said: "Latvia's prospective euro adoption is a strong signal to the region, to the euro area and to the global community and markets at large. It underlines the integrity of the euro and shows that sustained and stability-oriented policy action generate concrete results and economic reforms pay off."

VP Rehn - Speaking Points

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Comment by Peterson Institute/Aslund © Peter G. Peterson Institute for International Economics

© European Commission