Brussels, 05/06/2013 (Agence Europe) - In two reports adopted on Wednesday 5 June (see EUROPE 10858), the European Commission and European Central Bank say that Latvia can join the eurozone, becoming the 18th euro nation.
Euro Commissioner Olli Rehn said he was delighted to announce that Latvia, which will have the strongest economic growth in 2013, was ready to join in the euro on 1 January 2014. The final decision by the Ecofin Council may be taken in July. Rehn said: “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.” He praised Latvia's ability to successfully overcome severe macroeconomic imbalances and come out the other end stronger than before. He praised the government's energetic action to boost its adjustment capacity following the sharp recession of 2008-9 when the country's GDP fell by 20%. In order to recover, Riga requested international aid from the IMF and EU, and implemented a drastic austerity drive.
Commenting on the convergence criteria to be met in order to join the euro, the Commission said that, in April 2013, average inflation over twelve months stood at 1.3%, well below the reference point of 2.7% (calculated by adding 1.5% to the average inflation in Sweden (0.8%), Latvia (1.3%) and Ireland (1.6%) from May 2012 to April 2013). The Commission says that Latvia will need to remain vigilant if it is to keep inflation at that low level, as joining the euro will be accompanied by a price hike. The ECB says that consumer price changes have been very volatile over the past decade, ranging from +1.2% to 15.3%.
Latvia's public deficit went from 8.1% in 2010 to 1.2% in 2012 and is expected to remain stable in 2013. Public debt stood at 40.3% of GDP in 2012. At the end of May, the European Commission recommended that the excessive deficit proceedings against Latvia should be brought to a close.
The Commission says that the long-term interest rate for Latvian bonds, 3.8%, reflects market confidence in the country. The yield is well below the reference rate of 5.5% calculated by adding 2% to the average of the yield on long-term sovereign bonds, from May 2012 to April 2013, for Sweden (1.6 %), Latvia (3.8 %) and Ireland (5.1 %). The Latvian currency, the lats, has been in the European Exchange Rate Mechanism (ERM II) since May 2005, well above the minimum of two years.
A potential Cyprus? The Commission notes the high level of foreign banks in Latvia and the fact that half of all savings in the country's banks are from foreigners, mostly from former Soviet republics. Rehn says that Latvia cannot be compared with Cyprus, whose financial aid talks with the eurozone have raised fears of a spread of the crisis to elsewhere in the eurozone. He said the size of the Latvian banking sector was 150% of the country's GDP, which is nothing like the figure for Cyprus before restructuring (800% of the island's GDP). Latvia's membership of the eurozone bank supervision and restructuring mechanisms should guarantee better resilience for the Latvian financial system. Rehn called, however, for vigilance about dangers due to the special nature of Latvian banks and urged the country's government to clamp down on money-laundering in a determined manner.
The ECB makes a number of recommendations for the country. In order to boost resilience to economic shocks, it urges Latvia to pursue “ambitious” budget consolidation under the stability and growth pact rules; ensure the sustainability of the gains in competitiveness by avoiding any new hikes in unit labour costs; and improve its institutional capacity. (MB/transl.fl)