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EUROZONE : COMMISSION GREEN-LIGHTS LATVIA'S EURO ACCESSION.

On 5 June, the European Commission gave its green light to Latvia's accession to the eurozone, on 1 January 2014. The finance ministers of the 17 member states that have already adopted the single currency are expected to take their definitive decision at the July Ecofin Council, after the European Parliament has given its opinion.

The convergence report on Latvia published by the EU executive on the matter confirms that the country meets the five convergence criteria - the "Maastricht criteria" - required to adopt the single currency. The European Central Bank (ECB) has also published its own report, and while it concludes that Riga respects said criteria, it is somewhat more critical. The ECB expresses serious concerns about Latvia's long-term convergence in terms of inflation(1).

Latvia is ready to adopt the euro on 1 January 2014 thanks to a high level of sustainable economic converge, according to Economic and Monetary Affairs Commissioner Olli Rehn. He underlined the efforts Riga made to overcome the financial and economic crisis of 2008-2009, and noted that "Latvia is forecast to be the fastest-growing economy in the EU this year".

In terms of public finances, Latvia's budget deficit went from 8.1% in 2010 to 1.2% of the GDP in 2012 - this is well below the 3% reference value (convergence criteria). Commission forecasts suggest that this level will remain unchanged in 2013. Meanwhile, public debt, in 2012, was 40.7% of the GDP. The Commission predicts that there will be a 1.2% increase of the public debt in 2013. But in any case, the level would remain safely below the threshold of 60% of GDP. Riga also respects criteria for long-term interest rates and the exchange rate. For the latter, the Commission notes that during the two years preceding its assessment, the Latvian lats (the country's currency) exchange rate did not deviate from its central rate by more than [+ or -]1%. The lats has participated in the Exchange Rate Mechanism (ERM II) since May 2005.

INFLATION

As for inflation (price increase), Latvia recorded an average rate of 1.3% between May 2012 and April 2013 - a rate well below the authorised 2.7% threshold. "However, in the past ten years consumer price inflation in Latvia has been very volatile, ranging between annual averages of -1.2% and 15.3%," the report notes. The ECB added that "over the medium term" it will be difficult to maintain this low inflation rate. More broadly, the ECB warned that while Latvia respects the reference value of convergence criteria, "the longer-term sustainability of its economic convergence is of concern".

The ECB recalled that "joining a currency union entails foregoing monetary and exchange rate instruments and implies an increased importance of internal flexibility and resilience". Accordingly, the ECB strongly encourages Latvia to continue along a path of fiscal consolidation in line with the requirements of the Stability and Growth Pact. The ECB also recommends that Riga continue its efforts to improve the quality of its institution and its governance.

Last but not least, the ECB noted that the reliance of a significant part of the banking sector on non-resident deposits as a source of funding presents a serious risk for Latvia's financial stability.

Are these criticisms justified? The conclusions and analyses of the Commission and the ECB's reports are convergent, and both stress "sustainability," said Rehn. The ECB may be more critical but that is not new, the commissioner said wryly. Ultimately, he added, contrary to the ECB, the Commission is the one that has to say yes' or no' to the accession of a Union member state to the eurozone.

(1) The two reports are available at www.europolitics.info > Search = 336918
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Publication:European Report
Geographic Code:4EXLA
Date:Jun 6, 2013
Words:615
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