In a report published today, the commission concluded that the Baltic nation met a range of criteria relating to the strength of its public finances, its stable inflation rate, low interest rates and exchange rate stability. The decision now goes to European Union finance ministers, who are meeting next month. If approved, Latvia will join the euro in January 2014.
Commission vice-president Olli Rehn said Latvia’s success in meeting the criteria showed it was possible for a country to successfully overcome economic problems.
‘Following the deep recession of 2008/09, Latvia took decisive policy action, supported by the European Union-International Monetary Fund-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 said.
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.’
Latvia’s budget deficit reached 9.8% of its gross domestic product in 2009, but after a front-loaded austerity programme fell to just 1.2% last year.
Latvia's debt was 40.7% of GDP at the end of 2012. Its average inflation rate for the 12 months to the end of April was 1.3%, well within the 2.7% threshold required for joining the euro, while its long-term interest rate over the same period was 3.8%, below the reference value of 5.5%.
However, in a separate report, the European Central Bank said that while Latvia met the criteria for eurozone membership, there were concerns over the longer-term prospects for the country’s economy.
Latvia should continue along the path of ‘comprehensive fiscal consolidation’, and should also ‘lock in’ the competitiveness gains it had made in recent years by keeping a cap on wage growth, it said in a statement.
It also raised concerns over Latvia’s institutions and governance, and the large amount of foreign deposits held by the country’s banks. ‘Although Latvia´s economic adjustment capacity has been strong, it needs to make progress in improving the quality of its institutions and governance,’ an ECB statement explained.
‘Moreover, it is crucial that a comprehensive policy tool kit is available to deal with risks to financial stability, including those stemming from the reliance of a significant part of the banking sector on non-resident deposits as a source of funding.’
