EU and euro
Latvia's Integration in the European Union and Introduction of the Euro
Following Latvia's accession to the EU, the Bank of Latvia's policy is based on the strategic goal to prepare the country for a full-fledged participation in the Economic and Monetary Union. In the light of its commitment, Latvia is aiming towards both nominal and real convergence with EU Member States. Although real convergence is a long-term objective, Latvia is well on its way of achieving it.
In the period between the accession to the EU and 2007, real GDP growth in Latvia has exceeded the average GDP growth rate in EU countries, thus gradually narrowing per capita income differences.
The structure of Latvia's GDP is in line with that of industrially developed countries: the share of agriculture, hunting and forestry in total value added declined from 8.7% in 1995 to 3.0% in 2008, whereas the share of services increased from 60.6% to 74.2%.
The role of the EU in Latvia's foreign trade is strengthening: in 2008, 65.0% of total goods and services exports from Latvia went to the EU countries.
Compliance with the Maastricht Criteria
|
|
Criterion in 2007 |
Latvia's performance in 2007 |
Criterion in 2008 |
Latvia's performance in 2008 |
Criterion in December 2009 |
Latvia's performance in December 2009 |
|
Budget balance (% of GDP) |
-3.0 |
-0.4 |
-3.0 |
-4.0 |
-3.0 |
-6.7* |
|
Government debt (% of GDP) |
60.0 |
9.0 |
60.0 |
19.5 |
60.0 |
32.1* |
|
Average annual inflation rate of last 12 months (%) |
2.8 |
10.1 |
4.1 |
15.3 |
1.5** |
3.3 |
|
Long-term interest rate on government securities (%) |
6.43 |
5.28 |
6.24 |
6.43 |
5.93
|
12.36
|
|
Exchange rate regime |
Fixed exchange rate against the euro and participation in ERM II for at least two years |
Fixed exchange rate against the euro and participation in ERM II since May 2005 |
Fixed exchange rate against the euro and participation in ERM II for at least two years |
Fixed exchange rate against the euro and participation in ERM II since May 2005 |
Fixed exchange rate against the euro and participation in ERM II for at least two years |
Fixed exchange rate against the euro and participation in ERM II since May 2005 |
* Against GDP projections.
** The estimate does not include countries with deflation.
Sources: Treasury, the Central Statistical Bureau of the Republic of Latvia and Eurostat data.
The peg of the lats to the euro - the first most significant monetary adjustment following Latvia's accession to the EU - was effected on 1 January 2005, followed by joining the Exchange Rate Mechanism II (ERM II) on 2 May. The latter is an arrangement for exchange rate pegging and simultaneously a procedure for testing maturity of the euro-adopting accession countries. Latvia's participation in the ERM II is important for compliance with the Maastricht convergence criteria and becoming a full-fledged member of the Economic and Monetary Union.
According to the economic stabilisation programme approved in December 2008 by the Latvian Government and international financial institutions (the European Commission, IMF and a number of regional countries), Latvia's changeover to the euro might take place in 2014 at the earliest. In the previous three years, inflation posed a major obstacle to the introduction of the euro in Latvia as early as 2008; currently, the compliance with the budget deficit criterion figures as the main challenge. The introduction of the euro in Latvia will be an issue of the EU multilateral relations affecting the common interests of all EU countries. Therefore, the projected timeframe for the introduction of the euro is merely tentative and will gain an official status only after the completion of all negotiations and other formal procedures.
