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 2008 |
Latvia's performance in 2008 |
Criterion in 2009 |
Latvia's performance in 2009 |
Criterion in April 2010 |
Latvia's performance in April 2010 |
|
|
Budget balance (% of GDP) |
-3.0 |
-4.1 |
-3.0 |
-9.0 |
-3.0 |
-9.0 |
|
Government debt (% of GDP) |
60.0 |
19.5 |
60.0 |
36.1 |
60.0 |
36.1 |
|
Average annual inflation rate of last 12 months (%) |
4.1 |
15.3 |
1.5
|
3.3
|
1.0* |
-0.6 |
|
Long-term interest rate on government securities (%) |
6.24 |
6.43 |
5.93
|
12.36
|
6* |
12.64 |
|
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 |
* In accordance with the ECB Convergence Report 2010 (Ireland has been excluded from the calculation of the reference value of Maastricht criteria).
Sources: Treasury, the Central Statistical Bureau of the Republic of Latvia and Eurostat data.
The peg of the lats to the euro on 1 January 2005 was the first significant monetary adjustment after Latvia's accession to the EU, to be followed by joining the Exchange Rate Mechanism II (ERM II) on 2 May of the same year. ERM II is an arrangement for the pegging of the exchange rate and simultaneously a procedure for testing the maturity of a member state to adopt the euro. Latvia's participation in ERM II is important for compliance with the Maastricht convergence criteria and becoming a full-fledged member of the Economic and Monetary Union.
Consistently with both the Convergence Programme of Latvia for 2009-2012, whose medium-term projections support Latvia's maturity to meet the Maastricht criteria in 2012, and Latvia's Economic Stabilisation and Growth Revival Programme, the government of Latvia has set 1 January 2014 as the target for the adoption of the euro. Latvia's failure to introduce the euro as early as 2008 was on account of the high inflation, whereas at this junction meeting the budget deficit criterion is the largest challenge. The introduction of the euro in Latvia will be an issue of the EU multilateral relations affecting common interests of all EU countries. Therefore, the projected target or timeframe for the adoption of the euro will gain an official status only after the completion of all negotiations and other formal procedures.
