Press Release of May 2, 2005
At the EU Economic and Financial Committee meeting that took place in Brussels on April 29 with the participation of representatives from the euro area countries, the European Central Bank and the ERM II member states (Denmark, Estonia, Lithuania and Slovenia), Latvia has joined ERM II with the already established lats exchange rate against the euro, i.e. 1 EUR = 0.702804 LVL. Although the permissible standard exchange rate fluctuation within ERM II is +/-15%, Latvia has undertaken to unilaterally guarantee exchange rate fluctuation within +/-1%, preserving the fluctuation band, familiar to the financial market, that has existed since the lats was pegged to the SDR in 1994. That same fluctuation band was retained as the lats was re-pegged to the euro on January 1, 2005.
"Latvia has successfully pegged the lats to the euro at the beginning of this year. Following a four month assessment process, the European Commission and the European Central Bank have also acknowledged the above attainment. The peg rate is compliant with the current requirements of the economic development of Latvia: the peg of the lats to the euro has been timely and successful," said Mr. Ilmars Rimsevics, Governor of the Bank of Latvia.
The Latvian Government has thus made a significant step towards the implementation of its plan for introducing the euro. In the future, the Government and the central bank will have to make a joint effort to reduce inflation and meet the Maastricht criteria. Mr. Rimsevics emphasised that low inflation was not only one of the required criteria for the introduction of the euro, but also a significant precondition for further economic growth in Latvia, supported anew by the International Monetary Fund's research on the link between low inflation and buoyant economic development.
ERM II is a multilateral agreement aimed at supporting exchange rate stability and coordination in Europe. Participation in ERM II is a necessary step for Latvia to become a full member of the Economic and Monetary Union and introduce the euro. ERM II is a fixed exchange rate system whereby the participating country's currency is fixed at a central rate to the euro, upon multilateral consultations (EU Member States, the European Central Bank, the European Commission, the ERM II candidate).
As a member of ERM II, a country that is getting ready to introduce the euro must guarantee the stability of this exchange rate and meet several economic requirements or Maastricht criteria (low inflation, low interest rates, low budget deficit, low government debt). In accordance with the Government approved plan on Latvia's preparations for full-fledged membership in the Economic and Monetary Union, the Latvia lats has duly - as of January 1, 2005 - been pegged to the euro.
Latvia's monetary system will have to remain within ERM II at least two years, but the length of the participation will depend on whether the Maastricht criteria are met.