Latvia’s drive to adopt the euro

Riga: Latvia has blazed a unique path in meeting tough rules for its January 1 Eurozone entry, doing so while paying off a €7.5-billion (Dh38 billion, $10.3 billion) bailout that rescued it from near-bankruptcy amid the 2008-9 global crisis.

Under the 1992 Maastricht Treaty that created the euro, countries must meet targets on inflation, public finances, debt and exchange rate stability before they can adopt the currency.

But the soon to be 18-state Eurozone has seen members like Ireland, Portugal, Greece and Cyprus far exceed debt limits, forcing bailouts to prop up their economies.

Runaway inflation in the years following its 1990 independence from the crumbling Soviet Union proved the largest obstacle to Latvia’s Eurozone drive, spoiling initial hopes for entry in 2008.

In September of that year, annual average inflation hit 15.8 per cent as the global crisis began to hit Latvia hard.

It was brought down to 1.3 per cent by April 2013 — well under the 2.7 per cent required at the time under the variable Maastricht limit — prompting an EU green light for euro entry.

But a period of deflation since then means average inflation for 2013 is expected to be 0.4 per cent, with a return to a sustainable 2.3 per cent in 2014.

Like Eurozone members, candidate states must keep their public deficits — the shortfall between revenues and spending by the central government and local authorities — to under 3.0 per cent of gross domestic product (GDP).

Recession

Latvia managed to do so even as it recovered from the world’s deepest recession in 2008-9, when output shrank by nearly 25 per cent over two years.

It managed to repay the EU-IMF bailout without exceeding the deficit target by slashing public sector wages by more than a third, cutting benefits and and laying off hundreds of workers.

As a result, Latvia’s 2012 deficit came in at 1.3 per cent, a far cry from the 9.8 per cent deficit recorded as recently as 2009.

The 2013 figure is expected to be 1.5 per cent and 0.9 per cent in 2014.

To top it all off, in December 2012 Latvia repaid the EU-IMF bailout more than two years ahead of schedule.

The Maastricht limit for government debt is 60 per cent of output.

Meeting this target was never in doubt as Riga managed to reduce government debt from 44.7 per cent in 2010 to 40.7 per cent by the end of 2012.

This year’s debt to GDP ratio is forecast to hit 42 per cent with 43 per cent expected in 2014.

Latvia has fulfilled the exchange-rate stability requirement for many years because its currency, the lat, has been pegged to the euro since January 1, 2005, when the exchange rate was fixed at €1 = 0.702804