Latvia to adopt euro on January 1

December 29, 2013 - 10:00:32 am

Linda Grabouska shows a euro starter pack, containing a mixture of euro coins, she picked up with her daughter Jasmina at the Marupe post office in Latvia.

 

RIGA: Latvia has blazed a unique path in meeting tough rules for its January 1 eurozone entry, doing so while paying off a ¤7.5bn ($10.3bn) 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 percent as the global crisis began to hit Latvia hard.

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

But a period of deflation since then means average inflation for 2013 is expected to be 0.4 percent, with a return to a sustainable 2.3 percent 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 percent of gross domestic product (GDP).

Latvia managed to do so even as it recovered from the world’s deepest recession in 2008-9, when output shrank by nearly 25 percent 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 laying off hundreds of workers.

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

The 2013 figure is expected to be 1.5 percent and 0.9 percent 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 percent of output.

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

This year’s debt to GDP ratio is forecast to hit 42 percent with 43 percent 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 EUR = 0.702804 LVL.

AFP

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