Latvia

1) REFERENCES

Commission Opinion COM(97) 2005 final - Not published in the Official Journal

Commission Report COM (98) 704 final - Not published in the Official Journal

Commission Report COM (1999) 506 final - Not published in the Official Journal

Commission Report COM (2000) 706 final - Not published in the Official Journal

Commission Report COM (2001) 700 final - SEC(2001) 1749 - Not published in the Official Journal

Commission Report COM (2002) 700 final - SEC(2002) 1405 - Not published in the Official Journal

Commission Report COM (2003) 675 final - SEC(2003) 1204 - Not published in the Official Journal

Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]

2) SUMMARY

In its July 1997 Opinion the Commission took the view that it was too early to decide on Latvia's participation in the euro area immediately upon its accession. Its participation in the third stage of economic and monetary union (EMU) while not being a member of the euro area continued to pose problems. It would be necessary in particular for the legislation on the central bank to be made compatible with Community requirements. As for the movement of capital, Latvia had already achieved almost complete liberalisation, and the removal of the remaining restrictions should not present any major difficulty.

The November 1998 Report noted that some progress has been made in preparing for accession to economic and monetary union.

In its October 1999 Report, the Commission observed that Latvia had made important progress in preparing for accession to EMU, especially as regards the independence of its central bank.

The November 2000 Report noted that no new legislation had been enacted since the last regular report.

In its November 2001 Report, the Commission noted that, overall, Latvian legislation was broadly in line with the acquis.

In its October 2002 Report, the Commission found that, since the last regular report, Latvia had made progress in adopting the acquis.

In its November 2003 Report, the Commission found that, overall, Latvia is fulfilling the commitments and requirements arising from the accession negotiations and will be able to apply the corresponding acquis from the date of its accession.

The Treaty of Accession was signed on 16 April 2003 and accession took place on 1 May 2004.

COMMUNITY ACQUIS

The third stage of EMU began on 1 January 1999. This date will entail far-reaching changes for all Member States, even those not taking part in the euro area from the outset.

In the economic sphere, the keystone is the coordination of national policies (national convergence programmes, general economic guidelines, multilateral surveillance and excessive-deficit procedure). All countries are required to comply with the Stability and Growth Pact, to refrain from direct financing of the government deficit by the central bank, to prohibit privileged access by public authorities to financial institutions and to have liberalised capital movements.

Member States not taking part in the euro area conduct an independent monetary policy and participate in the European System of Central Banks (ESCB) under certain conditions. Central banks must be independent and must have price stability as their primary objective. Lastly, exchange-rate policy is regarded as a matter of common interest by all Member States, which must be in a position to participate in the new exchange-rate mechanism.

Even though accession entails acceptance of the objective of EMU, compliance with the convergence criteria is not a precondition. However, since those criteria are indicative of a macroeconomic policy geared to achieving stability, all Member States must, in due course, comply with them on a permanent basis.

EVALUATION

Latvia did not gain its independence until 1991. It has had to rebuild a market economy and establish new institutions. The reforms therefore began late and moved at a fairly slow pace. Latvia made significant progress in establishing a stable macroeconomic framework and a market economy up to 1998. It is on course to being able, in the medium term, to withstand competitive pressures and market forces within the EU. The 1999 Report considered that Latvia could be viewed as a functioning market economy. In Latvia the economy is very open and its commercial integration with the EU is progressing steadily. Per capita gross domestic product (GDP) stood at 33.1% of the EU average in 2001.

As regards economic activity, GDP growth of 6.5% in 1997 was particularly high. The Latvian economy was seriously affected by the Russian crisis as of the second half of 1998. GDP growth consequently fell to 3.6%. The economic recession after the 1998 Russian crisis was followed by a vigorous recovery. Led by exports, investment and private consumption, GDP increased to 6.6% in 2000 and 7.7% in 2001 despite a slowdown in the global economy. The annual increase in real GDP averaged some 6.1% in the period covered by the Commission's reports. The 2003 Report finds that economic activity has remained firm despite a weak external environment. GDP growth remained strong in 2002, at 6.1%. It gathered further momentum in the first quarter of 2003 and amounted to 8.8% over twelve months.

As regards the public finances, the Government's general budget showed a surplus equivalent to 1.8% of GDP in 1997. In 1998 the general government budget showed a financial surplus equivalent to 0.3% of GDP. The subsequent stagnation of economic growth produced a general government deficit equivalent to 4.2% of GDP in 1999. The deficit fell to 2.8% in 2000 and continued to fall in subsequent years, reaching 1.6% of GDP in 2001. The Finance Law 2002 provides for an increase in the budget deficit to an anticipated 2.75%. Since 1999 budgetary policy has been aimed at attaining a balanced budget in the medium term. General government average gross debt throughout the period in question is, in comparison, fairly low, equivalent to 13.6% of GDP. It has increased each year and in 2001 it rose by 2.1 percentage points to 16% of GDP. The 2003 Report finds that the budgetary reform process has stalled and that budgetary policy became more expansionary in 2002. As a result, the general government deficit increased to 3%. The general government debt, however, remains relatively low and was equivalent to 15.2% of GDP in 2002.

Since mid-1997 there has been a steady resurgence in inflation. In August 1999 the year-on-year rate of inflation was 2.1%, compared with 3.5% in September 1998. Throughout 1999 inflation remained low in Latvia, averaging 2.4%, but rose to 3.7% in April 2000. Price increases averaged 2.6% in 2000 and 2.5% in 2001. The figure for the period covered by the Commission's reports was 3.9%. Inflation fell to 2% in 2002 but nevertheless rose to 2.5% in April 2003.

On the exchange-rate front, the main objective of Latvian monetary policy is to maintain a fixed parity against a basket of currencies. During the summer of 1999 the currency had to cope with strains resulting from concern over the growing budget deficit. However, the central bank considers that it is technically able to link the currency to the euro at any time. In 1999 the lat rose by 4.7% against the currencies of Latvia's main trading partners. The 2001 Report considers that the central bank's monetary policy, involving a currency peg that has helped to secure price stability, has been successful. The 2003 Report notes that monetary conditions remain favourable to a currency peg and have therefore contributed to macroeconomic stability.

Latvia's current-account deficit is still large and is tending to widen with the acceleration in growth. In 1997 it amounted to 6.3% of GDP. Since the onset of the Russian crisis in August 1998, exports to the Commonwealth of Independent States (CIS) fell by almost half. Since the end of 1999 the current-account deficit, while remaining significant, has improved slightly. Reflecting the satisfactory export performance, it narrowed sharply to 9.6% of GDP in 1999 and to 6.8% in 2000. In 2001 it rose to 9.7%. It averaged 8.6% of GDP in the period covered by the Commission's reports. The 2003 Report finds that the current-account deficit has been reduced to 7.7% of GDP, which nevertheless remains a relatively high figure.

Regarding structural reforms, Latvia has made considerable progress. According to the timetable that was fixed, 95% of former state enterprises were to be privatised by 1 July 1998. The privatisation process is being implemented and the private sector now accounts for 65% of GDP and for 69% of employment in Latvia. In 2000 the government continued to make good the structural deficiencies in the economy. Substantial progress has been made in the financial sector and initial steps have been taken to reform the pension system. The restructuring of the Latvian banking sector has been practically completed. The 2001 Report notes that the level of unemployment, although high, is fairly stable. The level of education in Latvia is relatively high. The structural development of the economy has been considerable but has slowed recently. The Government has pursued a policy of privatisation. Restructuring plans are being implemented for state enterprises that are not to be privatised. Pension reform is being implemented as planned. Progress has been made in applying active labour market policies but several structural rigidities remain.

As for the independence of the central bank, legislation enacted in 1998 prohibited the granting of short-term credit to the State. Latvia has made substantial progress in its preparations for joining EMU next year. The central bank no longer has the right to buy state loans on the primary markets and the public authorities no longer enjoy privileged access to financial institutions. Nevertheless, the 2000 Report demanded that the definitions of public debt and public deficit be brought into line with the requirements of the acquis. However, the legal instrument establishing the Bank of Latvia still contains grounds for dismissing its effects that may well be contrary to the acquis. In June 2002 new legislation on the Bank of Latvia was adopted in order to bring it more in line with the provisions of the acquis relating to the requirement of the Bank's independence, particularly where the grounds for dismissing members of its governing board are concerned. The 2003 Report finds that Latvian law is in accordance with the acquis except for one area: Latvia still needs further amendments to the law on the central bank in order to guarantee the personal independence of the members of the board.

Regarding the state of negotiations, Latvia has indicated its readiness to accept the acquis relating to EMU and to comply with it fully. It has achieved a high level of compliance with that part of the acquis and has established the necessary administrative capabilities. Negotiations concerning the present chapter were concluded in December 2002. Latvia has not requested a transitional regime. In general, it is complying with the undertakings given in the accession negotiations in this area.

Last updated: 15.03.2004