European Central Bank Approves Latvia’s Bid to be Included into Euro Region

The European Central Bank has announced that it approves bid of Latvia to adopt Euro, even though policy makers are pretty concerned that this European country will face a tough time in maintaining economic achievements. European Central Bank, on its convergence report stated that Latvia is in reference values of the convergence criteria. The bank added that the longer term sustainability of the economic convergence is a concern.

Latvia is attempting to join Euro on 1st January, 2014, thereby becoming the 18th member of the currency union. This adoption would be crowning a recovery from the deepest recession in the world in 2009 to the fastest growth of the European Union in last year. A separate assessment report will be published by the European Commission and a final decision of Latvia’s inclusion will be taken by the finance ministers of the European Union on 9th July.

Incidentally, inflation in the Baltic country has averaged at 1.3% in last 12 months through April and this is well below the reference value of 2.7%. According to the officials of the European Central Bank, there are concerns over the sustainability of the inflation convergence. In the medium term, it will become a challenge to maintain the low inflation rates in Latvia. The monetary policy has pretty much limited room when it comes to maneuvering in a context which is characterized by little room for nominal exchange rate flexibility.

The general government budget deficit of Latvia is at 1.2% currently. On the other hand, the debt ratio is at 40.7% of the gross domestic product. Both of these are under the limits of the European Union in 2012. The central rate has been held close by the Latvian Government since May, 2011. Apart from that, the European Central Bank stated that the long term interest rates currently undershot the reference value.

To complete the requirements of becoming a part of the Euro region and the terms of a 7.5 billion Euro bailout in 2008, Latvia transformed the public finances of the same with austerity which is equal to 16% of the Gross Domestic Product. This move of Latvian Government got praises from numerous officials of the European Central Bank, including the President of the same, Herman Van Rompuy. If adapted into Euro, Latvia may receive a credit rating upgrade as well.