S-word of Damocles to decide Latvia's euro hopes

By bne IntelliNews November 6, 2012

Mike Collier in Riga -

Latvia's turnaround from economic basket case to poster child for the "austerians" has been well documented, but one thing remains to bookend the Baltic state's epic tale of bust and boom: accession to the Eurozone.

In Riga on November 2, the expectation that Latvia will become the 18th member of the currency union was flagged up by Prime Minister Valdis Dombrovskis in no uncertain terms.

"In one word, the eurozone means stability and growth," Dombrovskis said with a straight face of which Buster Keaton would have been proud. He was speaking in a freshly renovated, opulent annex of the Latvian central bank that displayed little evidence of the austerity measures implemented elsewhere in the country since he came to power in 2009.

"I see Latvia's future in the eurozone, " Dombrovskis said. "Latvia is on a sustainable growth path, its economy has grown for eight consecutive quarters. During the economic crisis, we have gone from being the worst affected country to become the fastest growing economy."

His government has targeted January 1, 2014 as the day Latvia will join the eurozone, and insists that it already meets all the Maastricht criteria which govern euro adoption.

But that just makes the S-word - sustainability - the buzzword until next July when a final decision on Latvia's euro entry will be made. Having logged some of the most extreme economic data ever recorded in the last five years (such as a cumulative GDP loss of 25% in 2008-09) Latvian officials are now making a concerted effort to prove to the European Central Bank and European Commission that lessons have been learned and the country will not return to boom and bust.

Asked by bne if Latvia expects to be admitted to the eurozone in 2014, Finance Minister Andris Vilks reached straight for the S-word: "Of course ... sustainability is the only issue that can be raised. September was the first month we met all the Maastricht criteria and there is a very good chance we will meet them next year and the next year. The inflation trend is positive, and in coming years Lavia could be amongst the countries with the lowest inflation in the EU. Interest rates for our bonds are also dropping."

There is no danger of Latvia returning to its bad habits, Vilks insisted: "If you go through such a deep crisis it's like [going through] a war. It has impacted all levels of Latvian society. You cannot easily forget such an experience. We should keep this feeling and approach as long as possible."

"We understand how important it is to be in the eurozone. We are able to show sustainability and that is definitely the key issue, to keep sustainability and even to speed up reforms to increase sustainability," Vilks added.

Having told the conference that Latvia could move from deficit to a balanced budget or even a surplus in 2015, Vilks told bne he hopes that threshold might be crossed even sooner.

"I won't be surprised to see us coming fast to a surplus budget. Maybe it could even happen during 2014. It's difficult to say politically, but to me the trend is so positive that during 2014 it could even be possible. The primary balance should be very close to zero already by 2014," Vilks said.

Latvia's budget deficit has already been slashed from 9.7% of GDP in 2009 to 3.5% in 2011 with a level of 1.9% targeted this year and 1.4% next.

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