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Transcript Estonia-Latviax

Background to Estonia
 had consistently recorded high rates of economic
growth and development
 Government spending is < 40% of GDP
 openness to international trade and high levels of
Foreign Direct Investment
monetary and fiscal convergence
 1. Stable prices: Inflation must not be more than 1.5% higher than the
average in the three member countries with best price stability
2. Stable exchange rate: The national currency must have been stable
relative to other EU currencies for 2 years within the ERMII
3. Sound government finances:
a. Total government debt must not exceed 60 per cent of GDP.
b. The budget deficit must not be greater than 3 per cent of GDP
4. Interest rate convergence: 5-year Treasury bond interest rate must
not be more than 2% higher than average of Euro Zone members
Joining Euro can encourage macro
stability because:
 can promote trade and capital investment because of less
currency risk
 Producers have to keep costs and prices down and may
encourage attempts to raise productivity and focus on
research and innovation. (dynamic efficiency)
 Reinforcing gains in comparative advantage
 Competitive devaluations to boost AD
Is Estonia an Optimal Currency
 Use Page 17 to find out what this means.
 Problems of joing EU – loss of control over monetary
 Is this a problem for Estonia?
 Who are main trading partners?
 Is there economic cycle in line with other EU
Background to Latvia
 Higher inflation rates since 2006
 Consumer spending boom link to current account
 Capital flight since recession (unable to attract FDI)
 3 main trading partners outside the EU.
Have the UK, Sweden and Denmark
achieved a stronger economic
performance outside of the Euro
CBA of Latvia joing Euro
 Page 21
 Overall impact on macro stability depends on:
 Ability to meet initial convergence criteria
 Who the main trading partners are
 The relative importance of interest rate management
 The need to attract FDI
 Whether trade cycles are in sync…