Transcript Latvia – Convergence report 2013

Convergence Report 2013
on Latvia
Christian Weise
EUROPEAN COMMISSION, DG ECONOMIC AND FINANCIAL AFFAIRS
05 June 2013, Riga
The Convergence Criteria - 1
•
“Maastricht” convergence criteria were assessed in line with
the principle of equal treatment
•
Quantitative and qualitative assessment – focus on
sustainability of convergence
•
Integrating findings of broader European Semester
surveillance (e.g. MIP)
•
Broad approaches and results are consistent with ECB (but the
two reports are fully independent)
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The Convergence Criteria - 2
•
Reference values and periods
•
Price stability: 2.7% in April 2013, based on the 12-month
average inflation of Sweden (0.8%), Latvia (1.3%) and Ireland
(1.6%) plus 1.5 percentage points; Greece (0,4% and
widening gap to EA) excluded as an 'outlier'.
•
Exchange rate: from 17 May 2011 to 16 May 2013
•
Long-term interest rate (LTIR): 5.5% in April 2013, which
is the 1-year average of the LTIRs of the price stability best
performers plus 2 p.p.; normalisation on Ireland's bond
market has allowed to use its LTIR in the assessment
(contrary to 2012)
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Conv. Criteria – 3
•
The average inflation rate in Latvia during the 12 months to April 2013 was 1.3%, 1.4
p.p. below the reference value and it is forecast to remain below the reference value in the
months ahead (with Latvia's HICP projected at 1.4% in 2013 and 2.1% in 2014).
•
The 1 p.p. VAT reduction in July 2012 contributed to low inflation, but in light of the
analysis of underlying fundamentals and the fact that the reference value has been met by
a wide margin, Latvia's price performance is assessed as sustainable.
•
Regarding public finances, the Commission considers that the excessive deficit has been
corrected in a credible and sustainable way (the deficit was at 1.2% and debt at 40.7% of
GDP in 2012) and has recommended that the Council closes the EDP for Latvia. If this is
done, Latvia will fulfil the criterion on the government budgetary situation.
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Conv. Criteria - 4
•
The Latvian lats has participated in ERM II since 2 May 2005, which is considerably
more than the minimum two years. Upon ERM II entry, the Latvian authorities committed
to keep the lats within a ±1% fluctuation margin and they have adhered to this. The lats
has not experienced tensions during the assessment period.
•
Reflecting strengthening confidence, Latvia’s average long-term interest rate has
declined significantly and was 3,8% over the year to April 2013, below the reference value
(5.5%). Spread to the Bund was around 200 basis points in April 2013.
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Conv. Criteria - 5
Following the 10 January 2013
parliamentary adoption of amendments to the 'Law on the Bank of
Latvia', Latvia’s legislation in the monetary domain is fully
compatible with the EU legislation.
•
Compatibility
of legislation:
•
Additional factors (Art 140 TFEU):
•
Latvia's external balance adjusted significantly during the crisis,
supported also by improvements in its external competitiveness.
•
Latvia's economy is well integrated within the EU economy
through trade and labour market linkages, and it attracts sizeable
foreign direct investments.
•
The integration of the domestic financial sector into the EU financial
system is substantial, mainly due to a high level of foreign ownership
of the banking system. Financial supervision and regulation have been
strengthened.
In light of its assessment, the Commission considers that Latvia
fulfils the conditions for the adoption of the euro.
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Sustainability of convergence
•
Convergence framework aims to ensure that MS follow policies that
support the smooth functioning of EMU – sustainability is key
•
Accordingly, the sustainability dimension is inherent in the
convergence criteria themselves, in particular the ones on price stability
and public finances (EDP)
•
Additional factors broaden the view on sustainability (required by the
Treaty)
•
Findings of enhanced policy coordination and surveillance also inform
the convergence assessment (e.g. no IDR in the MIP for Latvia)
•
Overall, the conditions are in place for Latvia to maintain a
sustainable and robust medium-term convergence path,
•
But this needs to be validated by sound policies following euro
adoption
7
Selected policy issues -1
Financial stability – Non-resident banks
•
The banking sector went through sizable deleveraging
since 2008 (credit decreased by around 40% of GDP)
•
Bank assets to GDP are relatively small in Latvia (147%
versus 367% in EU)
•
Locally- and CIS-owned banks have a long tradition in
servicing non-resident clients (up to 50% of total deposits)
•
These banks are required to keep a high share of liquid
assets and are subject to additional capital requirements
•
Latvia's legislation complies with international anti-money
laundering standards, but further efforts are needed to
improve implementation
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Selected policy issues -2
Public support

Public support for euro is rising, but from a very low basis

36% of residents are in favour of euro adoption (TNS, April
2013)

Opinion-makers have expressed their support (Employers’
Confederation, the Chamber of Commerce, the Traders’, the
Banking, and the Farmers’ Associations, the President)

Latvia is somewhat reassured by experience of Estonia, where
public opinion became more favourable mainly after euro adoption

Commission helps Latvia in the information and communication
campaign on the introduction of the euro in the framework of a
Partnership Agreement
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Key challenges
To ensure that euro adoption is a success, it is key that:
•
Latvia conducts a prudent fiscal policy, including resolute
implementation of the newly adopted Fiscal Discipline Law.
•
Latvia keeps up momentum with structural reforms (social
inequality, education, public administration) and further
strengthens quality of institutions.
•
Latvia avoids the re-emergence of a demand/wage boom and loss
of competitiveness by ensuring that wages grow in line with
productivity
•
Latvia closely monitors financial stability and is ready to
implement further regulatory measures if needed, in particular as
regards non-resident deposits and preventing asset bubbles.
•
The changeover to the euro is carefully prepared.
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Latvia – Convergence report 2013 – timeline
Latvia requested an ad-hoc convergence assessment on 5 March
5 June: Commission (and ECB) evaluate the fulfilment of Maastricht
criteria in the Convergence Report 2013; COM adopts legal proposal
for a Council Decision on the adoption of the euro by Latvia on 1
January 2014 (plus set of other legal documents)
June/July: Eurogroup recommendation, discussion in European
Council, opinion from European Parliament
July: Final decision: ECOFIN Council of 9 July 2013 to decide on the
abrogation of Latvia's derogation from the participation in the EMU
and to fix irrevocably the conversion rate between lats and the euro
(COM proposal to be adopted in late June)
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Thank you for your attention
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