Estonia-Latviax
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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
criteria.
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
Area:
Use Page 17 to find out what this means.
Problems of joing EU – loss of control over monetary
polic.
Is this a problem for Estonia?
Who are main trading partners?
Is there economic cycle in line with other EU
countries?
Background to Latvia
Higher inflation rates since 2006
Consumer spending boom link to current account
deficit
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
Zone?
CBA of Latvia joing Euro
Page 21
Evaluation
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…