Lija Strasuna

Inflation and budget deficit were some of the main reasons why Latvia and Lithuania failed to qualify for the introduction of Euro in March this year – convergent reports of the European Central Bank (ECB) and the European Commission (EC) are evident of this. However, both countries have good chances of complying with Maastricht criteria in the beginning of next year. The greatest uncertainty currently surrounds the fulfilment of the criteria on government bond interest rates, according to the latest Swedbank research.

«Latvia and Lithuania have good chances of complying with Maastricht criteria in the beginning of 2013, and joining Eurozone in 2014. Latvia’s chances are somewhat better, because it has a larger security budget reserve completion, as well as a stricter political dedication to introduce Euro,»- says Senior Swedbank Economist Lija Strasuna.

Most likely Greece will not be included in the calculation of the price stability criteria, because it is the only country to which the EC predicts a deflation for the beginning of 2013. If this happens, Latvia and Lithuania should have no problems with complying with this criterion. Both countries comfortable complete the state debt and currency rate stability criteria. In addition to that, Latvia is also coming close to complying with the budget deficit criterion. Lithuania also has good chances, but it has lower manoeuvrability because the coming parliamentary elections slow the making of important decisions, the economist projects.

«Policy makers in Latvia and Lithuania are still trying to comply with Maastricht criteria – it is important to state economic stability and a balanced growth independent of the future decision on whether or not to join the Eurozone. Even if both countries manage to successfully comply with all criteria, they still have the right to put off the introduction of Euro, if the situation in the Eurozone worsens significantly. This means that it is important to carefully follow the events transpiring within the united monetary union. Additionally, the important thing is not the fluctuations on financial markets, but the progress towards the arrangement of euro area’s institutional framework and measures on decreasing macroeconomic imbalance among members states of the Eurozone,»- Strasuna points.

There are five main criteria that allow the ECB and the EC decide whether or not a candidate country is ready to introduce Euro: price stability, and government bond interest rates, state budget deficit and debt, as well as currency rate stability. These criteria are not allowed to be completed through one-time measures; completion should be sustainable.

The first two so called movable goals – follow the development in other EU countries, so the values of the criteria constantly change. State financial stability evaluation has definite ceiling (3% of GDP deficit and 60% of the debt) – it is allowed to be exceeded even slightly, if significant progress is achieved in budget deficit and debt reduction in previous periods. Currency rate stability criterion is determined by the national currency’s fluctuation within the last two years was +/-15% in relation to Euro.

In addition to the main numerical criteria, there are known legislative requirements that cover the country’s legislation in relation to the independence of the central bank and the prohibition for the central bank to fund the government or other organizations.

Ref: 102.109.109.2843