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Monday 16.07.2018 | Name days: Hermīne, Estere
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Nordea Bank: Latvia is following a fleeing target – inflation criterion for Euro adoption

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Andris Strazds

If Eurozone member states continue to realize reforms in taxes, job market, pensions and social support system, as well as education and other industries, Eurozone’s economy could start to gradually recover next year.

Eurozone could go through a small increase of 0.6% next year, in comparison to this year’s 0.4%, says Nordea Bank senior economist Andris Strazds.

According to the economist, the situation in the Eurozone could develop in the following way: Spain and, possibly Italy, will agree on additional restrictions in the sphere of budget policy, receiving support from the European Stability Mechanism (ESM) and the European Central Bank to reduce the governments’ interest rates on State debts.

Therefore, a compromise will be agreed upon by Southern European countries that want to receive condition-free support from the ECB and the German Central Bank, which currently criticizes any kind of government bond purchases from the ECB.

It is also expected that the European Commission will reports about notable progress towards the formation of a «banking union» within the EU, systematically giving away monitoring of important banks to an EU level regulator and creating an investment guarantee fund on an EU level.

«Of course, there are multiple risks that could potentially threaten the aforementioned scenario. One such risk is the further increase of oil and fuel prices in the event of a military conflict between Israel and Iran. The possibility of a «heavy grounding» of China’s economy and the inability of American politicians to agree upon further budget policy are also notable risks,»- Strazds warns.

When asked whether or not Latvia will be able to comply with all Maastricht criteria next spring, the economist says that there are two major criteria worth mentioning. «One of them is budget deficit, for which there are no major concerns, because it will, most likely, not exceed 2% from GDP. The second criterion is inflation – despite VAT reduction, Latvia still has not met it,»- Strazds admits. At the same time, the expert notes that there is a large possibility that Latvia will manage to catch the fleeing target – inflation criterion for Euro adoption.

Strazds also believes that Latvia, when joining the Eurozone, would need to take part only in the ESM, but not in the European Financial Stability fund. He believes it to be necessary to set a specific condition during discussions – Latvia is not responsible for those debts and the collectivization of those debts: debts the Southern European countries had before Latvia’s joining of the Eurozone.

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