Brussels, 2 July 2009
Commission recommends 2012 for correction of the excessive deficit in Latvia and decides to release second loan instalment
The European Commission today recommended, in the context of the excessive deficit procedure, that the Council sets a deadline of 2012 for Latvia to reduce its budget deficit below 3% of GDP. The deadline is consistent with Latvia's ongoing process of economic and budgetary adjustment and its medium-term euro adoption aim, which is the anchor of its strategy. Separately, the Commission also decided to release the €1.2 billion second instalment of the European Union loan to Latvia to support the adjustment programme. The European Union, including several Member States individually, is providing significant support to the adjustment process through financial assistance of around € 5.3 billion, part of a wider package to which the IMF also pledged around € 1.7 bln. The second instalment of the EU loan will be disbursed within the month of July after the signature of a Supplemental Memorandum of Understanding and after raising the money in the financial markets.
"Latvia is going through a very painful adjustment, but the EU is providing considerable support with a balance of payments loan that is the biggest part of the international financial assistance, and the second instalment of which will be disbursed in the coming weeks. EU support is also coming from extra advances from the EU funds and the increased operations of the European financial institutions. The correction of the large budgetary and macro-economic imbalances will put the country on the road to the euro and to sustainable growth conducive to employment creation," said Joaquín Almunia, European Economic and Monetary Affairs Commissioner, urging: "attention should be paid to mitigate the negative impact of the adjustment on the poor".
Today Commissioner Almunia signed the decision that sets in motion the preparation of the second instalment of the €3.1 billion loan by the European Community agreed by the EU Council in January (see background below). The disbursement will be made in the second half of July after the signature, by the Latvian authorities and the Commission, of the Supplemental Memorandum of Understanding adopted today, and after completion of the borrowing operations by the Commission to finance the instalment.
The Commission also made recommendations under the excessive deficit procedure (Articles 104.5-104.7 of the EU Treaty) to the Council regarding Latvia. This is the last country for which recommendations were required after the notification of the national budgetary positions for 2008. The Commission in February had already adopted a report under Art 104.3 ( ), the first step in the EDP procedure.
Latvia 's very high current account deficits accumulated in recent years and the high indebtedness of the domestic sector in foreign currency made it particularly vulnerable when the global economic and financial crisis intensified last autumn. The country is presently undergoing an economic and budgetary stabilisation programme for which it secured an international financial assistance package of €7.5 billion last December. The EU is providing nearly half (3.1bln) though the BoP loan. A first installment of €1 bln was paid on 25 February and a second one (€1.2 bln) is expected in July. The remainder of the assistance was pledged by Sweden, Denmark, Norway, Finland and Estonia (€1.9bn together); the European Bank for Reconstruction and Development, Poland and the Czech Republic (another € 0.4bln); the International Monetary Fund (€1.7bln) and the World Bank (€0.4 bln).
Today's recommendations call for the Latvian authorities to implement fully the 2009 supplementary budget adopted by the Parliament on 16 June in order to reach a general government deficit this year of below 10% of GDP. It was -4.0% in 2008. Building on the consolidation being implemented this year, the authorities are invited to adopt, and rigorously implement, a budget for 2010 that will reduce the deficit further and to ultimately bring the deficit to below 3% by 2012.
To this end, the Latvian authorities are urged to enhance fiscal governance and transparency and reinforce the monitoring of the execution of the budget throughout the year.. They should also strengthen the binding nature of the medium-term budgetary rules.
The b udgetary consolidation measures should secure a lasting improvement in the general government balance while being geared towards enhancing the quality of the public finances and promoting structural reforms notably as regards education and healthcare, so as to reinforce the growth potential of the economy. Attention should also be paid to the distributional consequences of the adjustment and to mitigate the negative impact on the poorer sectors of the population.
This is the ninth EU country for which the Commission makes budgetary correction recommendations this year. Four are already in EDP: France, Greece, Ireland and Spain (see ) that joined Hungary and the United Kingdom which were the only two countries under heightened budgetary surveillance before the crisis intensified. Alongside Latvia, recommendations on another four - Malta, Lithuania, Poland and Romania, - will be considered by the EU finance ministers on 7 July, together with new recommendations under article 104.7 addressed to Hungary.
The EU balance of payment support for Latvia was agreed by EU finance ministers in January (see ). Besides Latvia, Hungary and Romania also benefit from BoP loans. Acting on a Commission proposal, in April EU finance ministers doubled the ceiling in the BoP financial support regulation (Regulation 332/2002) to €50 bln ( ). The ceiling had been doubled already in December. So far a total of €14.6 bln has been pledged for Hungary (€6.5 bln), Latvia (€3.1 bln) and Romania (€5 bln).