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European Commission

MEMO

Brussels, 5 March 2013

Latvia and the euro

The news

Today, Latvia formally asked the Commission to deliver an extraordinary convergence report with the aim of joining the euro from 1st January 2014. The report will assess if the country has achieved the five convergence criteria as defined in the Maastricht Treaty for joining the euro. The criteria include a qualitative assessment of the structural sustainability of public finances in Latvia.

If Latvia adopts the euro next year:

  1. Latvijas Banka, the central bank of Latvia, would become a member of the Eurosystem, the central banking system of the euro area. Upon adoption of the euro, the Latvian monetary financial institutions would be integrated into the euro area banking system and be able to participate in ECB open market operations.

  2. The Governor of the Central Bank of Latvia would become member of the Governing Council of the ECB.

  3. At the latest with the adoption of the euro, Latvia would become a participating member of the Single Supervisory Mechanism (SSM), which is currently being established and is expected to be fully operational 12 months after the entry into force of the respective regulation. However, Latvia might decide to join the SSM right from the beginning.

  4. Latvia would become a full member of the European Stability Mechanism, the Treaty on which it must also ratify.

  5. Latvia can become a full member of the Eurogroup of eurozone Finance Ministers once it has adopted the euro.

  6. Latvia would also have the right to design Latvia-specific euro coins for circulation throughout the Eurozone.

The procedure

  1. The Commission will draft the report during the course of spring, with the aim of publishing it end May/early June.

  2. In case of a positive assessment, the Commission would propose to the Council of Ministers to abrogate Latvia's derogation from the euro.

  3. The Council of Ministers would then receive a recommendation from the qualified majority of its eurozone Member States to this effect.

  4. The Council of Ministers would take a formal decision on the abrogation of the derogation, probably in the upcoming EU Presidency, after consulting the ECB and following discussion in the European Council. This would allow Latvia sufficient time for thorough technical preparations for introducing the euro in January 2014.

  5. Following the decision on the abrogation of this derogation, the Council of Ministers, acting with unanimity of its eurozone Member States, will also have to irrevocably fix the exchange rate and decide on other measures necessary for Latvia to introduce the euro in Latvia.

Background

The convergence criteria are set out in Art. 140 (1) of the EU Treaty.

The Maastricht convergence criteria:

WHAT IS MEASURED

HOW IT IS MEASURED

CONVERGENCE CRITERIA

Price stability

Harmonised consumer price

inflation rate

Not more than 1.5 percentage points above the rate of the three best performing EU countries

Sound public finances

Government deficit as % of GDP

Reference value: not more than 3%

Sustainable public finances

Government debt as % of GDP

Reference value: Not more than 60%

Durability of convergence

Long-term interest rate

Not more than 2 percentage points above the rate of the three best performing EU countries in terms of price stability

Exchange rate stability

Deviation from a central rate

Participation in ERM for 2 years without severe tensions

At least once every two years, the European Commission and the European Central Bank report to the Council of Ministers on the progress made by the Member States in reaching the convergence criteria for joining the euro. The latest convergence report was published in May 2012. Therefore, there is no obligation to publish a convergence report in 2013, except if a Member State asks the Commission for extraordinary assessments outside of the two-year cycle, when they consider they could fulfill the convergence criteria.

The EMU chapter in the Treaty states that all Member States (except Denmark and the UK, in view of their opt-out clauses) are committed to adopting the euro as soon as they reach a high degree of sustainable convergence towards the euro area. Nevertheless, the Treaty does not set the timing for adopting the euro. It allows time for each Member State to make the necessary adjustment and preparations to join. At the same time, the role of the euro as medium-term policy anchor should not be underestimated.

The Commission does not instruct Member States to pursue any particular strategy on euro adoption. However, strong domestic ownership and political commitment for euro adoption are important for achieving sustainable convergence.

The euro: facts and figures

  1. 332 million people use the euro in 17 eurozone countries: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

  2. The eurozone's GDP (calculated at purchasing power parity) is €7.8 trillion;

  3. The eurozone has 14.3% of the share of world GDP (at purchasing power parity);

  4. Exports: 12.5% of GDP (excluding intra-EU trade);

  5. Imports: 13.5% of GDP (excluding intra-EU trade).1

  • Total value of euro banknotes in circulation: €912.6 billion (15.7 billion banknotes, 2012);

  1. Total value of euro coins in circulation: €23.7 billion (102 billion coins, 2012).

The benefits of the euro are diverse and are felt on different scales, from individuals and businesses to whole economies. They include:

  1. Stable prices: In the 1970s and ‘80s many EU Member States had very high inflation rates, some of 20% and more. Inflation fell as they started preparing for the euro and, since its introduction, has remained around 2% in the eurozone. Price stability means that citizens’ purchasing power and the value of their savings are better protected.

  2. A more transparent and competitive market: The euro brings price transparency to the single market. Consumers can easily compare prices across borders and find the best price for a product or service. Greater price transparency also increases competition between shops and suppliers, keeping downward pressure on prices.

  3. The single euro payment area: The costs of transmitting money in euros to another eurozone country have been reduced since the introduction of the euro and EU rules on cross-border euro payments in 2001.

  4. Lower travel costs: The costs of exchanging money at borders have disappeared in the eurozone. This makes it cheaper to travel, whether on holiday, studying, or on business. In the 1990s, a person travelling through all the EU countries and exchanging money at every border would lose up to half their money in exchange costs – without making a single purchase.

  5. More cross-border trade – meaning more growth: Within the eurozone, there is no need for businesses to work in different currencies. Before the euro, a company would need to take account of the risk of fluctuating exchange rates. This meant either export prices were higher, or companies were discouraged from exporting in the single market. Before the euro, currency exchange costs alone were estimated at €20 to €25 billion per year in the EU (as much as 0.3% to 0.4% of GDP). With no exchange risks or costs, cross-border trade within the Euro area is encouraged. Not only can companies sell into a much larger ‘home market’, but they can also find new suppliers offering better services or lower costs.

  6. More international trade: The eurozone is also a large and open trading bloc. This makes doing business in euro an attractive proposition for other trading nations, which can access a large market using one currency. Eurozone companies also benefit because they can export and import in the global economy when they pay, and when they are being paid, in euros. This reduces the risk of losses caused by global currency fluctuations.

For more information

Latvia: http://ec.europa.eu/economy_finance/euro/countries/latvia_en.htm

The euro: http://ec.europa.eu/economy_finance/euro/index_en.htm

1 :

2011 figures.


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