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Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro
Speech by Vice-President Rehn at the Conference on the introduction of the Euro
Riga, 10 January 2014
Distinguished Guests, Ladies and Gentlemen,
Latvia is now the eighteenth member of the euro area! I congratulate your country on this impressive achievement.
Latvia's adoption of the euro is a major event not only for Latvia, but also for the euro area and the European Union as a whole.
Latvia's euro adoption has been the result of hard work under difficult circumstances. Its experience holds important lessons for countries that still face significant challenges.
In the pre-crisis years, Latvia's financial integration advanced rapidly driven by unsustainable credit growth based on optimistic expectations regarding future income gains and favourable financing conditions. This resulted in a quick build-up of macro-economic imbalances.
In 2008, the global financial crisis exacerbated the sharp unwinding of those imbalances. Credibility of the currency peg regime in Latvia came into question and necessitated an international financial assistance programme.
This marked the beginning of unprecedented corrective action undertaken by the authorities in the course of the ensuing years.
Several interlinked policies had to be put in place quickly. International partners helped Latvian authorities to design high quality measures and ensure effective use of the EU structural funds.
Frontloaded fiscal consolidation and structural reforms facilitated reallocation of resources to the tradable sector, which in turn created basis for an export-driven recovery.
Latvia's successful adjustment process allowed it to finish the programme on time and re-established policy credibility. In those circumstances, commitment to euro introduction was an important strategic decision of Latvian authorities.
Determined policies ensured that Latvia convincingly met the criteria for euro adoption and allowed the Council to conclude positively on the sustainability of Latvia's convergence.
Ladies and gentlemen,
In the last six months Latvian authorities, banks, businesses, and European partners worked together to prepare smooth euro changeover. This concerted action helped to establish confidence in the new currency from day one.
The latest surveys show that many Latvians are worried about abusive price setting. Looking back at previous changeovers, there has been no evidence of a significant overall price increases attributable to euro introduction.
Nevertheless, the European Commission takes such concerns seriously. We therefore very much welcome the "Fair Euro Introducer" initiative which invites businesses to commit not to misuse the changeover for their own profit, to respect the changeover rules and provide the necessary assistance to their clients before and after euro adoption. We are confident that the authorities will address complaints of abusive price settings quickly.
While public support for euro adoption is still not very strong, our experience with previous euro area enlargements shows that this can be attributable to uncertainties about cash changeover and other changes that euro area membership may bring.
We also see that as time goes by, euro is perceived more favourably: in Estonia, support for the euro increased substantially after euro adoption.
I believe that the successful changeover in Latvia and ongoing recovery in the euro area will boost public support for the euro.
Advantages of adopting the euro
Provided that it is backed up by continued sound policies, the euro is set to bring benefits to Latvia. These include the elimination of exchange rate risk, lower transaction costs and favourable financing conditions for businesses and better price transparency for consumers.
At macro level, Latvia will benefit from the ECB's monetary policy that ensures price stability. Euro area membership is likely to foster trade integration and attract investment, thereby supporting medium-term growth prospects. Finally, as a member of the euro area, Latvia will participate in decision-making on issues that already affect the country now due to the nine-year-old peg to the euro.
Euro adoption anchors Latvia's perception as a stable and well-respected partner at the core of European integration. This irrevocably strengthens Latvia's national identity: fully being part of Europe has been and remains always central for Latvia. In this context, we are glad that the people of Latvia have decided that the backside of the euro coins should reflect the profile of the national symbol Milda.
Of course, in order to realise the full economic benefits of monetary union and minimise risks to sustainable convergence in the long run, it will be essential to continue with sound macroeconomic and structural policies, which should be fully geared towards a smooth performance within the euro area. We understand that Latvian authorities are committed to such policies. Let me now outline the main policy challenges for Latvia.
Latvia's policy challenges in the euro area
Latvia joins the euro area as a catching-up economy. There is a potential for further price level convergence in the long term, as income levels rise towards the euro-area average.
While this does not automatically imply a loss of price and cost competitiveness, the process needs to be managed carefully in order to pre-empt excessive price pressures at an early stage.
This in turn requires productivity growth, continuous improvements in business environment and new investment.
Looking ahead, it is essential that sustainable convergence is not jeopardised by another round of re-emerging imbalances assuming that real interest rates may remain for a while lower in Latvia than in the euro area on average.
Policy effort has to be directed at ensuring a prudent macro stance, appropriate supervisory practices and macro-prudential policies. Regarding non-resident banking, close monitoring of financial stability risks, readiness to adopt regulatory measures if needed, and determined implementation of anti-money laundering rules will remain key.
Latvia needs to proceed implementing structural reforms in line with the Country Specific Recommendations to further enhance competitiveness, reduce the grey economy and strengthen the functioning of product and labour markets.
Social inequality and long-term unemployment are still very high in Latvia. Progress can and should be made now as the economic and fiscal situation has improved.
We look forward to working with the Latvian authorities on this broad-based policy agenda in the context of the enhanced EMU surveillance and policy co-ordination framework.
It is perhaps not unusual that a small open economy undergoes profound structural changes - but the story of how Latvia became the 'first' after being the 'last' is more than that.
The Latvian economy demonstrated substantial flexibility during the adjustment process, and its authorities proved their capacity to reinforce key elements of their policy framework.
From a more general perspective, Latvia has shown that determined implementation of economic reforms generates concrete results, even under difficult circumstances.
Latvia's experience also underscores the desirability of pre-emptive policies in order to avoid the build-up of unsustainable imbalances.
Ladies and gentlemen,
Latvia's entry is good news for the euro area. It underlines the vitality of the EMU project and shows that the euro area is open to all Member States which fulfil the conditions set by the Treaty.