European Central Bank Executive Board member Joerg Asmussen said measures intended to lower inflation in Latvia and aid its convergence with the euro area must be “sustainable.”
“Measures to reduce inflation temporarily or easily reversible measures to lower the fiscal deficit do not represent sustainable convergence,” Asmussen said at a conference in Riga today. “The decision to adopt the euro is a very fundamental one and should not be taken lightly.”
Latvia, along with Lithuania, is in the final stage of the exchange-rate mechanism, which countries must enter before joining the euro. While the country reduced spending equivalent to about 9 percent of gross domestic product in 2009 to tame its deficit, Latvia is currently struggling to slow inflation and announced a cut in sales tax to 21 percent from 22 percent last month.
“Very careful preparation is required to make sure that convergence continues also after euro adoption,” Asmussen said.
In its Convergence Report published on May 30, the ECB said Latvia still doesn’t fulfill all the requirements for entry to the euro, including requirements on central bank independence. On inflation, the ECB said the country may find containing price increases “challenging.” The Latvian government has said it intends to join the euro in 2014.
“A country that wants to be a member of the euro area needs to keep its public finances in order,” Swedish Finance Minister Anders Borg said at the same conference in Riga today. “If the European Union is saying Latvia cannot be a member of the euro area, who can then be? Who could have done more to restore competitiveness?”
International Monetary Fund Managing Director Christine Lagarde said Latvia’s adoption of the euro will help reduce interest rates and send a strong stability signal. The country “needs to deliver” on progress towards adopting the single currency, she said.
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