RIGA - The European Central Bank announced April 30 that it has included the Latvian lat in the Exchange Rate Mechanism II, the transition regime necessary before a country can adopt the euro.
The news came as a welcome first-anniversary-in-the-EU surprise for the government, which is burdened by high inflation and a current account deficit. The lat was pegged at 0.702804 to 1 euro on Jan. 1, 2005, meaning that only four months had passed before the currency was allowed to join the ERMII.
Estonia and Lithuania's currencies were fixed to the euro far longer before they were included in the exchange rate regime.
Aigars Stokenbergs, an advisor to Prime Minister Aigars Kalvitis, told the Baltic News Service that Finance Minister Oskars Sprurzins and Bank of Latvia President Ilmars Rimsevics deserved all the credit for lat's inclusion in the ERM II.
For Latvia to join the European Monetary Union and phase in the common currency, it must meet the ERMII's required stability criteria for at least two years.
The standard fluctuation band is plus or minus 15 percent around this central rate, but Latvian authorities have told the European Central Bank that, as a unilateral commitment, they would maintain the fluctuation band of plus or minus 1 percent.
Latvia was admitted to the ERM II together with Malta and Cyprus, two other new members of the European Union. Currently the eurozone comprises 12 member states. The United Kingdom, Denmark and Sweden have opted to keep their own currencies, an option the union's new member states were not given.
But the road ahead will be tough for Latvia. Presently the country does not comply with the consumer price index requirement, as last year inflation amounted to 6.2 percent, the highest among the EU member states.
The European Central Bank said that Latvia needed to strengthen its fiscal policy in order to reign in inflation and reduce the current account deficit. The bank also suggested taking measures to tighten domestic demand and excessive domestic credit growth, seen as two factors leading to the record-high consumer price growth.
Finance experts saluted the development, though many were skeptical that Latvia could hold down runaway price-growth to the required level in as little as two years.
Economics Institute director Raita Karnite said Latvia would not succeed in significantly reduceing inflation in the next 24 months. She added, however, that European bank officials could "close their eyes" on the price-growth since the spread of the single currency throughout Europe was a much bigger gain for Brussels.
Teodors Tverijons, head of the Commercial Bank Association, said that high inflation meant Latvia might not introduce the euro in 2008, the target date. But the economy would not be affected since the lat is already pegged to the common currency, he said.
He added, many new member states, due to objective circumstances would have higher inflation than allowed under the Maastricht treaty since they are developing fast. Moreover, the fact that a state has inflation of 5 percent or 2 percent could not influence the overall economic stability in Europe.
Tverijons suggested that the Bank of Latvia start a discussion on revising the Maastricht criteria since the latter were established a while ago and are rather of a theoretical than practical nature.
The three main Maastricht criteria require that the state budget deficit must not exceed 3 percent of GDP, that inflation must not be more than 1.5 percent higher than the average figure for the three EMU members with the lowest inflation and the national debt must not include 60 percent of GDP.