Red-hot economies, inflation throw cold water over Baltics' euro-plans

  • 2005-10-12
  • Staff and wire reports
RIGA - Political leaders and economists in the Baltics have begun to openly worry that their countries will be unable to meet Maastricht criteria and adopt the common currency along with the first wave of new EU member states in 2007.

Latvian Prime Minister Aigars Kalvitis went so far as to say that he doubted any of the 10 new member states would meet the requirements on time. "I don't think that any of the new member states will manage to meet all Maastricht criteria for euro adoption," he said at a business conference last week.

"Here, Europe will take a political decision," he added, "and then, I believe, each country will be assessed separately regarding the adoption of the euro."

He admitted that Latvia was failing to control inflation - currently it has the highest rate in the EU25 - and to meet other requirements as well.

On Oct. 11 Kalvitis even said that the government was prepared to adopt radical measures - including new taxes - in order to curb demand and stem inflation.

The Latvian Statistics Bureau announced this week that the consumer price index rose 7.2 percent year-on-year as of September, the steepest level in years.

Latvia wants to adopt the currency in 2008, though the government has proven unable to rein in inflation. The Bank of Latvia expects consumer prices to jump at an annual 6 percent rate this year, almost twice the rate acceptable for euro introduction.

To the north, the Estonian Institute of Economic Research announced last week that Estonia would only be able to meet the inflation criteria for the euro if there was zero inflation during the next six months - an all-but impossible task. The institute's director, Marje Josing, said a survey of corporate leaders revealed that upward pressure on producer prices was strong due to higher fuel prices.

As of September, the maximum inflation that Estonia could have in order to comply with Maastricht criteria was 2.4 percent, compared with the actual inflation rate of 4.1 percent, Josing said. "Until April next year, when the evaluation of Estonia's readiness for accession (to euro) is to take place, inflation should run at zero percent, or there should be minor deflation," she said.

The situation is a bit rosier in Lithuania. The Baltics' largest country has the best chances at seeing the euro in 2007, an SEB Group forecast released last week stated.

"According to our estimations, the Maastricht inflation criterion would be 2.6 - 2.8 percent in spring 2006 - at the time of the evaluation of the first wave of EU newcomers. So Lithuania's chances to join the euro zone in 2007 are really good," said Agle Budryte, SEB Vilniaus Bankas' chief analyst.

Slovenia, which reported a drastic decline in the average inflation over the last six months, was also a solid candidate to introduce the euro in 2007 as well, she added.

The EU has not set deadlines for meeting these requirements, as each member state has set its own timetable.

SEB added that economic growth in the Baltics was on pace to become the fastest in Europe in 2005-2007, but growing energy prices have kept inflation high.

Kalvitis underscored the 4.5 percent inflation in next year's budget. "We will not let the inflation rate exceed the limit of one digit, and we will work to slow it down," he said.

In Estonia, analysts were maintaining a dreary inflationary outlook. Hansabank analyst Maris Lauri said that the steady increase in prices wouldn't slow even if world energy markets stabilized.

"Apparently the pace of inflation will not slow down significantly," she told the Baltic News Service. "The world market prices for gasoline have come lower a bit indeed, and maybe the effect of this will reach Estonia soon too. But at the same time, because of the increase in oil prices, effects of the second round have become stronger; from the start of the new year a price rise in the production of heat will be added," Lauri observed.

The Bank of Estonia has said that causes of the higher-than-expected monthly rise in inflation were of a temporary nature. "As regards to the reasons of the rise, we once again have to point to more expensive oil, which resulted in a nearly five percent price rise in fuel and transport services compared with the preceding month," said Andres Saarniit, a central bank.

The consumer price index in September increased 0.8 percent compared with August, and the annual increase in the index was 4.9 percent, the Statistical Office announced last week.

The annual rate of inflation in eurozone countries at the same time was 2.5 percent, the Bank of Estonia said.