RIGA - The European Commission, the EU executive authority, has chastised Latvia for inadequate macroeconomic policies that have led to the current imbalances and that could still lead to a hard-landing scenario with growth plummeting to some 2 percent or lower.
In a report issued Feb. 13, the commission stated that "the overall conclusion is that the worsening of the budgetary position in 2007 is not in line with a prudent fiscal policy aimed at ensuring sustainable convergence."
The commission added that Latvia's "budgetary targets are not ambitious" and that they might not be accomplished this year, which would prolong the country's precarious economic situation.
Latvia has the fastest rate of economic growth in the 27-member EU, but high inflation, wage growth and an extremely large current account deficit have put the country in a vulnerable position.
These vulnerabilities, in turn, have led to widespread criticism of the government and a reduction in the country's ratings by international agencies.
A spokesman for the central bank criticized the EC report for being out of date since the latest data clearly show that Latvia's economy is cooling down.
"The only rational explanation for such a tone in the European Commission's report is use of rather old statistical data as the economic stabilization measures have already given results," said Martins Gravitis.
"Gross domestic product, lending, real estate prices and amounts of transactions, retail volumes and other indicators show too sharp a slowdown of development growth, while inflation will be the last indicator to react to it," he said.
But Gravitis faulted the Latvian government more than the commission for the inconsistency.
"The only conclusions are that the government, other than its economic balancing works, should more often and deeper inform the European Commission to avoid such inadequate reports published in the name of European institutions," he said.
Still, the report seemed to take into account Latvia's changing macroeconomic environment.
"From mid-2007 some slowdown has become visible in the housing market and in domestic consumption, but insufficient to remove the downside risks of a potential hard landing," the report said.
But criticism followed. "In this context fiscal policy has insufficiently tackled the emerging vulnerabilities," the report added.
For Latvia, the report was particularly timely since it preceded 's by one day 's a visit by EC President Jose Manuel Barroso.
Barroso reiterated the conclusion in the report, saying that he was confident that Latvia's leadership was aware of the issues and the risks. As the report recommended, the "key to addressing internal and external imbalances will be a more ambitious fiscal stanceâ€¦ prioritizing public expenditure and re-examining taxation instruments to avoid demand stimulus in sectors which do not significantly strengthen the economy's medium- and long-term supply potential, particularly real estate, and a more responsible public sector wage growth."
The latter will, of course, pose the ultimate challenge for the government. As prices rocket 16 percent 's food prices even faster 's public sector workers are clamoring for raises. On Feb. 17 Prime Minister Ivars Godmanis said that a priority for the 2009 's 2011 budget period will be raising salaries for doctors, teachers, policemen and other state workers.