RIGA - There is hope Latvia could still meet a 2012 target for adopting the euro as long as the country can control its budget deficit, said Bank of Latvia Governor Ilmars Rimsevics.
Despite Latvia's troubled economic situation, Rimsevics said there was still a chance for the government to satisfy the euro requirements, outlined in the Maastricht criteria, ahead of the 2011 deadline.
If Latvia is to adopt the European single currency by 2012, its budget deficit must not exceed 3 percent of its GDP, the maximum allowable amount under the Maastricht criteria.
"Even in this complicated economic situation, the government has a chance and the obligation to meet the requirements for timely euro adoption," said Rimsevics.
"It would significantly improve the stability of the Latvian economic environment and foster economic recovery. Therefore all decisions related to public finance should in the future be measured by the 'euro 2012' yardstick, realizing that the greatest difficulties in switching to the euro are related to the national budget criterion, not inflation as before," he said.
The introduction of the euro in Latvia has been promoted as a strategic national goal, in line with accession to the EU and NATO.
However, initial plans to adopt the euro in 2008 were dashed after the government failed to rein in soaring inflation rates.
Accelerated inflation rates also caused Estonia and Lithuania to delay their changeover.
Following 2008's disappointing failure, the Latvian government resolved to adopt the euro by 2012.
But while inflation continues its downward trend Latvia's euro adoption is now facing a more immediate threat in the form of a rising budget deficit.
TOO LITTLE TOO LATE?
Rimsevics has warned Latvia would struggle to satisfy budget deficit requirements despite a government reform package centering on wage reduction, banking-sector reform and public-sector austerity.
"The measures for raising revenues and cutting expenditures included in the economic stabilization plan could not compensate for the effects of the steep decline in economic activity," said the central bank president.
"The risks that built up during the years of steep growth through inadequate fiscal policies and the failure to create provisions for the times of slower economic development have started to realize," he added.
Cheap credit and huge borrowing during the prosperous period between 2003 and 2007 produced huge balance of payment deficits throughout the Baltic States.
After several years of steep economic growth Latvia has now entered a phase of sharp economic downturn compounded by the effects of the global financial crisis. Rimsevics said the hard landing currently being experienced by Latvia could have been softened if it had managed to adopt the single currency by 2008.
Rimsevics said the euro would have leant some much needed stability to the Latvian economy, allowing foreign investment and employment to remain steady.
Growing concerns over the stability of the currency continues to cause a slowdown in foreign investment in Latvia.
However, devaluation is not the answer, said Rimsevics, who maintains that central bank reserves are sufficient to ensure the stability of the national currency.
Rimsevics said local exporters would gain little, as they use imported materials to make their products, and devaluation would only make imports costlier.
Latvia's residents, too, would suffer from devaluation, including 200,000 households that have taken euro-denominated loans.
The Latvian state, which recently borrowed 7.5 billion euros as part of an international aid package to stabilize its ailing economy, would have to repay much more in lats in case of devaluation.
Meanwhile, Estonia and Lithuania also plan to make a bid for eurozone membership by 2010 and 2013 respectively.
Countries aiming to adopt the euro must spend at least two years in the European Union exchange-rate framework to prove their currency's stability.
Under the requirements, the central banks must keep the currencies pegged within a 15 percent trading band against the euro.
If a country devalues their currency during the trial period they will be banned from entering the eurozone for at least two years.
