Latvian finance minister Oskars Spurdzins admitted his country’s chances of joining the eurozone in 2008 have been dented by the rejection of neighbouring Lithuania’s bid to adopt the European currency next year.
The European Commission’s strict adherence to the letter of the law in making Lithuania the first country to be refused entry to the currency union seems to have eliminated any hope Latvia had of persuading authorities to overlook its high levels of inflation.
“You are right in your judgment,” Latvia’s finance minister said when asked by Emerging Markets whether he was less confident of being able to meet the original timetable as a result of last week’s decision. “In the case of Latvia, we’ve not determined at any cost the exact date. That’s not what we are striving for; we’re striving to fight down inflation.”
The Baltic country, with the highest inflation rate among the 25 EU nations, was already reconsidering its time frame, but the stance of the commission could be the final nail in the coffin for the 2008 goal. Nevertheless, Spurdzins expressed disappointment with the commission’s decision to allow concerns about prices to override the dynamic growth trend, and stringent fiscal discipline evident across the three Baltic states, which saw GDP rise 8.2% last year, well above any European rivals.
“We would certainly welcome some flexibility from the commission,” he said. “The commission should bear in mind the different conditions that countries have.”
He stressed that the government is focused on trying to cut inflation rather than alter the EU rules, which cover government borrowing, inflation and exchange rates. The commission’s decision to delve into decimal places to turn down Lithuania has divided viewpoints in the private sector. Having previously bent rules for bigger countries, Brussels has also been attacked for discrimination.
Edward Parker, head of emerging Europe sovereigns at Fitch described the EC’s decision as “disappointing” and a “revealing and damaging signal of the euro club’s wider attitude to its expansion.” Hans-Joerg Rudloff, chairman of Barclays Capital, hinted that political factors may have been at play: “At the moment, Europe’s development towards further integration seems to have stalled, and national priorities are prevailing. Clearly, a not-so-favourable development.”
Michael Ganske, head of research at Deka Investment, disagreed: “At the end of the day, I think it was the right decision by the EU; you have to stick to the criteria.”
Spurdzins said the level of the Lat had contributed to high inflation, noting “it obviously has its impact on inflation, but it also has a positive impact on imports.” But he stressed that it was too early to tell whether the balance between the two is right, and pointed out that climbing energy prices have had a bigger impact on prices.