COMMISSION STAFF WORKING DOCUMENT Assessment of the 2012 national reform programme and convergence programme for LATVIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Latvia's 2012 national reform programme and delivering a Council opinion on Latvia's updated convergence programme, 2012-2015
Date: 2012-05-30
Institutions: European Commission
Subjects: Latvia, budgetary equilibrium, economic convergence, educational reform, judicial reform, long-term unemployment, pay policy, poverty, public debt, research and development, social integration, tax reform, youth unemployment

EUROPEAN COMMISSION 

Brussels, XXX  
[…](2012) XXX draft 

COMMISSION STAFF WORKING DOCUMENT 

Assessment of the 2012 national reform programme and convergence programme for 
LATVIA 

Accompanying the document 

Recommendation for a  

COUNCIL RECOMMENDATION 

on Latvia's 2012 national reform programme and delivering a Council opinion on 
Latvia's updated convergence programme, 2012-2015 

EN 

   EN 

 
 
 
  
 
 
CONTENTS 

1. INTRODUCTION........................................................................................................... 3 

2. ECONOMIC DEVELOPMENTS AND CHALLENGES .............................................. 3 

2.1.Recent economic developments and outlook ........................................................ 3 

2.2. Challenges ............................................................................................................ 3 

3. ASSESSMENT OF THE POLICY AGENDA ............................................................... 3 

3.1. Fiscal policy and taxation..................................................................................... 3 

3.2. Financial sector..................................................................................................... 3 

3.3. Labour market, education and social policies ...................................................... 3 

3.4. Structural measures promoting growth and competitiveness............................... 3 

3.5. Modernisation of public administration ............................................................... 3 

4. OVERVIEW TABLE...................................................................................................... 3 

ANNEX ............................................................................................................................... 3 

2 

 
 
 
 
EXECUTIVE SUMMARY 

After a strong rebound in 2011, Latvia's GDP growth is expected to decelerate to 2.2% in 
2012.  The  rate  of  unemployment  dropped  substantially  in  2011  and  is  expected  to 
decrease further to 14.8% in 2012 but youth and long-term unemployment rates remain 
high. 

The  government  has  ensured  financial  stability  and  fiscal  consolidation  by  over-
achieving  its  fiscal  targets.  In  2012,  the  general  government  deficit  is  expected  to 
decrease  to  2.1%  of  GDP.  In  other  areas,  however,  reform  efforts  have  been  limited, 
particularly as regards the public administration and the unified wage grid, management 
of  state  owned  assets,  strengthening  of  the  competition  framework,  setting  up  of  the 
Development  Bank  and  outlining  proposals  for  managing  the  EU  funds  in  the  new 
financing period. 

Latvia continues to face important policy challenges: building on the significant progress 
made  regarding  public  finances,  further  fiscal  consolidation  is  necessary  to  meet  the 
medium-term  objective  to  maintain  market  confidence.  Latvia  has  one  of  the  highest 
long-term and youth unemployment rates in the EU. There is a relatively high tax wedge 
on low-wage earners and a high level of undeclared work. A high share of the population 
is at risk of poverty or social exclusion. The coverage of unemployment benefits is low 
and the impact of social transfers on poverty reduction is small. Inefficiencies in the civil 
justice  system  have  a  negative  impact  on  the  business  environment.  The  education  and 
training  systems  are  not  adapted  to  labour  market  needs  and  not  geared  to  improving 
Latvia’s  innovation  performance.  Improving  energy  efficiency,  in  particular  of  the 
building stock, would contribute to growth and jobs, while reducing energy dependence. 

3 

 
1. INTRODUCTION 

Procedural aspects 

In  July  2011  the  Council  of  the  European  Union  adopted  only  one  country-specific 
recommendation for Latvia: implement the balance of payments programme conditions. 

In November 2011 the Annual Growth Survey for 2012 (AGS 2012) presented the basis 
for  building  the  necessary  common  understanding  about  the  priorities  for  action  at 
national and EU levels in 2012. It focused on five priorities — ensuring growth-friendly 
fiscal  consolidation,  restoring  normal  lending  to  the  economy,  promoting  growth  and 
competitiveness,  tackling  unemployment  and  social  consequences  of  the  crisis,  and 
modernising public administration — and encouraged Member States to implement them 
in the 2012 European Semester. 

Against  this  background,  Latvia  presented  its  national  reform  programme  and 
convergence  programme  in  April  2012.  The  documents  outline  the  fiscal  consolidation 
efforts  in  a  consistent  manner,  based  on  medium-term  macroeconomic  projections  and 
key  structural  reforms.  The  national  reform  programme  evaluates  the  progress  made 
towards  meeting  the  national  targets  for  employment,  R&D,  education,  energy  and 
climate  change,  and  poverty  reduction  for  2020.  It  also  describes  the  measures  Latvia 
plans to take under the Euro Plus Pact. 

This  Staff  Working  Document  assesses  the  state  of  implementation  of  the  balance  of 
payments programme condition, as expressed in the latest Supplemental Memorandum of 
Understanding,  identifies  current  policy  challenges  and,  in  this  light,  examines  the 
country’s latest policy plans. 

Overall assessment 

Overall, the policy plans submitted by Latvia are adequate, but in some areas they lack 
the  ambition  to  address  the  challenges  in  a  comprehensive  way.  The  most  pressing 
challenges  facing  Latvia  are  to  continue  growth-friendly  fiscal  consolidation  and 
implement  wide-ranging  structural  reforms  to  achieve  sustainable  growth  and  catch  up 
with other EU countries. In particular, strong implementation of the conditions outlined 
in the latest Supplemental Memorandum of Understanding will be important, inter alia in 
the  fields  of  energy  markets  and  energy  efficiency,  higher  education  and  vocational 
training,  management  of  state-owned  enterprises,  public  administration  and  the  judicial 
system,  competition  and  public  procurement  policies,  restructuring  and  sales  of  state-
owned banks and management of EU funds. 

2. ECONOMIC DEVELOPMENTS AND CHALLENGES 

2.1.Recent economic developments and outlook 

Recent developments 

After  a  severe  economic  contraction  in  2008-09,  the  Latvian  economy  started  to  grow 
again towards the end of 2010 and switched to a rapid recovery in 2011. The economy 
expanded  by  5.5 %  in  2011  driven  mainly  by  exports  and  investments  and  was  quite 
resilient  to  the  adverse  external  demand  shocks  in  the  second  half  of  the  year.  At  the 
beginning  of  2012,  industrial  production,  retail  trade  and  transport  services  were  also 
performing  relatively  well,  indicating  some  decoupling  from  the  weak  performance  in 
many  EU  Member  States.  The  economic  sentiment  indicator  rebounded  to  a  four-year 
high  at  the  beginning  of  2012  with  improvements  recorded  in  both  the  household  and 
corporate  sectors.  Unemployment  remains  among  the  highest  in  the  EU  after 
deteriorating to about 20 % at the beginning of 2010 from 6-7 % in the pre-crisis period. 

4 

 
 
However, the unemployment rate dropped substantially to 16.1 % in 2011 and 15.0 % in 
the last  quarter of  the year. The harmonised index of consumer prices  (HICP) inflation 
was  in  line  with  expectations  at  4.2 %  in  2011,  including  a  large  contribution  from  the 
increase in VAT rates. The constant-tax price index is estimated at 2.7 % in 2011. 

The current account balance turned to a deficit of 1.2 % of GDP in 2011 after surpluses in 
2009  and  2010.  The  country  remained  in  a  net  lender  position,  however,  as  the  net 
inflows  in  the  capital  account  reached  2.1 %  of  GDP.  The  rebalancing  of  the  economy 
towards tradable sectors continued at a fast pace as the share of exports in GDP expanded 
to  59 %  in  2011  from  54 %  in  2010.  The  net  inflows  of  foreign  direct  investments 
rebounded  substantially  in  2011  while  the  share  of  external  debt  to  GDP  decreased 
further. 

Outlook 

The  Commission  spring  forecast  projects  that  Latvia’s  growth  rate  will  slow  down  to 
2.2 % in 2012 due to weakening external demand in the first half of the year combined 
with some downward correction of the consumption propensity of households as a result 
of  global  economic  uncertainties.  However,  in  line  with  the  expected  improvement  in 
external  demand,  growth  is  set  to  regain  momentum  in  the  second  half  of  2012  and  to 
accelerate  to  3.6 %  in  2013.  Unemployment  is  expected  to  decrease  further  in  2012-13 
though at a relatively weak pace set by slower economic growth. Inflation is projected to 
decelerate to 2.6 % in 2012 and 2.1 % in 2013 as the impact of the tax increases in 2011 
weakens  substantially.  Uncertainties  about  prices  of  primary  energy  resources  pose  a 
significant  risk  to  the  inflation  forecast,  as  the  country  depends  heavily  on  energy 
imports. 

Both  the  national  reform  programme  and  the  convergence  programme  share  the  same 
economic outlook, but neither of them gives any figures on the impact of the proposed 
structural  reforms  on  growth.  The  economic  growth  outlook  for  2012-13  is  broadly  in 
line  with  the  most  recent  Commission  forecast.  In  2014-15,  the  annual  growth  rate  is 
expected to accelerate to 4 %, which is seen as the medium-term potential growth in the 
country.  This  rate  remains  unchanged  from  the  projections  presented  in  the  2011 
programmes  but  could  be  subject  to  slight  downside  risks  as  the  results  of  the  2011 
census show a faster decline in the population than previously estimated. 

2.2. Challenges 

Although  growth  has  resumed  after  the  financial  crisis,  Latvia  should  speed  up  its 
reforms to improve growth potential. In particular, Latvia has amongst the highest long-
term and youth unemployment rates in the EU. This, along with the relatively high tax 
wedge on low wage earners and the high level of undeclared work, indicates a need for 
appropriate  labour  market  policies,  a  review  of  the  tax  and  benefit  system  and  greater 
efforts  to  tackle  the  grey  economy  (e.g.  without  effective  activation  and  support 
measures,  the  marginal  tax  rate  for  low-earners  will  remain  discouragingly  high, 
increasing both unemployment and poverty). The high share of the population at risk of 
poverty  or  social  exclusion  is  also  a  cause  for  concern:  families  with  children  and  the 
unemployed are particularly affected. The coverage of unemployment benefits is low and 
the impact of social transfers on poverty reduction is small. Ensuring an effective system 
of social assistance to protect the most vulnerable while maintaining incentives to work 
remains a challenge. 

Despite  relatively  good  overall  educational  attainment,  the  quality  of  tertiary  and 
vocational education remains a cause for concern. There is evidence of skills mismatches 

5 

 
 
on  the  labour  market,  including  an  insufficient  number  of  graduates  in  science  and 
technical  subjects.  There  is  also  a  low  degree  of  employment  in  knowledge-intensive 
activities.  More  efforts  to  implement  the  necessary  reforms  in  higher  and  vocational 
education  (in  line  with  the  commitment  made  in  the  Supplemental  Memorandum  of 
Understanding)  would  help  to  adapt  education  and  training  systems  further  to  labour 
market needs. Latvia’s poor innovation performance impairs its competitiveness and the 
country  has  no  systematic  and  effective  research  and  innovation  policy.  There  is  little 
R&D  investment  by  domestic  companies  or  large  foreign  affiliates  to  support 
specialisation in knowledge-intensive and innovation-driven sectors. 

Completing the restructuring and sales of the three state-owned banks — Parex, Citadele 
and MLB — to comply with the Commission’s state aid decisions is the most pressing 
issue in the field of financial stability. Consistent implementation of the plans for these 
banks  would  further  increase  confidence  in  the  financial  sector  and  allow  the  public 
sector  to  withdraw  from  commercial  activities.  The  2011  Latvian  Competitiveness 
Report  also  highlights  the  underdeveloped  financial  markets  as  one  of  the  main 
weaknesses of the economy. 

Regional  economic  disparities  have  widened,  mostly  due  to  the  rapid  growth  of  the 
capital Riga. Regional problems are most acute in the eastern parts of the country, which 
have particularly low levels of investment per capita, relatively few enterprises and very 
high  unemployment  rates.  Disparities  are  widening  due  to  an  increasing  urban/rural 
divide, triggered largely by migration to Riga from rural areas and other cities. 

The  poor  overall  condition  of  transport  infrastructure  is  undermining  the  growth  and 
competitiveness of the country. Significant differences also exist in the development of 
ICT  infrastructure  and  expansion  of  broadband  connections  between  urban  and  rural 
areas. 

Isolation  from  the  EU  gas  and  electricity  markets  and  low  energy  efficiency  are  key 
challenges  facing  Latvia.  One  centrepiece  could  be  to  improve  significantly  the  energy 
efficiency of the building stock, thereby contributing to growth and jobs, while reducing 
energy dependence. Low energy efficiency is also a challenge for the transport sector. 

Further environmental challenges lie in the water and wastewater treatment sectors and 
waste  management,  with  landfills  remaining  the  main  option  for  disposal  of  municipal 
waste (around 90 %). 

Progress  with  reforming  management  of  both  state-owned  enterprises  and  public  real 
estate will require a sharp focus. The new state-owned enterprises governance model is 
supposed to be in place by the end of March 2013, while action is still needed to adopt a 
special law on management of state-owned enterprises, to transfer assets under the new 
state-owned  enterprises  management  authority  and  to  give  the  centralised  state-owned 
enterprises  manager  appropriate  capacity.  Further  centralisation  of  public  real  estate 
management  under  the  Finance  Ministry  and  divestments  of  assets  not  used  for  public 
needs are planned. 

Progress is expected in the next few months on a number of key conditions included in 
the  latest  Supplemental  Memorandum  of  Understanding:  preparing  a  strategy  for 
legislation, 
management  of  human  resources, 
strengthening  energy  efficiency  programmes,  making  amendments  to  the  Public 
Procurement  Law,  improving  the  quality  assurance  system  for  roadbuilding,  reviewing 
the port management and taxation system, adopting a Construction Law, etc. 

implementing  energy-related  EU 

6 

 
Given the notable impact of EU cohesion funds on the economy, creating the conditions 
for effective support and reinforcing strategic programming of funds for 2014-2020 will 
be important in order to deliver on the Europe 2020 priorities. 

Inefficiencies  in  the  civil  justice  system  have  a  negative  impact  on  business  and  the 
economic environment, as they increase the risk and cost of doing business. There is a 
large backlog of civil and commercial cases before the first- and second-instance courts, 
together with excessively long procedures. There are still weaknesses in the insolvency 
law.  The  professional  performance  and  accountability  of  judges  are  not  always  up  to 
standard.  Training  of  both  judges  and  prosecutors  is  not  sufficient  to  ensure  that  they 
have the appropriate qualifications. 

3. ASSESSMENT OF THE POLICY AGENDA  

3.1. Fiscal policy and taxation 

The  main  goal  of  the  medium-term  budgetary  strategy  of  the  2012  convergence 
programme  is  to  secure  correction  of  the  excessive  deficit  situation  by  the  deadline 
recommended  by  the  Council  (2012)  and  subsequently  to  approach  the  medium-term 
objective  (MTO),  which  has  been  revised  to  a  more  ambitious  target  of  a  structural 
deficit  of  0.5 %  of  GDP.  Under  the  convergence  programme  strategy,  the  headline 
general government balance will reach a near-balanced position in 2015. The adjustment 
is front-loaded,  with greater improvement in the structural deficit  in 2012-2013  than in 
2014-2015. 

Budgetary developments and debt dynamics 

As  a  result  of  the  ambitious  front-loaded  fiscal  consolidation  implemented  since  2009 
and of the faster-than-expected recovery in growth, Latvia’s general government position 
improved  strongly  in  2011,  reaching  a  deficit  of  3.5 %  of  GDP,  which  is  considerably 
better  than  both  the  initial  deficit  target  set  under  the  balance-of-payments  assistance 
programme (deficit of no more than 6 % of GDP) and the target of a deficit of no more 
than  4.5 %  of  GDP  in  the  2011  convergence  programme.  This  was  achieved  thanks  to 
stronger-than-expected  economic  recovery  and  lower  exceptional  costs  related  to  the 
restructuring of the banking sector. Moreover, while tax revenue as a share of GDP was 
broadly  in  line  with  expectations  in  the  previous  programme,  several  expenditure 
categories not related to absorption of EU funds (notably social benefits) were kept under 
tight control, leading to a reduction in their share in GDP. 

The  programme  expects  the  general  government  headline  deficit  to  decline  further  to 
2.1 %  of  GDP  in  2012,  which  is  in  line  with  the  projections  in  the  Commission  spring 
2012  forecast  and  better  than  the  target  of  a  deficit  of  2.5 %  of  GDP  in  the  previous 
programme.  The  macroeconomic  scenario  underpinning  these  projections  is  broadly  in 
line  with  Commission  projections;  however,  the  most  recent  information  (notably  the 
estimate of economic growth in the first quarter of 2012) indicates that this scenario can 
be  considered  as  cautious.  According  to  estimates  in  the  programme,  measures  in  the 
2012 budget law to improve the budgetary position add up to 0.7 % of GDP (see Box 1). 
The  budget  law  was  adopted  by  the  Saema  (Parliament)  on  15  December  2011.  The 
programme  thus  aims  to  bring  the  excessive  deficit  below  the  3 %  reference  value  — 
with sizeable leeway against adverse developments — by the date recommended by the 
Council. Risks to fiscal projections for 2012 stemming from the macroeconomic scenario 
seem  on  the  upside,  taking  into  account  the  most  recent  information.  However,  the 
programme acknowledges that consideration is being given to reducing the VAT rate; the 
letter  accompanying  the  programme,  along  with  recent  public  information,  suggest  that 
this  will  take  place  in  2012  already  (see  also  the  section  on  the  ‘Tax  system’). 

7 

 
 
Nevertheless, the planned reduction in the VAT rate is unlikely to endanger meeting the 
current target for 2012. 

  Box 1: Main budgetary measures 

  Revenue 

2011 

1.6 % of GDP 

2012 

  Legislative measures to support the fight against the 
grey  economy,  including  application  of  reversed 
VAT in some sectors, and changes in taxation of the 
gambling industry (0.25 % of GDP) 

Broadening  the  real  estate  tax  base  and  abolishing 
the  limits  on  increases  in  real  estate  tax  (0.03 %  of 
GDP) 

2013 

Expenditure 

-0.7 % of GDP 

Nominal  wage  freeze  in  the  public  sector  and  other 
measures to limit or reduce expenditure, notably cuts 
in  subsidies  to  transport  and  road  maintenance  and 
review  of  the  sickness  benefit  scheme  (-0.4 %  of 
GDP) 

  Resuming  contributions  to  the  private  mandatory 
funded  pension  scheme  at  6 %  of  gross  wages, 
compared  with  the  current  temporarily  lowered 
contribution of 2 % (-0.6 % of GDP) 

Reforming  the  system  of  family  allowances  and 
social safety net (impact not specified) 

Continue  limiting  maximum  amounts  of  family  and 
sickness benefits (impact not specified) 

2014 

n/a 

2015 

n/a 

n/a 

n/a 

Note: The budgetary impact in this table is the impact reported in the programme, i.e. by the national 
authorities.  A  plus  sign  means  that  revenue/expenditure  increases/decreases  as  a  consequence  of  the 
measure.  

For 2013, the authorities are aiming for a nominal budget deficit of 1.4 % of GDP, which 
is  better  than  the  target  of  a  deficit  of  1.9 %  of  GDP  in  the  previous  programme.  The 
macroeconomic  projections  in  the  programme  for  2013  are  plausible.  According  to  the 
programme  scenario,  the  reduction  in  the  headline  deficit  will  be  achieved  through 
continuous  restraint  in  compensation  of  employees  (i.e.  a  nominal  wage  freeze  in  the 
public  sector)  and  through  further  cuts  in  intermediate  consumption.  These  measures, 
however,  currently  do  not  seem  to  be  backed  by  any  specific  action  and  thus  represent 
risks  to  attainment  of  the  target.  While  in  the  past  the  Latvian  authorities  have 
demonstrated their ability to implement planned expenditure cuts, these have often taken 
the form of ‘across-the-board’ expenditure reduction. Such a strategy entails risks related 
to slippages in implementation, excessive cuts in public employment being detrimental to 
efficiency,  and  uncompetitive  wages  which  could  lead  to  better  performing  employees 
quitting the public sector, a trend which is already visible in higher-level positions. It will 
thus  be  important  to  identify  targeted  and  sustainable  measures  in  the  2013  budget  to 
support  the  planned  expenditure  restraint.  At  the  same  time,  there  are  several  areas  — 
notably  social  benefits  —  where  expected  savings  in  2013  are  already  backed  by 
legislation. Another risk comes from the planned tax cuts that are being considered but 
are not yet reflected in the programme scenario (see the section on the ‘Tax system’). 

8 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The structural balance1 is expected to improve by ¼% of GDP in 2013 (compared with 
an  improvement  of  ½%  based  on  estimates  in  the  Commission  spring  2012  forecast), 
taking  the  structural  deficit  to  below  1 %  of  GDP,  according  to  the  information  in  the 
programme.2 These projections take into account the negative impact on both the nominal 
and (recalculated) structural balance of restoring contributions to the mandatory funded 
private  pension  scheme  to  6 %  of  gross  wages  from  2013,  compared  with  the  current 
reduced  level  of  2 %.  In  the  Commission  estimates,  the  current  lower  level  of 
contributions  is  treated  as  a  temporary  measure  excluded  from  the  structural  balance. 
Thus its reversal in 2013 will affect only the nominal but not the structural balance. The 
impact of this reversal on the 2013 nominal balance is, however, assessed to be higher in 
the Commission’s projections than in the programme’s estimates, posing another risk to 
attainment of the target. 

Latvia’s  medium-term  budgetary  objective  has  been  revised  in  the  2012  convergence 
programme.  The  new  medium-term  objective of  a structural  deficit  of 0.5 % of GDP is 
higher than the previous figure and adequately reflects the requirements of the Stability 
and Growth Pact. The revision of the medium-term objective is linked to a major reform 
of fiscal governance in Latvia which is discussed in more detail below.    

In  2014  and  2015,  the  programme  aims  for  a  continuous  improvement  in  the  nominal 
balance,  reaching  a  near-balanced  position  in  2015.  The  targeted  improvement  comes 
from continuing restraint in government consumption. Thus risks applicable in 2013 will 
remain  relevant.  Planned  tax  cuts  pose  another  risk.  According  to  the  programme,  the 
structural deficit will approach the medium-term objective by the end of the programme 
period in 2015.    

Based  on  the  information  provided  in  Tables  2a,  2b  and  2c  in  the  Annex  to  the 
programme,  the  expenditure  benchmark  is  set  to  be  met  in  all  the  years  following 
correction  of  the  excessive  deficit  (i.e.  2013-2015).  However,  taking  into  account  the 
discretionary impact on revenue of restoring contributions to the mandatory funded pillar 
to 6 % of gross wages (included in Table 7.8 of the programme, but not reflected in Table 
2b), the expenditure benchmark would be missed, albeit only narrowly, in 2013. Taking 
the  Commission  estimate  of  the  discretionary  impact,  the  deviation  in  2013  would  be 
somewhat higher. However, in both cases the average deviation in 2012 and 2013 would 
remain negative, given the substantial front-loaded expenditure restraint in 2012. In the 
outer  years  of  the  programme  the  planned  expenditure  restraint  would  ensure  that 
expenditure growth remains significantly negative, and hence in line with the expenditure 
benchmark in the Stability and Growth Pact. 

In  the  programme  scenario  the  general  government  debt  is  projected  to  increase  from 
42.6 % of GDP in 2011 to 46.7 % in 2014, falling thereafter rapidly to 38.9 % of GDP in 
2015.  This  profile  reflects  accumulation  of  financial  assets  in  anticipation  of  large 
repayments  of  loans  under  the  financial  assistance  programme  (as  evidenced  by  high 
stock-flow  adjustment  in  2012-2014)  and  the  subsequent  repayment  of  a  large  share  of 
these  loans  in  2014-2015.  In  June  2011,  the  authorities  successfully  returned  to 
international financial markets and a second major international bond issue took place in 

1   Cyclically-adjusted balance net of one-off and temporary  measures, recalculated by the Commission 
on the basis of the information provided in the programme, using the commonly agreed methodology. 
2   Compared  with  the  recalculated  structural  balance,  the  programme  forecasts  higher  structural 
budgetary improvement, by 0.5 % of GDP annually in 2013-2015. The discrepancy is mainly due to a 
different assessment of the starting cyclical point between the common methodology and the approach 
taken  in  the  programme.  Subsequently,  the  programme  attributes  a  higher  share  of  the  targeted 
nominal improvement to the structural component than in the recalculated information. 

9 

 
                                                 
February 2012. All major credit-rating agencies have revised Latvia’s sovereign ratings 
to the investment grade. The latest upgrade took place in May 2012. 

Long-term sustainability 

Assuming  no  policy  change,  debt  would  stand  at  42.7 %  of  GDP  by  2020.  Ensuring 
continued  sufficient  primary  surpluses  over  the  medium  term,  as  planned  in  the 
programme, would further improve the sustainability of public finances. 

Fiscal framework 

The current fiscal framework in Latvia lacks an effective mechanism to limit expenditure 
growth  in  good  economic  times.  In  particular,  there  are  no  fiscal  rules  at  central 
government  level  that  could  impose  a  binding  constraint  on  the  annual  budgetary 
process.  Recognising  the  need  to  develop  a  multi-annual  and  rules-based  budgetary 
framework  that  would  minimise  the  risk  of  pro-cyclical  fiscal  loosening  in  the  new 
growth  phase,  in  November  2011  the  Latvian  government  adopted  the  draft  Fiscal 
Discipline Law, which is  currently  being scrutinised by Parliament. The draft law is in 
line  with  the  commitments  made  by  the  Latvian  government  under  the  balance  of 
payments  programme  and  seeks  to  implement  the  evolving  EU  acquis  in  the  area  of 
fiscal governance in Latvia’s legislation. The authorities also intend to pass constitutional 
amendments to enhance the legal standing of the law. 

Once implemented, the new law would considerably strengthen the fiscal framework in 
Latvia.  The  current  draft  clearly  lays  down:  the  principles  of  a  counter-cyclical  fiscal 
policy;  a  balanced  budget  rule  as  an  instrument  for  a  sustainable  and  counter-cyclical 
policy;  a  debt  rule;  transitional  provisions,  including  consistency  with  the  Stability  and 
Growth  Pact;  escape  clauses;  the  requirement  to  publish  a  report  in  case  of  deviations 
from the target; and regular monitoring and reporting requirements to ensure compliance 
with the fiscal rules. Once the Fiscal Discipline Law is adopted, the authorities also plan 
to  adopt  the  medium-term  budget  framework  law,  setting  binding  expenditure  ceilings 
for 2+1 years on a rolling basis. 

Tax system 

Latvia has one of the lowest tax-to-GDP ratios in the EU, at 27.8 % of GDP in 2011. The 
tax  system  relies  relatively  heavily  on  consumption  taxes,  compared  with  other  EU 
states, although labour taxes (in particular, social contributions) still form the largest tax 
revenue category. The taxation framework can  be considered  growth-friendly, although 
the high tax wedge on low wage earners requires some attention. The government plans 
to shift taxation further from labour to other sources. The overall tax system shows a low 
degree of progressivity. 

The government plans to lower the tax burden on labour substantially — by about nine 
percentage points in the long run according to the programme. The Parliament recently 
approved in the first reading a bill to reduce value added tax rate (from 22% to 21% as of 
1  July  2012)  and  the  personal  income  tax  rate  (from  25%  to  20%  over  the  three-year 
period starting from 2013). The tax cuts were not accompanied by measures to improve 
the structural balance. The reduced VAT rate runs contrary to the strategy of shifting the 
burden  of  taxation  to  other  sources  and  limits  further  opportunities  to  reduce  taxes  on 
labour.  Even  though  the  NRP  mentions  tax  policy  as  one  of  the  main  instruments  to 
tackle  poverty  and  foresees  several  measures  (increasing  non-taxable  PIT  threshold, 
increasing  tax  reliefs  for  dependants  or  introducing  progressive  income  taxes),  these 
considerations were not reflected in the recent tax changes.  

The  sizeable  fiscal  consolidation  that  took  place  in  2009-2012  helped  to  adjust  public 
finances  to  a  more  sustainable  growth  pattern.  Over  half  of  the  consolidation  effort, 

10 

 
which was equivalent to 17 % of GDP over these years (albeit coming after a period of 
unsustainable  growth  of  public  spending  prior  to  2009),  took  place  on  the  expenditure 
side. These cuts took the form, in particular, of downsizing government expenditure by 
implementing  large-scale  reforms  in  health  and  education  along  with  the  territorial 
administrative reform. On the revenue side, although tax rates increased in almost all tax 
categories  during  the  period  of  fiscal  consolidation  in  2009-2012,  the  biggest  increase 
was in consumption taxes. The consolidation thus supported growth in the medium term, 
since  to  a  large  extent  it  took  the  form  of  the  least  harmful  measures  —  cuts  in 
government consumption and increases in consumption taxes. 

The full benefit of the significant increases in consumption tax introduced between 2009 
and 20123 did not materialise, however, as they were accompanied by growth in the share 
of  the  informal  economy,  as  demonstrated  by  an  increase  in  the  VAT  compliance  gap4 
from 16 % in 2007 to 47 % in 2011. Recent studies5 suggest that the informal economy is 
considerably larger in Latvia than in peer group countries and is concentrated in sectors 
like  construction,  services  and  retail.  Part  of  the  reason  for  engaging  in  informal 
economic  activities  stems  from  dissatisfaction  with  the  taxation  system  and  with 
government  spending  as  well  as  poor  law  enforcement.  The  ‘Doing  Business  2011’ 
report ranks Latvia the lowest of the three Baltic countries in the category ‘paying taxes’. 
This is due to time-consuming tax compliance procedures (on average it takes 293 hours 
to  comply  with  tax  administration  requirements),  whereas  the  number  of  taxes  and  the 
tax rate in relation to profits score favourably. 

The government is stepping up the efforts to combat the informal economy. After several 
initial  delays,  the  Action  Plan  to  Combat  the  Shadow  Economy  is  now  being 
implemented and several legislative measures (e.g. application of reverse VAT in sectors 
prone to undeclared activity) have entered into force from 2012. Moreover, the Law on 
Individual  Declaration  of  Property  and  Reporting  of  Undeclared  Income  was  adopted 
recently  with  effect  from  June  2012.  It  introduces  the  possibility  to  legalise  previously 
undeclared taxable income and aims to improve oversight over an individual’s financial 
position, in particular the accuracy of expenses incurred and the payment of taxes and the 
legality of income derived. However, the results of the strategy will not be visible until 
the medium term and the impact is difficult to quantify. 

Environmental  taxes  remain  relatively  underdeveloped  and  are  heavily  dominated  by 
motor  fuel  taxation,  whereas  taxation  of  other  energy  sources,  pollution  and  use  of 
natural resources is below the EU average, sometimes significantly so, even though taxes 
on  disposal  of  municipal,  construction  and  industrial  waste  increased  considerably  in 
2009.  Nevertheless,  further  broadening  the  tax  base  to  other  sources  of  environmental 
taxation,  in  particular  on  pollution,  combined  with  broader-based  taxation  of  energy 
sources  would  help  to  achieve  environmental  goals  while  providing  room  for  a  shift 
away from taxation of labour. 

3.2. Financial sector 

Financial stability 

3  

In particular, an increase in the standard VAT rate from 19 % to 22 % and in the reduced rate to 12 % 
while significantly narrowing the scope of the reduced rate, but also numerous excise tax increases. 
4   The VAT compliance gap measures the ratio between VAT actually collected to theoretically possible 
collection, based on the value of private consumption taking into account the existence of preferential 
rates. While the gap is likely to reflect the illegal tax avoidance, it could also mirror other aspects like 
a shift in consumption preferences towards goods with lower rates and/or recourse to legal means of 
tax avoidance. 

5   See Sauka, A. and Putniņš, T. (2011), Shadow Economy Index for the Baltic Countries 2009 and 2010, 

Stockholm School of Economics in Riga, May 2011. 
11 

 
                                                 
In the banking sector, both solvency and liquidity risks have abated substantially. Despite 
a  delayed  return  to  profitability,  continued  capital  support  from  parent  institutions  and 
from government for two state-owned banks (Parex Bank, the second largest bank prior 
to  the  crisis,  and  the  Mortgage  and  Land  Bank  (MLB))  kept  capital  adequacy  ratios 
comfortable at 15 % on average at the end of 2011. The deterioration of the loan quality 
has come to an end, as the proportion of non-performing loans (overdue by more than 90 
days) peaked at 19.4 % in July 2010 before declining to 18.4 % in 2011. In the framework 
of  the  international  financial  assistance,  banking  supervision  and  regulation  have  been 
tightened  (capital,  liquidity  and  reporting  requirements)  and  cooperation  with  foreign 
supervisors improved. 

The restructuring and sales of the three state-owned banks — Parex, Citadele and MLB 
— to comply with the Commission’s state aid decisions are the most pressing issues in 
the  field  of  financial  stability.  The  strategy  for  the  work-out  and  sale  of  the  assets  of 
Parex  Bank  and  Citadele  Bank,  taking  into  account  possible  market  interest,  state  aid-
related  issues  and  any  pending  legal  challenges,  is  being  implemented.  MLB’s 
divestment  of  commercial  assets  to  form  the  basis  for  a  real  development  bank  is  well 
under way. 

To  assess  clients’  creditworthiness  and  lending  risks  better,  the  authorities,  in 
consultation  with  experts,  are  making  legislative  changes  to  increase  transparency  and 
regulated access by operators in the financial sector to wider information on individuals’ 
solvency  situation  (e.g.  the  online  State  Revenue  Service  and  State  Social  Security 
Agency data or the reports of state- and municipality-owned companies on individuals’ 
payment discipline). 

The policy agenda is not sufficiently focused on surveillance of the non-resident banking 
sector,  especially  in  view  of  the  experience  of  Parex  Bank  and  Latvijas  Krajbanka. 
Regulatory  and  supervisory  measures,  as  illustrated  in  the  case  of  Krajbanka,  have  not 
fully covered possible risks associated with this particular sector. 

Access to finance 

Access to finance is a challenge and the cost of capital is relatively high, hindering both 
debt  and  equity  financing.  Information  disclosure,  corporate  governance  and 
entrepreneurial culture would need to be improved to allow greater access to financing. 
Most of the support programmes available for SMEs and start-ups, financed mostly from 
EU structural funds, are rather fragmented and lack coherence; the programmes offering 
loans  and  guarantees  for  the  manufacturing  industry  as  well  as  the  microcredit 
programme  for  SMEs  have  had  moderate  success.  Only  a  small  part  of  the  available 
venture capital funds (seed and start-up financing for SMEs and microenterprises) have 
been invested so far. Consolidation of various state support programmes is planned, with 
the creation of a Financial Development Institution (in line with the commitment made in 
the Supplemental Memorandum of Understanding). 

Given  the  problems  with  access  to  credit  financing  and  equity  capital  and  the  need  to 
increase  knowledge  transfer,  there  is  room  for  improving  promotion  of  Latvian  SMEs 
among potential foreign investors. Ongoing measures and coordination to attract foreign 
investment  are  being  re-assessed  in  line  with  effectiveness  criteria  and  in  view  of  the 
strong competition from the other Baltic countries and Poland. 

3.3. Labour market, education and social policies 

Labour market policies 

The labour market is slowly recovering from the effects of recession, but the employment 
levels  are  still  far  below  the  pre-crisis  levels  and  the  unemployment  rate  is  among  the 

12 

 
highest  in  Europe.  High  long-term  unemployment  (7.4 %  of  the  active  population)  and 
youth  unemployment  (26.3 %)  are  the  most  serious  legacies  of  the  crisis.  Most  of  the 
young unemployed have no professional qualifications (only basic or general secondary 
education),  partly  due  to  the  fact  that  the  vocational  education  and  training  system  and 
curricula  are  generally  considered  weak  and  unattractive.  Together  with  the  high 
inactivity rate and emigration, these issues pose threats to future labour supply. The level 
of early school leaving is relatively high. 

To tackle unemployment, the government reallocated some structural funds financing for 
active labour market policies in 2011. However, activation of unemployed is still among 
the  lowest  in  the  EU.  In  previous  years,  active  labour  market  policies  were  financed 
almost  exclusively  by  the  European  Social  Fund.  However,  its  financing  will  be 
exhausted  soon  and  no  national  financing  is  planned.  Consequently,  the  funding  and 
activation  of  the  unemployed  for  2012-2013  have  decreased  compared  with  2010-2011 
and  are  insufficient  given  the  challenges  on  the  labour  market.  Due  to  the  low  social 
protection of the unemployed, the active labour market policies are also performing the 
role  of  a  social  safety  net,  as  the  public  works  programme  and  training  grants  are  a 
significant  source  of  income  for  the  unemployed.  This  dual  role  of  the  active  labour 
market  policies  limits  the  resources  available  for  genuine  activation  measures  and 
decreases their efficiency. 

Efforts  have  been  made  to  improve  the  effectiveness  of  active  labour  market  policies 
(e.g. planned  introduction  of  profiling,  evaluations  of  active  labour  market  policies, 
monitoring  and  assessment  system  of  training  providers,  activation  measures  in  the 
public  works  programme,  planned  measures  to  facilitate  regional  mobility,  etc.). 
However, active labour market policies could still be made more effective, in particular 
by making training more relevant to labour market needs, simplifying and increasing the 
choice within the training voucher system, providing effective counselling and job-search 
assistance,  increasing  the  efficiency  of  the  wage  subsidy  and  on-the-job  training 
programmes, introducing safeguards to prevent abuse, keeping programmes attractive for 
employers,  setting  clear  goals  for  the  programmes  and  promoting  the  self-employment 
and business start-up programmes managed by MLB and the State Employment Agency. 
To  increase  the  employment  rates,  the  government  plans  to  lower  taxes  on  labour, 
improve  the  effectiveness  of  active  labour  market  policies  and  stimulate  demand  for 
labour (measures to support entrepreneurship) and support for regional mobility. 

To tackle youth unemployment, specially designed active labour market policies targeted 
at  youth  have  been  implemented:  a  1-1.5-year  short-cycle  vocational  education  and 
training  programme,  ‘job  trials’  in  vocational  schools,  voluntary  work  and  wage 
subsidies  for  young  workers.  However,  given  the  scale  of  the  problem,  these  limited 
activities  have  a  relatively  small  impact.  Insufficient  efforts  and  financing  are  directed 
towards  bringing  unemployed  youths  with  no  professional  qualifications  back  into 
education.  Cooperation  between  the  Education  Ministry  and  municipalities  to  improve 
career guidance and social services for 15- to 19-year olds is also weak. 

Following  the  European  Council  of  30  January  2012,  the  Latvian  authorities  together 
with  the  Commission  examined  possible  action  to  reduce  youth  unemployment, 
including  through  refocusing  structural  funds,  the  government  plans  to  tackle  youth 
unemployment  through  twelve  measures.  Most  proposals  focus  on  using  existing 
measures  and  the  available  national  and  EU  funding  allocations.  In  some  cases  it  is 
proposed to adjust measures and sharpen the focus on youth: for example, an additional 
300 
two  measures  — 
modernisation of vocational education and training infrastructure and the additional 2 000 
short-term  vocational  education  stipends  —  envisage  additional  funding  through  over-

targeted  specifically  at  youth.  Only 

training  vouchers 

13 

 
commitments. In view of the extent of the problem these measures will not be sufficient 
to make a significant impact. 

Social policies 

During the last three years the income inequality and relative poverty rates have been on 
a  downtrend  trend,  but  they  are  still  among  the  highest  in  the  EU.  Severe  material 
deprivation  has  increased  considerably  over  the  same  period.  In  2011,  40 %  of  the 
population  were  at  risk  of  poverty  or  social  exclusion.  This  is  not  only  a  major  social 
problem,  but  also  has  implications  for  the  employability  of  the  workforce  and  future 
growth prospects. Families with children and unemployed are at a particularly high risk 
of poverty. The coverage of unemployment benefits is low — around one quarter of the 
unemployed are entitled and the entitlement rules have been tightened with effect from 
2012.  Child  poverty  affects  not  only  children  living  in  jobless  households  but  also 
households with high work intensity. Social transfers have little impact on reducing child 
poverty.  Older  people  are  the  only  group  of  the  population  who  benefited  from 
improvements in the poverty rate during the crisis. However, the pension indexation has 
been frozen until the end of 2013, while wage growth and inflation  are projected  to be 
relatively high. Consequently, the at-risk-of-poverty rate amongst older people is likely 
to increase again in 2012-2013. 

While  social  protection  expenditure  as  a  share  of  GDP  increased  during  the  crisis 
(automatic stabiliser effect), Latvia spends relatively little on social protection and social 
transfers  have  little  impact  on  poverty  reduction,  as  a  large  share  of  them  are 
redistributed  back  to  middle-  and  high-income  earners.  Spending  on  means-tested 
benefits is low and the active labour market policies grants are partly performing the role 
of a social safety net. The design of social assistance benefits also contains poverty and 
unemployment  traps  and  there  are  concerns  about  benefit  targeting,  adequacy  and 
insufficient activation of the benefit recipients. Large inequalities exist in access to social 
assistance  across  local  governments.  Poor  transparency,  lack  of  effective  data 
management  and  monitoring  systems,  and  lack  of  research  in  this  area  complicate 
evidence-based  decision-making  (in  line  with  the  condition  set  in  the  Supplemental 
Memorandum of Understanding, the World Bank will undertake a comprehensive social 
assistance study in 2012-2013). 

Government policies to reduce poverty are concentrating on reducing income inequality, 
lightening the tax burden on working families and increasing access to the labour market. 
The government has decided to continue in 2012 most of the measures in the Emergency 
Social  Safety  Net  Strategy.  The  main  components  are  the  public  works  programme  for 
the unemployed, an increase in the guaranteed minimum income (50 % co-financed from 
central  government),  free  healthcare  for  the  poor,  central  government  co-financing  for 
housing  benefits  (to  be  phased  out  in  April  2012)  and  transport  compensation  for 
vulnerable groups. 

The  effects  of  an  ageing  population  and  emigration  will  appear  soon,  posing  serious 
challenges  to  the  future  sustainability  and  adequacy  of  the  pension  system.  Several 
reforms  have  been  introduced  in  line  with  the  conditions  set  in  the  Supplemental 
Memorandum  of  Understanding:  retirement  and  early  retirement  age  limits  will  be 
gradually increased from 2014 on, the minimum insurance period will be raised from 10 
to  15  years  and  the  pension  indexation  will  remain  frozen  until  the  end  of  2013 
(consumer price index-linking will be introduced afterwards). Also, the contribution rates 
to the mandatory funded pension scheme are to be restored from 2 % to 6 % in January 
2013  (in  line  with  the  commitment  made  in  the  Supplemental  Memorandum  of 
Understanding).  The  national  reform  programme  mentions  plans  to  increase  the 
retirement age as of 2014. 

14 

 
Education and lifelong learning 

Education  and  training  budgets  suffered  significant  cuts  during  the  crisis  and  measures 
are  being  taken  to  ensure  cost-efficiency:  for  example,  the  general  education  school 
network has been consolidated and the ‘money follows pupil’ funding model introduced. 
Funding  from  the  EU  structural  funds  has  been  invested  in  developing  specialised 
vocational schools, modernising higher education and creating competence centres. 

Despite  the  relatively  high  educational  attainment  (tertiary  attainment  rates  improved 
significantly  from  18.6 %  in  2000  to  32.3 %  in  2010  and  have  almost  reached  the  EU 
average),  a  significant  share  of  the  workforce  have  no  professional  qualifications  and 
limited  access  to  quality  education,  especially  higher  education.  Universities  perform 
poorly  in  worldwide  rankings  (also  compared  with  other  Baltic  countries).  Higher 
education  suffers  from  low  international  competitiveness  (low  share  of  international 
students,  publications  and  international  lecturers)  and  weak  cooperation  between 
universities and businesses. The share of mathematics, science and technology graduates 
is  the  lowest  in  the  EU.  There  are  concerns  about  decision-making  and  governance  in 
higher education institutions. One of the main measures implemented in higher education 
is  a  large-scale  assessment  of  study  programmes  that  will  form  the  basis  for  future 
decisions. Performance-based financing is not expected to be introduced before 2013. 

The share of students enrolled in vocational education and training is among the lowest 
in Europe. The challenge remains to improve the quality, effectiveness and attractiveness 
of vocational education and training, including providing modern material and technical 
bases in vocational education and training institutions, adapting curricula to match labour 
market  needs  better  and  promoting  quality  apprenticeships.  Delays  are  reported  in 
implementation of the measure funded by the European Regional Development Fund on 
‘Vocational education infrastructure’, putting at some risk the end of 2015 deadline for 
completing  the  programme.  Additional  resources  (more  than  EUR  44  million)  to  fulfil 
the initial programme goals are to be found within the current Operational Programme. 
Targeted measures to bring early school leavers  back  into  education  are  missing.  More 
support  for  poor  families  with  children  in  vocational  or  general  education  institutions, 
coupled with more budget places and scholarships and wider availability of student loans 
in universities, would be one way to reverse this trend. 

Participation  in  lifelong  learning  is  also  low.  There  has  been  little  progress  on 
implementing  the  strategy  and  the  quality  and  effectiveness  of  the  existing  schemes 
should  be  improved,  especially  by  increasing  their  relevance  to  labour  market  needs. 
Since  enterprises  are  not  active  in  training  their  staff,  support  for  companies  providing 
training for their employees could be considered. 

The  government  has  planned  a  number  of  measures  to  make  vocational  education  and 
training  more  attractive,  such  as  modernisation  of  infrastructure  and  equipment, 
development  of  modular  vocational  education  and  training,  improvement  of  vocational 
education  and  training  programmes  in  cooperation  with  sectoral  expert  councils  and 
development of the National Qualifications Framework. In the area of higher education, 
the  main  measure  is  the  evaluation  of  study  directions  which  will  provide  a  basis  for 
taking further decisions. There are also plans to improve the infrastructure and equipment 
and to introduce a new model for financing higher education institutions plus legislative 
amendments to improve the quality and flexibility of higher education. 

3.4. Structural measures promoting growth and competitiveness 

Latvia’s  export  structure  has  become  more  diversified  over  the  years  and  the  recent 
growth in exports has contributed significantly to the overall economic recovery and the 
rebalancing  of  the  economy  towards  tradable  sectors.  Nevertheless,  major  structural 

15 

 
problems  remain.  Latvia’s  labour  productivity,  in  terms  of  real  GDP  per  employed 
person,  is  still  significantly  below  the  EU  average  and  countries  with  economic 
similarities such as Lithuania and Estonia. 

The role of EU funds 

For the period 2007–2013, Latvia has been allocated EUR 4.5 billion from the structural 
funds and the Cohesion Fund under the ‘Convergence’ objective. Latvia is implementing 
three  Operational  Programmes:  ‘Human  resources  and  employment’  supported  by  the 
European  Social  Fund,  ‘Entrepreneurship  and  innovations’  supported  by  the  European 
Regional Development Fund and ‘Infrastructure and services’ supported by the European 
Regional Development Fund and the Cohesion Fund. Absorption of EU funds stands at 
36.4 %  of  the  total  available  financing,  corresponding  to  the  EU-27  average  of  above 
35 %  (European  Social  Fund  execution  is  high  at  60.04 %,  with  execution  of  the 
European Regional Development Fund at 33.4 % and of the Cohesion Fund at 32.1 %). In 
2010 and 2011 absorption of structural funds was delayed compared with the ambitious 
budget  plans,  mainly  due  to  delays  in  public  procurement,  insufficient  administrative 
capacity in line ministries and lack of bank financing. 

Implementation of financing is critical for major Cohesion Fund projects in the transport 
sector,  e.g.  the  modernisation  of  railway  stock  and  reallocation  of  port  activities  in 
Krievu  sala.  The  poor  overall  condition  of  transport  infrastructure  is  being  slowly 
addressed with EU financing, though the quality standards for roadbuilding need further 
improvements  in  line  with  the  conditions  set  in  the  Supplemental  Memorandum  of 
Understanding. Also, the development of ICT infrastructure shows a significant divide in 
broadband coverage between densely populated and rural areas. 

Overall,  the  experience  gained  from  implementing  cohesion  policy  in  Latvia  highlights 
weaknesses  related  to  the  intervention  logic  of  investments,  including  the  evaluation 
capacity.  Coordination  of  support  with  neighbouring  Member  States  is  insufficient,  in 
particular in the context of the Baltic Sea Strategy. 

Research and innovation 

Latvia’s poor innovation performance — the country is consistently ranked amongst the 
last  on  the  Innovation  Union  scoreboard  —  could  impair  its  long-run  competitiveness. 
There is no systematic and effective research and innovation strategy and little research 
and innovation investment by either domestic companies or foreign affiliates to support 
specialisation in knowledge-intensive and innovation-driven sectors. Latvia also has the 
lowest business R&D intensity in the EU (0.22 % of GDP in 2010) and licence and patent 
revenue is rather low. The national innovation system is overshadowed by low scientific 
performance, as measured by the share of publications in the top 10 % most cited which, 
at only 2.9 %, is the second lowest score in Europe. 

The national research and innovation system faces a number of challenges: 

(i) There is limited capacity to design, implement and coordinate research and innovation 
policy: Latvia has a complicated decision-making process for such a small country and 
the  effectiveness  of  policy  measures  has  been  undermined  by  a  lack  of  systematic 
evaluations (an external evaluation is ongoing and planned to be finished by the end of 
November 2012). 

(ii) The scientific and research infrastructure is underdeveloped and the limited research 
and innovation resources available are spread too thinly to be efficient. 

(iii) Cooperation between businesses and academics continues to be poor: companies are 
barely  using  the  research  potential  of  universities  or  state  research  institutes  and  their 
participation  in  the  ongoing  competence  centres  programme  is  rather  low.  The  level  of 

16 

 
commercialisation of research is low: the technology transfer contact points operating in 
several  universities  produce  modest  results,  in  part  due  to  the  incomplete  legal 
framework for protecting intellectual property rights. 

(iv)  There  is  a  lack  of  highly  qualified  scientists  and  engineers;  the  number  of  new 
doctorates awarded remains low and many scientists pursue their careers abroad. 

In the course of fiscal consolidation, R&D intensity fell to 0.46 % in 2009 after peaking 
at 0.7 % in 2007. With the help of structural funds (EUR 466 million or 10 % of the total 
allocations  are  earmarked  for  implementation  of  R&D  and  innovation  policies),  R&D 
intensity recovered somewhat to 0.6 % in 2010, which is still one of the lowest in the EU. 
In  view  of  the  heavy  dependence  on  structural  funds  and  the  low  level  of  business 
investment,  the  national  target  of  increasing  R&D  intensity  to  1.5 %  by  2020  is  rather 
ambitious. 

There  is  no  systematic  monitoring  to  create  a  continuous  and  stable  basis  for  basic 
research activities. The growing share of structural funds in R&D funding is tilting the 
previous  balance  between  institutional  and  competitive  funding  more  towards  project-
based,  competitive  funding.  One  major  issue is  funding  of  R&D  after  2013,  before  the 
new round of structural funds is available. Moreover, as the level of support will remain 
constrained  and  there  is  a  risk  of  some  of  the  direct  support  measures  being  poorly 
funded, the merits of introducing broader tax incentives for research and innovation have 
to be considered. 

In  order  to  address  these  weaknesses,  Latvia  has  taken  the  following  steps:  (i) 
governance  is  being  improved  by  setting  up  a  cross-departmental  coordination  centre 
under  the  Prime  Minister;  (ii)  efforts  are  being  made  to  modernise  the  scientific 
infrastructure — nine national research centres were established in 2011; (iii) measures 
have been taken to attract foreign academics, to increase the number of researchers and to 
attune  the  education  system  more  to  business  needs  by  involving  employers’ 
organisations  in  the  governance  of  universities  and  assessing  vocational  study 
programmes;  (iv)  steps  are  being  taken  to  promote  commercialisation  of  science, 
encourage  industrial  innovation  and  support  the  development  of  innovative  enterprises 
(business  development  involving  new  products  and  technologies,  competence  and 
technology transfer centres, innovation vouchers, etc.). 

Further  efforts  should  be  made  to  improve  the  quality  of  the  science  base  and  to 
rationalise research and higher education institutions in line with the thematic priorities 
and  budgetary  constraints.  This  should  result  in  fewer  but  larger  entities  more  able  to 
build  up  critical  mass  in  specialised  areas  of  education  and  research,  coupled  with 
progressive  introduction  of  competitive  funding  based  on  independent  evaluation.  In 
order to address the current challenges and to qualify for the EU funding within the post 
2013+  period,  Latvia  should  draw  up  a  research  and  innovation  strategy  for  smart 
specialisation,  so  that  EU  structural  funds  can  be  used  more  efficiently  and  synergies 
between  different  EU  and  national  policies,  as  well  as  public  and  private  investments, 
can be increased. 

Energy markets 

Energy  markets  in  Latvia  remain  dominated  by  horizontally  and  vertically  integrated 
monopolies.  Due  to  limited  interconnection,  the  gas  and  electricity  markets  are  largely 
separated  from  other  EU  Member  States.  Increasing  interconnection  capacity  would 
contribute to enhancing competition in energy markets. 

The  concentration  in  the  electricity  generating  sector  is  very  high:  the  dominant  utility 
Latvenergo  produced  more  than  90 %  of  all  power  in  the  country  in  2010.  In  the  gas 

17 

 
market,  100 %  of  imports  are  purchased  by  JSC  ‘Latvijas  Gaze’  from  Russia. 
Concentration at retail level is very high on both the electricity and gas markets. Latvia 
has notified measures fully transposing both the electricity and the gas directives (with a 
derogation  for  gas)  and  the  regulator  —  the  Public  Utility  Commission  —  is  legally 
independent since amendments to the relevant law came into force in August 2011. 

A risk assessment is under way on gas interconnections with Estonia and Lithuania, plus 
an assessment of pipeline projects (the Poland-Lithuania ‘Baltic Connector’ gas pipeline) 
and  of  a  regional  liquefied  natural  gas  terminal.  As  regards  electricity,  for  historical 
reasons the system is interconnected with the networks of Belarus, Russia, Estonia and 
Lithuania  (BRELL  Ring  agreement).  Consequently,  synchronisation  with  the  EU 
electricity  system  is  not  possible  without  negotiations  with  Russia  and  Belarus  on 
technical operation of the networks. 

The  policy  response  to  the  challenges  facing  the  energy  sector  consists  mainly  of: 
(i) following the legal transposition, it is time to implement the Third Energy Package in 
practice for both electricity and gas, which as a first step entails the certification of the 
independence of the electricity transmission system operator which is expected later this 
year;  (ii) preparing  the  gas  sector  for  the  end  of  isolation  and  subsequent  creation  of 
market structures (e.g. decision on a regional liquefied natural gas terminal in the Baltic 
region);  (iii) linking  the  gas  network  to  the  EU  (e.g.  the  Latvia/Lithuania  reverse-flow 
project);  (iv) strengthening  Latvia’s  national  electricity  grid  to  transport  energy  from 
Finland,  Sweden  or  Poland;  (v) continuing  cooperation  with  the  Commission  in 
negotiations  with  Russia  and  Belarus  on  operation  of  the  electricity  network;  and 
(vi) continuing work with a view to joining Nord Pool Spot and creating a Baltic regional 
electricity market. 

Renewable energy 

Latvia has committed itself to meet a target of 40 % of renewable energy sources in final 
energy  consumption  and  a  10 %  share  for  renewable  energy  in  the  transport  sector  by 
2020 (in 2010 Latvia was close to its interim target for 2011/2012 of 34 %). Latvia has 
notified  measures  fully  transposing  the  EU  Renewable  Energy  Sources  Directive. 
However,  insufficient  progress  has  been  made  on  developing  a  coherent,  stable  and 
predictable  framework  to  support  renewable  energy.  Support  schemes  are  not  fully 
adequate in terms of the tariff levels and/or cost reductions due to technical development, 
but  retroactive  changes  must  be  avoided  given  the  negative  effect  on  overall  investor 
confidence. 

Resource efficiency and the environment 

The Second National Energy Efficiency Action Plan assumes that both the EU Cohesion 
Policy Fund and the Climate Change Financial Instrument will continue to play a major 
role  in  financing  improvements  in  energy  efficiency.  Latvia  has  put  forward  a  mix  of 
policy  measures  addressing  energy  saving  in  the  main  sectors  of  the  economy.  In  the 
years  ahead  more  than  70 %  of  energy  savings  are  expected  to  be  generated  in  the 
buildings sector. However, without placing any major burden on public budgets, Latvia 
could  significantly  increase  the  benefits  derived  from  energy  efficiency  investments  by 
introducing the legal and fiscal framework necessary for energy performance contracting. 

The  tax  system  does  not  provide  sufficient  incentives  for  reducing  energy  costs  and 
shifting  consumption  towards  energy-efficient  products  (vehicles  or  insulation  of 
buildings  and  heating  systems).  The  impact  of  the  natural  resources  tax  is  small  and 
insufficient  to  penalise  inefficient  energy  use.  Quality  standards  in  construction  and 
waste management are low. The potential for reducing dependence on energy imports is 

18 

 
untapped  and  the  share  of  net  energy  imports  in  the  foreign  trade  balance  for  goods 
increased to about 50 % in 2010-11. 

In  2011,  the  Energy  Strategy  for  2030  was  launched  to  complement  and  update  the 
2007–2016  Energy  Development  Guidelines.  It  includes  large-scale  infrastructure 
projects, fiscal measures (including energy and carbon taxes) and national targets in the 
energy  sector.  In  this  context,  programmes  to  increase  energy  efficiency  in  public 
buildings  and  production  facilities  are  in  progress.  Measures  include  technological 
upgrades and replacing fossil fuels by renewable energy in heating systems. Also, a first 
set of agreements have been signed for projects to reduce emissions from public lighting. 
The EU funds and the Climate Change Financial Instrument have been playing a key role 
in  financing  energy  efficiency  measures  already  implemented  or  planned.  However, 
considering  that  Latvia’s  energy  intensity  is  still  more  than  double  the  EU-27  average, 
especially  for  industrial  companies,  further  efforts  are  clearly  necessary.  For  example, 
Latvia  could  significantly  increase  the  benefits  reaped  from  investments  in  energy 
efficiency  by  introducing  the  legal  and  fiscal  framework  necessary  for  energy 
performance contracting. 

Latvia has committed itself to limit the increase in greenhouse gas emissions in sectors 
not  covered  by  the  emissions  trading  system  by  17 %  (of  2005  levels)  by  2020. 
According to the latest projections, based on existing measures, emissions are expected 
to  increase  by  14.7 %  (compared  with  2005),  leading  to  an  overachievement  by  2 
percentage  points.  However,  energy  efficiency  is  low  in  transport,  which  is  the  sector 
with  the  largest  emissions  in  Latvia,  with  25.9 %  of  the  country’s  greenhouse  gas 
emissions in 2009. The public transport network is not sufficiently consolidated and use 
of  renewable  energy  and  further  electrification  of  the  railways  have  not  been  fully 
explored.  While  acknowledging  the  high  share  of  the  transport  sector  in  Latvia’s 
greenhouse gas emissions, the national reform programme does not put forward specific 
measures addressing this problem (e.g. intermodal shifts). Although the national reform 
programme  reports  compulsory  admixture  and  exemptions  from  excise  duties  for 
biofuels, the action taken so far has not led to significant emission cuts. 

The  structure  of  the  waste  management  system  in  Latvia  is  still  not  in  line  with  the 
principles  of  resource  efficiency.  Latvia  still  landfills  90 %  of  municipal  waste  and  the 
level  of  landfill  taxes  remains  low  compared  with  other  countries.  Separate  waste 
collection, reuse, recycling and recovery are limited. The limited producer responsibility 
system is not able to cover the full costs of separate collection and recycling of the main 
waste  streams.  No  incentives  are  in  place  to  promote  prevention  and  participation  in 
separate  collection  (pay-as-you-throw  schemes).  Latvia  is  not  likely  to  reach  the  2020 
investment.  This  creates  significant 
recycling 
opportunities  for  growth  in  sectors  connected  with  waste  management  and  recycling. 
Latvia  has  also  taken  major  steps  to  develop  quality  water  supply  and  waste  water 
management services further. Continued efforts are needed in the years ahead to ensure 
steady growth of the share of the population with access to these services. 

target  (50 %)  without  substantial 

Other structural measures 

To  tighten  management  of  state-owned  enterprises  and  real  estate,  in  line  with  the 
commitments  made  in  the  Supplemental  Memorandum  of  Understanding,  in  December 
2011 the authorities adopted the ‘Concept paper on state-owned enterprises governance’ 
that  lays  down  the  principles  for  setting  up  a  centralised  state-owned  enterprises 
manager,  governing  relations  with  line  ministries,  measuring  the  performance  of  state-
owned  enterprises,  revising  dividend  and  remuneration  policies  and  reviewing  the 
institutions responsible for supervising government- and municipality-owned companies. 
Also, plans for the final stages of further centralisation of state real estate management 

19 

 
under  the  State  Real  Estate  Agency  have  been  developed,  deciding  which  real  estate 
assets  to  keep  or  to  auction  off  and  which  need  to  be  transferred  to  the  Agency,  while 
centralising  decisions  on  real  estate  investment  projects  in  the  process  of  drafting  the 
state budget. 

The  competition  climate  in  Latvia  can  be  improved,  especially  in  sectors  like 
construction,  healthcare  and  pharmacy,  public  services  and  food  supply  (dominated  by 
two  big  chains).  The  Competition  Council  has  inadequate  capacity  to  perform  more 
active,  targeted  market  surveillance.  There  is  also  insufficient  competition  in  public 
procurement, notably for maintenance works and construction of roads and bridges. As 
regards  public  services,  port  authorities  occasionally  run  commercial-like  activities  and 
prevent private companies from offering their services, leading to legal disputes. In this 
context,  the  Supplemental  Memorandum  of  Understanding  contains  a  commitment  to 
introduce, by mid-2012, a proper assessment system to monitor observance and uniform 
application  of  the  criteria  for  government  and  municipal  authorities  to  engage  in 
commercial activities, including port services. 

Latvia adopted the horizontal law transposing the Services Directive with some delay in 
April 2010. The law was amended in March 2012 to ensure better compliance with the 
directive.  In  general,  no  major  obstacles  have  been  identified  but  some  restrictions  on 
cross-border provision of services still exist in tourism and construction. The number of 
restrictions  on  regulated  professions  is  moderate,  except  for  the  profession  of  notary 
where Latvia refused to repeal the nationality requirement, despite the judgments of the 
Court of Justice of the EU of 24 May 2011 (concerning six other Member States). The 
‘point  of  single  contact’  provides  relatively  good  information,  except  on  cross-border 
service  provision.  Completion  of  procedures  is  mostly  possible  for  national  service 
providers, whereas technical solutions are needed for cross-border use of e-identification 
and e-signatures. 

The ‘Rail Baltic’ project, which has gained new impetus in the reviewed trans-European 
transport network policy, would connect the main EU networks with north-east Europe. 
Electrified  European-gauge  railway  infrastructure  is  to  be  built,  providing  a  strong 
stimulus for economic growth and reducing greenhouse gas emissions through a modal 
shift to rail. In this context, it is important to ensure that competition in the rail freight 
sector,  including  rail  traffic  management,  is  effective  and  that  new  entrants  can  gain 
access to the market. 

The take-up of broadband internet is below the EU average due to the rural broadband 
gap.  The  rural  broadband  state  aid  scheme  co-financed  by  EU  funds  and  approved  in 
2011 should lower the broadband deployment cost in rural areas; however, it needs to be 
implemented as part of an overall national broadband strategy, which the authorities plan 
to adopt by the end of 2012. Also, in accordance with the recently agreed EU policy on 
radio  spectrum  for  wireless  broadband,  Latvia  should  work  on  authorising  use  of  the 
digital  dividend  spectrum  to  stimulate  competitive  and  ubiquitous  mobile  broadband 
services. 

3.5. Modernisation of public administration 

Latvia has allocated EUR 22.8 million, or 3.9 % of the overall EU funding available, to 
modernisation  of  public  administration  under  the  priority  ‘Administrative  capacity-
building’ of the Operational Programme on ‘Human resources and employment’ funded 
by  the  European  Social  Fund.  Although  some  improvements  have  been  made,  a  great 
deal remains to be done. In particular, the authorities need to move away from financing 
basic  operations  (e.g.  temporary  staff  recruitment)  that  lead  to  supporting  low  value-
added,  short-term  projects.  Instead,  narrowing  the  number  of  eligible  activities  and 

20 

 
clearly  targeting  them  on  reforms  in  public  administration  would  provide  greater 
efficiency. 

Despite  earlier  delays  in  implementing  the  relevant  conditions  in  the  previous 
Supplemental  Memorandums  of  Understanding, 
the  authorities  have  committed 
themselves to preparing a strategy on public administration by spring 2012, which will, 
inter  alia,  establish  a  stronger  institutional  model  responsible  for  human  resources  and 
recruitment policy and payroll, normalise the distribution of employees within the unified 
wage  grid  based  on  effective  skills  assessment, 
introduce  central  control  for 
establishment of new posts and reward the performance of employees through earnings 
and  career  development.  In  this  area,  however,  given  past  delays,  it  is  unclear  how  far 
these commitments will be put into practice. 

While Latvia has made efforts to lighten the administrative burden on businesses, a focus 
on  real  efficiency  gains  is  lacking  and  the  initiatives  taken  have  been  fragmented.  The 
government lacks a comprehensive strategy on supporting enterprises and improving the 
business environment. Nevertheless, in 2010 and 2011 a number of measures were taken 
to  help  micro-companies  and  self-employed  to  start  a  business,  especially  by  reducing 
start-up costs related to registration, equity capital requirements and taxation. In addition, 
the time it takes to obtain a permanent electricity connection has been shortened and the 
management  of  EU  structural  funds  projects  has  been  simplified.  However,  the  new 
Construction  Law,  supposed  to  simplify  construction  procedures,  as  well  as  legislation 
for the protection of investors, are yet to be adopted by Parliament. Also, the compliance 
requirements for tax administration remain to be simplified and the electronic registration 
of  enterprises,  the  electronic  procurement  system  and  the  one-stop  shop  for  the 
registration of property are yet to be completed. 

As regards the efficiency of the Latvian civil justice system, the main challenges are the 
large  case  backlog  and  the  lengthy  proceedings  in  civil  and  commercial  cases.  The 
situation  is  similar  for  administrative  courts,  which  are  empowered  to  rule  on  licences, 
registrations and tax issues. Latvia has a low clearance rate (i.e. the capacity of courts to 
deal  with  new  and  pending  cases)  and  a  high  disposition  time  (i.e.  the  number  of  days 
necessary  to  dispose  of  pending  cases).  The  situation  has  deteriorated  in  the  last  few 
years,  with  only  73 %  of  cases  adjudicated  within  one  year  in  2011.  Moreover,  many 
cases  do  not  get  resolved  at  first  instance,  which  creates  delays  and  backlogs  at  all 
instances, up to the Supreme Court. The inefficiency was particularly acute in insolvency 
proceedings. New insolvency legislation has been adopted to streamline and expedite the 
insolvency  process  and  introduce  a  reorganisation  option  for  companies.  However,  its 
effects still need to be fully analysed. Further improvements of Latvia’s insolvency laws 
are  being  discussed.  There  is  also  some  concern  that  the  Latvian  judiciary  is  not 
maintaining and updating its knowledge of EU law.  

The number of cases handled per year by judges is very high, while the judicial support 
staff may not always be sufficiently qualified to assist the judges. There is also concern 
about  the  qualifications  and  the  accountability  of  the  judiciary.  The  creation  of  an 
independent Council for the Judiciary in 2010, responsible for evaluating the professional 
performance  of 
the 
independence of the judiciary. 

the  situation,  while  guaranteeing 

judges,  should 

improve 

they  are  working 

The authorities are taking measures to improve the performance of the judicial system. In 
particular, 
(audio, 
videoconferencing  and  IT  solutions)  and  the  efficiency  of  procedural  law,  setting  up  a 
system  for  publication  of  judgments,  levelling  the  workload  of  different  courts  and 
developing the legal framework for mediation. The Annual Action Plan for Improvement 
of  the  Business  Environment  for  2012  includes  measures  to  ensure  use  of  e-services  in 

improving  court 

infrastructure 

towards 

21 

 
legal proceedings. It is too early to assess the relevance and efficiency of the measures 
proposed. 

In  2011  the  government  also  passed  the  Electronic  Government  Development  Plan  for 
2011–2013 estimating that 50 % of the population will use e-government in 2015. By late 
2011,  20  e-services  had  been  introduced  and  about  150  more  are  expected  to  be 
introduced in 2012 followed by another 50 e-services in 2013. 

22 

 
4. OVERVIEW TABLE  

to 

to 

the 

Measures 

to  ensure 

law  submitted 

Tax  measures  beneficial 

three  pension  pillars  and 

Preparation  of  a  Medium-Term  Budget 

2011 commitments 
Euro Plus Pact (national commitments and progress) 
• 
Adoption  of  fiscal  discipline  principle: 
committed  to  cut  deficit  below  3 %  of  GDP  for 
2012  and  aiming  for  a  2.5 %  of  GDP  deficit;  the 
goal  is  to  improve  the  fiscal  position  so  that  the 
general government deficit would be 1.9 % of GDP 
in 2013 and 1.1 % in 2014. 
• 
Framework Law. 
• 
long-term 
financial  stability  of  the  state  pension  system:  in 
accordance  with 
to 
the  draft 
Parliament,  from  2016  to  2021  a  gradual  increase 
is  planned  in  the  retirement  age  from  62  to  65 
years and in the qualification period from 10 to 15 
years;  measures  to  preserve  the  sustainability  of 
the 
restore 
contributions  to  the  second  pillar  to  6 %  of  gross 
salaries by 2013. 
• 
labour: 
priority is given to substantial increases in indirect 
taxation,  with  VAT  increased  to  22 %,  higher 
excise tax and doubling of the real-estate tax rates 
from  initially  low  levels;  the  tax  policy  for  2011-
2014  is  directed  in  a  way  to  ensure  stability  and 
predictability  with  limitations  of  new  revenue 
measures;  a  further  shift  of  the  tax  burden  from 
labour  to  consumption  and  property  is  planned 
over  the  medium  term;  the  tax  system  could 
include action to support entrepreneurship. 
Measures to fight the shadow economy. 
• 
Labour market reform: plan to carry out a 
• 
set  of  comprehensive  and 
interrelated  policy 
measures  supported  by  the  EU  structural  funds 
with  the  aim  of  decreasing  the  risk  of  structural 
labour  market 
increasing 
unemployment, 
participation, 
job  quality  and 
in 
increasing  the  competitiveness  of  the  education 
system. 
Measures to align salary and productivity 
• 
developments:  to  link  the  future  increase  in  the 
wage bill in the public sector with the productivity 
growth rates in the economy. 
international 
Measures 
• 
cooperation  in  the  area  of  research  and  raise  the 
competitiveness of research. 
• 
Higher  education  reform:  develop  an 
improved  external  quality  assurance  system  for 
higher  education  by  preparing  a  transition  from 
study  programme  accreditation  to  study  direction 
accreditation  and  introducing  performance-based 
funding  —the  ‘money  follows  quality’  principle 
— in national legislation. 
• 
vocational 
to 
Measures 
education:  further  work  is  planned  to  develop  a 
restructure 
national  qualification  system  and 

investing 

promote 

promote 

to 

Summary assessment 

fully 

implemented 

Latvia  has  almost 
the 
commitments  in  the  fiscal  and  fiscal  governance 
field,  in  particular  as  regards  strong  and  front-
loaded  fiscal  adjustment  which  should  allow  the 
country to exit the Excessive Deficit Procedure in 
spring  2013.  On  the  down  side,  there  have  been 
some  delays  as  regards  the  Fiscal  Discipline  Law 
and there is still some uncertainty about reversing 
the second pension pillar contributions to 6 %. 

The  commitments  have  been  implemented  partly. 
The government has proposed to start reducing the 
tax wedge on labour (personal income tax rate and 
non-taxable  thresholds)  from  January  2013,  but  it 
remains to be seen how ambitious the reforms will 
be: e.g. some of the ambition can be taken away by 
the  proposed  VAT 
reduction  or  Maastricht 
inflation  criteria  considerations.  The  fight  against 
the  grey  economy,  in  particular  against  envelope 
salaries  that  hinder  fair  competition,  has  not  been 
ambitious  and  aggressive  enough.  There  has  been 
a  welcome  reassessment  of  the  effectiveness  of 
existing  active  labour  market  policies  and  their 
financing,  but  further  and  more  comprehensive 
steps  are  needed  to  address  the  high  levels  of 
structural  and  youth  unemployment.  There  has 
been  some  progress  as  regards  streamlining  the 
vocational  school  system,  mostly  with 
the 
financing from EU funds.    

and 

long 

ambitious 

The  commitments  have  been  implemented  partly. 
The  new  Education  Minister  has  proposed  a 
number  of 
overdue 
reforms/measures as regards vocational and higher 
education  and  research  and  science,  inter  alia: 
refocusing  EU  funding  in  the  vocational  school 
programme;  highlighting  the  education  quality 
issues; proposing a wage scheme for teachers that 
external 
would 
assessment  of  the  science  base  and  policy,  etc.  It 
remains  to  be  seen  how  much  of  the  above  will 
actually be implemented.         
There have been some steps towards improving the 
business  environment  (as  evidenced  by  the  high 
Doing  Business 
rankings).  However,  much 
remains  to  be  done  as  regards  tax  compliance 
procedures,  construction  procedures,  ensuring  fair 

reward  merits; 

attracting 

23 

 
 
 
procurement,  providing  a  sufficiently  skilled 
labour  force,  making  the  support  to  businesses 
from  EU  funds  more  efficient,  improving  the 
justice system, etc. 
The  efforts/measures  by  the  Latvian  Investment 
and  Development  Agency 
to  attract  foreign 
investment  are  insufficient  and  rarely  produce 
successful outcomes.  

The  Latvijas  Krajbanka  experience  shows  that 
these  commitments  have  not  been  implemented 
fully,  though  follow-up  action  should  further 
improve  the  stability  of  the  financial  system.  In 
particular,  closer  relations  with  neighbouring 
financial  sector  regulators  are  important  to  avert 
future  cross-border  crises.  There  has  been  good 
progress, albeit belated, as regards restructuring of 
the Mortgage and Land Bank, although the sale of 
commercial  assets  has  not  yet  happened.  It  is 
unclear  if  anything  has  been  achieved  as  regards 
encouraging banks to tackle bad loans.    

improve 

fostering 

Measures 

Measures 

framework 

innovations 
by 
for  more  efficient 

vocational  education,  including  development  of 
module-based  vocational  education  programmes: 
optimisation  and  differentiation  of  vocational 
education institutions. 
• 
the  business 
to 
environment:  reducing  the  administrative  burden 
on  businesses,  as  well  as  ensuring  appropriate  e-
services  for  businesses;  measures  to  provide  on-
line business registration, to reduce the procedures 
and the time taken to obtain a construction permit 
and  to  improve  legislation  for  investor  protection 
by providing greater transparency. 
• 
developing  a 
cooperation between scientists and entrepreneurs. 
•  
Measures to strengthen supervision of the 
financial  system:  amendment  of  the  supervisory 
framework  as  needed  to  keep  pace  with  evolving 
international  best  practice;  amendments  to  the 
legal  acts  strengthening  the  capital  base  and 
liquidity  requirements  will  be  adopted  in  2011–
2012 
the  Fourth  Capital 
Requirements Directive; intensive supervision will 
in  particular,  on  capital 
continue 
adequacy  and  the  quality  of  restructured  loans,  as 
well  as  close  monitoring  of  lending  to  non-
residents. 
• 
Measures  to  improve  risk  and  crisis 
management:  the  work  on  practical  arrangements 
for  cooperation  (coordinated  decision-making, 
burden  sharing,  establishment  of  a  common 
database  and  monitoring  of  financial  stability)  is 
going  on  at  the  level  of  the  working  groups 
established and the results will be presented to the 
Stability  Group  during  its  meeting  at  the  end  of 
2011. 
• 
lending, promotion of responsible lending. 
• 

Incentives  to  tackle  bad  loans  and  renew 

Restructuring of the state-owned banks. 

implement 

focusing, 

to 

Europe 2020 (national targets and progress) 
Employment  rate  target  (in  %,  20-64  age  group): 
73 % 

R&D target (% of GDP): 1.5 %  

Greenhouse  gas  (GHG)  emissions  target:  +17 % 
(compared with 2005 emissions) 

Renewable  energy  target:  40 %  by  2020  (RES 
Directive 2009/28/EC). 

Energy  efficiency  —  reduction  in  primary  energy 
consumption by 2020 (0.67 Mtoe) 

The  employment  rate  stood  at  67.1 %  in  2009, 
65 % in 2010 and 67.2 % in 2011. All these figures 
will  be  revised  downwards  based  on  the  latest 
population census. 
Gross  domestic  expenditure  on  R&D  stood  at 
0.46 % of GDP in 2009 and 0.6 % in 2010. In view 
of  the  heavy  dependence  on  structural  funds  and 
the  low  level  of  business  investment,  the  national 
target  of  increasing  R&D  intensity  to  1.5 %  by 
2020 is rather ambitious. 
Change in greenhouse gas emissions between 2005 
and  2010:  +5 %  (this  figure  corresponds  to  the 
current scope of the emissions trading scheme). 
In 2009 Latvia had achieved its 2011/2012 interim 
target  of  34 %  but,  based  on  the  data  in  the 
National  RES  Progress  Report,  in  2010  the  share 
of  renewables  slipped  back  again  (to  32.5 %). 
Further  efforts  are  needed  to  sustain  the  progress 
towards the target for 2020. 
The  energy  efficiency  objectives  are  based  on 
national  circumstances  and  national  formulations. 

24 

 
 
 
 
Early school leaving target: 13.3 % 

Poverty target: At risk of poverty 21 % 
121 000  people  (at-risk-of-poverty  and  jobless 
households) 

Tertiary education target: 32.3 % 

As  the  method  to  express  the  impact  of  these 
objectives  on  energy  consumption  in  2020  in  the 
the 
same  format  was  agreed  only  recently, 
Commission  is  not  yet  able  to  present  this 
overview. 
The proportion of early leavers from education and 
training  (percentage  of  the  population  aged  18-24 
with at most lower secondary education and not in 
further  education  or  training)  stood  at  13.3 %  in 
2010.  Over  the  last  decade  Latvia  has  made 
progress  on  reducing  the  number  of  early  school 
leavers (from 16.9 % in 2002 to 13.3 % in 2010). It 
is currently performing better than the EU average 
of 14.1 %. Based on current trends, Latvia is likely 
to achieve its national target of 13.9 %, but it is not 
ambitious enough (the EU headline target is set at 
10 % in 2020). 
The  at-risk-of-poverty  rate  fell  from  25.7 %  in 
2009 to 19.3 % in 2011. Thus, the target in relative 
terms  has  been  reached.  The  main  driver  behind 
the developments in the at-risk-of-poverty rate was 
a  significant  drop  in  the  poverty  threshold  (the 
population  as  a  whole 
is  worse  off).  The 
improvements in the target value are not the result 
of  any  deliberate  policy  action  and  will  have  no 
long-lasting  impact.  The  real  challenge  will  be  to 
prevent the at-risk-of-poverty rate from increasing 
as the economy continues to recover. 
Tertiary  educational  attainment  stood  at  32.3 %  in 
2010,  a  5.3  pps  increase  since  2008.  Tertiary 
attainment  rates  have  improved  significantly  over 
the last decade (from 18.6 % in 2000 to 30.1 % in 
2009 and 32.3 % in 2010) and have almost reached 
the EU average of 33.6 %. Latvia has set a national 
target  of  34–36 %  of  graduates  by  2020,  which, 
based on current trends, is likely to be achieved. 

25 

 
 
ANNEX 

Table I. Macroeconomic indicators 

Core indicators
GDP growth rate
Output gap 1
HICP (annual % change)
Domestic demand (annual % change) 2
Unemployment rate (% of labour force) 3
Gross fixed capital formation (% of GDP)
Gross national saving (% of GDP)
General government (%  of GDP)
Net lending (+) or net borrowing (-)
Gross debt
Net financial assets 
Total revenue 
Total expenditure
  of which: Interest
Corporations (%  of GDP)
Net lending (+) or net borrowing (-)

1995-
1999

2000-
2004

2005-
2008

2009

2010

2011

2012

2013

3.8
-2.6
4.8
6.8
16.6
18.9
14.5

-0.9
12.5
9.9
37.9
38.8
0.9

7.4
-0.9
3.2
8.7
11.9
25.3
19.1

-1.9
13.9
8.9
33.9
35.9
0.8

6.9
9.0
9.7
7.5
7.3
31.9
18.3

-1.4
13.0
4.0
35.9
37.3
0.5

-17.7
-10.3
3.3
-27.4
17.1
21.6
29.1

-9.8
36.7
-5.6
34.7
44.5
1.5

-0.3
-9.4
-1.2
0.1
18.7
19.5
23.9

-8.2
44.7
-13.7
35.7
43.9
1.4

5.5
-4.3
4.2
10.2
16.1
22.4
25.0

-3.5
42.6
n.a
35.6
39.1
1.5

2.2
-3.1
2.6
2.8
14.8
23.2
25.0

-2.1
43.5
n.a
36.0
38.1
1.7

3.6
-1.5
2.1
4.6
13.2
24.8
25.6

-2.1
44.7
n.a
34.9
37.0
1.8

-3.3

-4.1

-9.3

17.1

12.6

5.2

3.4

2.4

n.a
n.a
20.5
35.2

n.a
n.a
21.0
35.9

-94.9
8.3
12.7
30.5

-90.4
-1.7
26.1
30.2

-80.8
-1.2
23.7
34.2

-56.3
-5.1
17.4
23.1

-1.4
n.a
36.8
6.2
18.5
0.0

-108.7
11.7
14.3
33.5

0.6
11.0
38.9
5.3
20.6
2.8

-5.5
17.4
41.2
6.6
16.7
-0.6

-1.5
33.6
33.9
11.8
18.3
-0.1

3.6
10.1
41.8
5.2
20.2
7.0

-1.1
30.2
34.2
7.1
16.7
0.3

Net financial assets, non-financial corporations
Net financial assets, financial corporations
Gross capital formation
Gross operating surplus
Households and NPISH (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Gross wages and salaries
Net property income
Current transfers received
Gross saving
Rest of the world (%  of GDP)
Net lending (+) or net borrowing (-)
Net financial assets
Net exports of goods and services
Net primary income from the rest of the world
Net capital transactions 
Tradable sector
Non-tradable sector
  of which: Building and construction sector
Real effective exchange rate (index, 2000=100)
Terms of trade in goods and services (index, 2000=100)
Market performance of exports (index, 2000=100)
Notes:
1 The output gap constitutes the gap between actual and potential gross domestic product at 2000 market prices.
2 The indicator for domestic demand includes stocks.
3  Unemployed persons are all persons who were not employed, had actively sought work and were ready to begin working immediately or within two 
weeks. The labour force is the total number of people employed and unemployed. The unemployment rate covers the age group 15-74.

4.9
101.9
-1.4
2.1
1.9
51.5
38.1
5.3
129.0
105.6
122.4

11.1
83.8
-1.5
7.6
2.4
46.8
43.5
7.2
145.5
104.8
124.3

-16.2
71.4
-17.5
-2.1
1.5
47.0
41.6
8.0
127.0
105.1
116.2

-7.5
40.2
-11.0
-0.4
0.6
52.0
37.7
5.8
93.3
101.5
104.8

-5.7
22.4
-7.7
0.3
0.1
54.6
33.5
4.9
87.9
99.9
109.8

0.9
n.a
-3.9
0.7
2.1
53.0
36.6
5.5
131.0
109.1
125.9

0.8
n.a
-4.5
0.1
2.6
n.a
n.a
n.a
129.0
108.8
128.2

-1.1
n.a
36.2
7.7
18.0
0.5

n.a
n.a
22.7
36.9

-0.7
n.a
35.5
8.4
16.7
1.0

0.1
n.a
-5.3
-0.1
2.7
n.a
n.a
n.a
127.2
109.0
129.9

Source :
Commission spring 2012 forecast

26 

 
 
 
 
Table II. Comparison of macroeconomic developments and forecasts 

Real GDP (% change)
Private consumption (% change)
Gross fixed capital formation (% change)
Exports of goods and services (% change)
Imports of goods and services (% change)
Contributions to real GDP growth:
- Final domestic demand
- Change in inventories
- Net exports
Output gap1
Employment (% change)
Unemployment rate (%)
Labour productivity (% change)
HICP inflation (%)
GDP deflator (% change)
Comp. of employees (per head, % change)
Net lending/borrowing vis-à-vis the rest of the 
world (% of GDP)

2011
COM CP
5.5
4.4
24.6
12.6
20.7

5.5
4.4
24.6
12.6
20.7

2012
COM CP
2.0
1.9
7.4
3.8
5.1

2.2
2.2
6.0
4.5
5.1

2013
COM CP
3.7
3.7
7.3
5.4
5.8

3.6
3.3
10.4
6.3
7.5

8.6
2.1
-5.2
-4.3
3.4
16.1
2.0
4.2
5.4
4.2
0.9

8.6
2.1
-5.2
-3.9
3.1
15.4
2.2
4.2
5.4
4.3
0.9

3.0
0.0
-0.8
-3.1
0.7
14.8
1.5
2.6
2.1
1.7
0.8

3.2
0.0
-1.2
-3.2
0.7
14.1
1.3
2.6
1.7
2.7
-0.5

5.1
0.0
-1.4
-1.5
1.2
13.2
2.4
2.1
1.6
2.2
0.1

4.5
0.0
-0.8
-1.8
1.1
13.3
2.6
2.0
2.0
2.9
-1.1

2014
CP
4.0
4.0
6.5
5.9
6.0

4.6
0.0
-0.6
-0.3
1.2
12.1
2.7
2.0
2.0
3.8
-1.4

2015
CP
4.0
4.0
6.4
5.6
5.8

4.7
0.0
-0.7
1.1
1.2
10.7
2.8
2.0
2.0
4.1
-1.7

Note:
1In per cent of potential GDP, with potential GDP growth according to the programme as recalculated by the Commission.

Source :

Commission spring 2012 forecasts (COM); Convergence programme (CP).

27 

 
Table III. Composition of the budgetary adjustment 

(% of GDP)

2011

2012

2013

2014

2015

Change: 
2011-2015

Revenue
of which:
- Taxes on production and imports
- Current taxes on income, wealth, etc.
- Social contributions
- Other (residual)
Expenditure
of which:
- Primary expenditure

of which:

Compensation of employees
Intermediate consumption
Social payments
Subsidies
Gross fixed capital formation
Other (residual)
- Interest expenditure
General government balance (GGB)
Primary balance
One-off and other temporary measures
GGB excl. one-offs
Output gap2
Cyclically adjusted balance2
Structural balance
Change in structural balance

3

COM
35.6

COM
36.0

11.5
7.4
8.8
7.9
39.1

11.8
7.4
8.7
8.1
38.1

CP
37.4

11.8
7.5
8.8
9.3
39.5

COM
34.9

11.8
7.4
7.7
8.1
37.0

CP
35.1

11.7
7.5
8.0
7.9
36.5

CP
34.1

11.5
7.4
7.6
7.6
34.9

CP
32.8

11.3
7.3
7.5
6.7
33.1

37.6

36.5

37.8

35.2

34.7

32.8

31.0

9.6
7.1
11.4
0.3
4.2
5.1
1.5
-3.5
-2.0
0.8
-4.3

-4.3

-2.3

-3.2

9.4
7.0
10.9
0.3
4.2
4.7
1.7
-2.1
-0.4
1.0
-3.1

-3.1

-1.2

-2.2
0.9

9.4
7.1
11.0
0.3
4.2
5.9
1.7
-2.1
-0.4
0.0
-2.1

-3.2

-1.2

-1.2
1.9

9.1
6.8
10.3
0.3
3.8
4.9
1.8
-2.1
-0.3
0.0
-2.1

-1.5

-1.7

-1.7
0.6

8.9
6.5
10.2
0.3
2.9
5.8
1.8
-1.4
0.5
0.0
-1.4

-1.8

-0.9

-0.9
0.3

8.5
5.9
9.6
0.3
1.5
7.0
2.1
-0.8
1.4
0.0
-0.8

-0.3

-0.7

-0.7
0.2

8.1
5.4
9.1
0.3
1.2
6.9
2.1
-0.3
1.8
0.0
-0.3

1.1

-0.6

-0.6
0.1

CP
-2.8

-0.2
-0.1
-1.3
-1.2
-6.0

-6.6

-1.5
-1.7
-2.3
0.0
-3.0
1.8
0.6
3.2
3.8
-0.8
4.0

5.4

1.7

2.5

3

-

3.2

-1.7

1.19

1.19

1.19

3.71

1.19

1.19

1.19

-0.67

-0.49

-1.07

-3.03

-2.81

1.5
0.1

1.4
0.5

0.5
2.1

0.9
0.4

0.1
0.7

-0.6
1.1

-0.11
1.33

-0.11
-0.94

-0.11
-0.99

Structural primary balance
Change in structural primary balance
Expenditure benchmark
Public expenditure growth4 (real)
Reference rate5,6
Lower reference rate5,7
Deviation in % of GDP 
   from applicable reference rate
Two-year average deviation in % of GDP 
   from applicable reference rate
Notes:
1On a no-policy-change basis.
2Output gap (in % of potential GDP) and cyclically-adjusted balance according to the programme as recalculated by the Commission on the 
basis of the information in the programme.
3Structural (primary) balance = cyclically adjusted (primary) balance excluding one-off and other temporary measures.
4M odified expenditure aggregate used for the expenditure benchmark, growth rates net of non-discretionary changes in unemployment benefit 
and of discretionary measures.
5The reference rates applicable to 2014 onwards will be available from mid-2012. For illustrative purposes, the current reference rates have 
also been applied to the years 2014 onwards.
6The (standard) reference rate applies starting in the year following the one in which the country reaches its M TO.
7The lower reference rate applies as long as the country is adjusting towards its M TO, including the year in which it reaches the M TO.

-0.11
-0.16

-0.11
-0.27

-0.11
-0.12

-0.14

-0.22

-0.53

0.17

n.a.

n.a.

-
-

-

-

Source :
Convergence programme (CP); Commission spring 2012 forecasts (COM); Commission calculations.

28 

 
 
 
Table IV. Debt dynamics 

Average 
2006-10

24.2
6.4

3.7
0.9

0.9
0.6
-0.5
1.9

2011

42.6
-2.1

2.0
-2.9

1.5
-2.2
-2.2
-1.1

2012

2013

COM

43.5
1.0

0.4
-0.1

1.7
-0.9
-0.9
0.7

CP

44.5
1.9

0.4
0.2

1.7
-0.8
-0.7
1.3

COM

44.7
1.2

0.3
-0.3

1.8
-1.5
-0.7
1.3

CP

45.8
1.3

-0.5
-0.5

1.9
-1.6
-0.9
2.3

2014
CP

46.7
0.9

-1.4
-0.4

2.2
-1.7
-0.8
2.7

2015
CP

38.9
-7.8

-1.8
-0.5

2.1
-1.8
-0.9
-5.4

(% of GDP)

Gross debt ratio1
Change in the ratio
Contributions 2 :

1. Primary balance
2. 'S nowball' effect

Of which:
Interest expenditure
Growth effect
Inflation effect

3. S tock-flow adjustment

Of which:
Cash/accruals diff.
Accum. financial assets

Privatisation

Val. & residual effects

Notes:
1End of period.
2The snowball effect captures the impact of interest expenditure on accumulated debt, as well as the impact of real GDP 
growth and inflation on the debt ratio (through the denominator). The stock-flow adjustment includes differences in cash 
and accrual accounting, the accumulation of financial assets, and valuation and other residual effects. 

Source :
Convergence programme (CP); Commission spring 2012 forecasts (COM); Commission calculations.

29 

 
 
Table V. Long-term sustainability indicators 

LV

EU27

No policy 
change 
scenario 

Convergence 
programme 
scenario

No policy 
change 
scenario 

SCPs scenario

S2
of which:

Initial budgetary position (IBP)
Long-term change in the primary balance (LTC)
 of which:

pensions
health care and long-term care
others

S1 (required adjustment)1

-0.7

0.9
-1.6

-1.6
0.5
-0.6

-1.9

-2.2

-0.8
-1.3

-1.3
0.5
-0.6

-3.7

2.9

0.7
2.3

1.1
1.5
-0.3

2.2

0.7

-1.6
2.4

1.2
1.5
-0.3

-0.1

Debt,  % of GDP (2011)
Age-related expenditure, % of GDP (2011)
Notes:
The 'no policy change' scenario depicts the sustainability gap under the assumption that the budgetary position evolves according 
to the spring 2012 forecast until 2013. The 'convergence programme' scenario depicts the sustainability gap under the assumption 
that the budgetary plans in the programme are fully implemented
1The required adjustment of the primary balance until 2020 
Source:
Commission, 2012 stability and convergence programmes

42.6
17.2

82.8
25.8

Figure. Medium-term debt projection 

(% of GDP)

50

Gross debt as % of GDP - LV - Medium-term debt projections

45

40

35

30

25

20

15

10

5

0

0
9
9
1

2
9
9
1

4
9
9
1

6
9
9
1

8
9
9
1

0
0
0
2

2
0
0
2

4
0
0
2

6
0
0
2

8
0
0
2

0
1
0
2

2
1
0
2

4
1
0
2

6
1
0
2

8
1
0
2

0
2
0
2

2
2
0
2

4
2
0
2

6
2
0
2

8
2
0
2

0
3
0
2

COM no policy change scenario
COM + Shock ( -1pp in the short-term/long-term interest rate on maturing and new debt from 2014)
COM + Shock (+1pp in the short-term/long-term interest rate on maturing and new debt from 2014)
COM consolidation scenario (0.5% per year on SB) in order to achieve MTO
COM consolidation scenario (1% per year on SB) in order to achieve MTO
SP scenario

Source: 

Commission, 

2012 

convergence 

programme.

30 

 
 
 
 
Table VI. Taxation indicators 

Total tax revenues (incl. actual compulsory social contributions, % of GDP)
Breakdown by economic function (% of GDP)1
     Consumption

              of which:

              - VAT

             - excise duties on tobacco and alcohol

             - energy

             - other (residual)

     Labour employed

     Labour non-employed

     Capital and business income

     Stocks of capital/wealth
     p.m.  Environmental taxes 2
3
VAT efficiency
     Actual VAT revenues as % of theoretical revenues at standard rate

2001

28.9

2005

29.2

2007

30.6

2008

29.2

2009

26.7

2010

27.3

10.7

12.3

11.9

10.6

10.3

10.8

6.8

1.3

1.7

1.0

7.8

1.3

2.2

0.9

8.2

1.1

1.7

0.9

6.7

1.5

1.7

0.7

6.0

1.6

2.1

0.7

6.6

1.5

2.0

0.7

14.6

14.0

14.6

14.4

13.6

13.9

0.1

2.0

1.3

2.2

0.1

2.1

0.7

2.7

0.1

2.9

1.0

2.1

0.1

3.3

0.8

2.0

0.3

1.7

0.8

2.3

0.4

1.2

1.0

2.4

49.0

59.5

63.7

49.2

38.0

42.8

Note: 
1 T ax revenues are broken down by economic function, i.e. according to whether taxes are raised on consumption, labour or capital. See European Commission (2012), 

T axation trends in the European Union, for a more detailed explanation.

2 T his category comprises taxes on energy, transport and pollution and resources included in taxes on consumption and capital.

3 T he VAT  efficiency is measured via the VAT  revenue ratio. T he VAT  revenue ratio is defined as the ratio between the actual VAT  revenue collected and the revenue 

that would theoretically be raised if VAT  was applied at the standard rate to all final consumption. A low ratio can indicate a reduction of the tax base due to large 

exemptions or the application of reduced rates to a wide range of goods and services ('policy gap') or a failure to collect all tax due to e.g. fraud ('collection gap'). See 

European Commission (2011), T ax reforms in EU Member States, European Economy 5/2011, for a more detailed explanation.

Source: Commission

31 

 
 
 
Table VII. Financial market indicators 

Total assets of the banking sector (% of GDP)
Share of assets of the five largest banks (% of total assets)
Foreign ownership of banking system (% of total assets)
Financial soundness indicators:
              - non-performing loans (% of total loans) 1)
              - capital adequacy ratio (%) 1), 2)
              - return on equity (%) 1), 3)
Bank loans to the private sector (year-on-year % change)
Lending for house purchase (year-on-year % change)
Loans-to-deposits ratio
CB liquidity as % of liabilities
Banks' exposure to countries receiving official financial assistance  (% of GDP)4)
Private debt (% of GDP)
Gross external debt (% of GDP) 4)
            - Public
            - Private
Long-term interest rates spread versus Bund (basis points)*
Credit default swap spreads for sovereign securities (5-year)*
Notes: 
1) Latest September 2011.
2) The capital adequacy ratio is defined as total capital divided by risk-weighted assets.   
3) Net income-to-equity ratio. After extraordinary items and taxes.
4) Latest data 2011Q3.
* M easured in basis points.

2007

2008

2009

2010

2011

147.0
67.2
57.7

0.8
11.1
24.3
34.5
44.7
236.7
0.0
…
89.1

5.0
36.2
106.6
…

141.1
70.2
68.3

3.6
11.8
4.6
10.2
4.4
278.4
3.0
…
90.1

9.2
41.0
244.8
790.1

162.0
69.3
69.2

16.4
14.6
-41.6
-7.3
-4.2
254.7
0.7
…
103.2

24.8
46.3
913.5
703.6

169.1
60.4
…

15.9
13.9
-19.7
-8.4
-4.4
213.4
0.0
…
97.5

32.2
45.3
759.4
358.8

150.5
…
…

15.1
15.6
9.8
-6.9
-7.7
201.2
0.0
…
…

31.3
44.7
329.9
235.6

Source :
Bank for International Settlements and Eurostat (exposure to macro-financially vulnerable countries), IMF (financial soundness indicators), 
Commission (long-term interest rates), World Bank (gross external debt) and ECB (all other indicators).

32 

 
 
 
 
Table VIII. Labour market and social indicators 

Labour market indicators
Employment rate 
(% of population aged 20-64)
Employment growth 
(% change from previous year)
Employment rate of women 
(% of female population aged 20-64)
Employment rate of men 
(% of male population aged 20-64)
Employment rate of older workers 
(% of population aged 55-64)
Part-time employment 
(% of total employment)
Part-time employment of women  
(% of women employment)
Part-time employment of men  
(% of men employment)
Fixed-term employment 
(% of employees with a fixed-term contract)
Unemployment rate1 (% of labour force)
Long-term unemployment2  (% of labour force)
Youth unemployment rate 
(% of youth labour force aged 15-24)

2006

2007

2008

2009

2010

2011

73.5

75.2

75.8

67.1

65.0

67.2

5.2

2.8

0.6

-12.6

-4.3

3.1

69.1

70.7

72.1

66.8

64.9

65.8

78.2

80.1

79.7

67.4

65.1

68.7

53.3

57.7

59.4

53.2

48.2

51.1

6.7

8.7

4.8

7.1

6.8

2.5

6.7

8.3

5.1

4.2

6.0

1.6

6.6

8.4

4.7

3.3

7.5

1.9

12.2

10.7

13.1

9.2

9.9

9.4

10.6

11.7

11.1

7.7

4.3

17.1

4.6

33.6

8.0

6.8

18.7

8.4

34.5

Youth NEET3 rate (% of population aged 15-24)

11.1

11.8

11.4

17.4

17.8

Early leavers from education and training (% of 
pop. 18-24 with at most lower sec. educ. and not 
in further education or training)
Tertiary educational attainment (% of population 
30-34 having successfully completed tertiary 
education)
Labour productivity per person employed 
(annual % change )
Hours worked per person employed  (annual % 
change)
Labour productivity per hour worked (annual % 
change; constant prices)
Compensation per employee (annual % change; 
constant prices)
Nominal unit labour cost growth (annual % 
change)

14.8

15.1

15.5

13.9

13.3

22.9

26.3

28.7

31.2

33.9

5.9

5.8

-0.9

-1.3

6.9

7.2

10.8

11.9

-4.2

-4.3

0.1

2.4

16.4

27.7

20.7

-5.3

-2.9

-2.4

4.7

-0.8

5.5

-11.6

-3.4

-1.1

-7.9

-6.7

-9.8

-7.7

2.1

-3.1

7.7

6.5

16.1

8.4

29.1

:

:

:

2.0

1.0

1.0

Real unit labour cost growth (annual % change)

4.6

5.8

6.9

Notes:

1 According to ILO definition (age group 15-74).
2 Share of persons in the labour force who have been unemployed for at least 12 months.
3 NEET are persons who are neither in employment nor in any education or training.

Sources: 
Commission (EU Labour Force Survey and European National Accounts) 

33 

 
 
Expenditure on social protection 
benefits (% of GDP)
Sickness/Health care
Invalidity
Old age and survivors
Family/Children
Unemployment
Housing and social exclusion n.e.c.
Total
of which:  means-tested benefits
Social inclusion indicators
Risk of poverty or exclusion1 (% of total 
population)
Risk of poverty or exclusion of children (% of 
people aged 0-17)
Risk of poverty or exclusion of elderly (% of 
people aged 65+)
At-risk-of-poverty rate2 (% of total population)
Value of relative poverty threshold (single 
household per year) - in PPS
Severe material deprivation3  (% of total 
population)
Share of people living in low work-intensity 
households 4 (% of people aged 0-59 not 
student)
In-work at-risk-of-poverty rate (% of persons 
employed)

Notes:

2005

2006

2007

2008

2009

3.37
0.89
5.69
1.32
0.52
0.07
12.8
0.18

3.77
0.87
5.51
1.21
0.52
0.10
12.7
0.19

3.39
0.74
4.81
1.17
0.41
0.13
11.3
0.20

3.68
0.92
5.44
1.39
0.51
0.17
12.7
0.25

3.92
1.29
7.52
1.73
1.59
0.13
16.8
0.32

2006

2007

2008

2009

2010

41.4

35.8

33.8

37.4

38.1

42.8

33.7

33.2

38.0

42.0

51.0

23.1

49.2

21.2

58.1

25.6

55.5

25.7

37.7

21.3

2668

3309

4354

4394

3580

30.6

24.9

19.0

21.9

27.4

7.0

6.1

5.1

6.7

12.2

11.2

9.7

11.0

11.2

9.7

1 People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) 
and/or suffering from severe material deprivation (SM D) and/or living in households with zero or very low 
work intensity (LWI).

2 At-risk-of-poverty rate: share of people with an equivalised disposable income below 60% of the national 
equivalised median income. 

3 Share of people who experience at least 4 out of 9 deprivations: people cannot afford to i) pay their rent or 
utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish, or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have 
a washing machine, viii) have a colour TV, or ix) have a telephone.

4 People living in households with very low work intensity: share of people aged 0-59 living in households 
where the adults work less than 20% of their total work-time potential during the previous 12 months.

Sources: 
For expenditure on social protection benefits ESSPROS; for social inclusion EU-SILC.

34 

 
Table IX. Product market performance and policy indicators 

Performance indicators

Labour productivity1 total economy (annual 
growth in %)
Labour productivity1 in manufacturing (annual 
growth in %)
Labour productivity1 in electricity, gas, water 
(annual growth in %)
Labour productivity1 in the construction sector 
(annual growth in %)
Patent intensity in manufacturing2 (patents of the 
EPO divided by gross value added of the sector)

Policy indicators

Enforcing contracts 3 (days)
Time to start a business 3 (days)
R&D expenditure (% of GDP)
Tertiary educational attainment 
(% of 30-34 years old population)
Total public expenditure on education 
(% of GDP)

Product market regulation4, Overall
(Index; 0 = not regulated; 6 = most regulated)
Product market regulation4, Retail
(Index; 0 = not regulated; 6 = most regulated)
Product market regulation4, Network industries 5
(Index; 0 = not regulated; 6 = most regulated)

2002-
2006

6.3

5.5

2007

2008

2009

2010

2011

5.9

2.3

-4.2

-5.2

4.6

1.8

-4.4

-0.7

13.1

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

5.4

0.8

2002-
2006

n.a.

n.a.
0.5

-6.0

-2.8

8.2

-6.6

n.a.

0.8

0.9

n.a.

n.a.

n.a.

2007

2008

2009

2010

2011

279

16
0.6

279

16
0.6

309

16
0.5

309

16
0.6

18.4

25.6

27.0

30.1

32.3

369

16
n.a.

n.a.

5.3

5.0

5.7

n.a.

n.a.

n.a.

2005

2006

2008

2009

2010

2011

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

Notes:
1Labour productivity is defined as gross value added (in constant prices) divided by the number of persons employed.
2 Patent data refer to applications to the European Patent Office (EPO). They are counted according to the year in which 
they were filed at the EPO. They are broken down according to the inventor's place of residence, using fractional counting if 
multiple inventors or IPC classes are provided to avoid double counting. 
3 The methodologies, including the assumptions, for this indicator are presented in detail on the website 
http://www.doingbusiness.org/methodology. 
4 The methodologies for the product market regulation indicators are presented in detail on the website 
http://www.oecd.org/document/1/0,3746,en_2649_34323_2367297_1_1_1_1,00.html. The latest available product market 
regulation indicators refer to 2003 and 2008, except for network industries.

5 Aggregate ET CR.

*figure for 2007.

Source :

Commission, World Bank - Doing Business  (for enforcing contracts and time to start a business) and OECD (for the 
product market regulation indicators). 

35 

 
 
 
 
Table X. Green growth performance 

Green growth performance

Macroeconomic
Energy intensity 
Carbon intensity 
Resource intensity (reciprocal of resource productivity)
Waste intensity 
Energy balance of trade 
Energy weight in HICP
Difference between change in energy price and inflation 
Environmental taxes over labour taxes
Environmental taxes over total taxes

Sectoral 

Industry energy intensity 
Share of energy-intensive industries in the economy
Electricity prices for medium-sized industrial users 
Public R&D for energy 
Public R&D for the environment
Recycling rate of municipal waste
Share of GHG emissions covered by ETS
Transport energy intensity
Transport carbon intensity
Change in the ratio of passenger transport and GDP

Security of energy supply
Energy import dependence
Diversification of oil import sources 
Diversification of energy mix
Share of renewable energy in energy mix

kgoe / €
kg / €
kg / €
kg / €
% GDP
%
%
ratio
ratio

kgoe / € 
% GDP
€ / kWh
% GDP
% GDP
ratio
%
kgoe / €
kg / €
%

%
HHI
HHI
%

2001-
2005

0.40
1.06
3.49
n.a.
-4.3%
13
-0.16
16.9%
8.5%

0.41
6.7
n.a.
n.a.
n.a.
3.8%
n.a.
0.68
1.97
n.a.

62.2%
n.a.
0.29
32.0%

2006

2007

2008

2009

2010

0.33
0.85
3.26
0.13
-5.7%
12
8.8
16.4%
7.8%

0.36
6.3
0.04
0.01%
0.01%
4.1%
24.8%
0.73
2.08
-0.3%

65.8%
0.00
0.29
30.9%

0.31
0.81
3.18
0.11
-4.6%
11
3.5
14.1%
6.8%

0.27
6.1
0.04
0.02%
0.01%
5.3%
23.1%
0.70
1.99
0.1%

61.5%
0.00
0.29
29.6%

0.31
0.81
2.79
0.10
-5.8%
11
20.4
13.5%
6.7%

0.23
6.8
0.07
0.01%
0.01%
6.8%
23.0%
0.58
1.63
-5.4%

57.9%
0.00
0.29
30.0%

0.35
0.88
2.62
n.a.
-4.4%
12
6.9
16.8%
8.7%

0.28
7.1
0.09
0.02%
0.02%
7.8%
23.2%
0.54
1.46
n.a.

58.8%
0.00
0.30
36.2%

0.37
n.a.
n.a.
n.a.
-4.8%
14
0.6
n.a.
n.a.

n.a.
n.a.
0.09
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

n.a.
n.a.
n.a.
n.a.

Country-specific notes: 
The year 2011 is not included in the table due to lack of data.
General explanation of the table items:
Source: Eurostat unless indicated otherwise; ECFIN explanations given below.
All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2000 prices):
          Energy intensity: gross inland energy consumption (in kgoe) divided by GDP (in EUR).
          Carbon intensity: Greenhouse gas emissions (in kg CO2 equivalent) divided by GDP (in EUR).
          Resource intensity: Domestic material consumption (in kg) divided by GDP (in EUR).
          Waste intensity: waste (in kg) divided by GDP (in EUR).
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP.
Energy weight in HICP: the share of the "energy" items in the consumption basket used in the construction of the HICP.
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual %-change).
Environmental taxes over labour or total taxes: from DG TAXUD's database "Taxation trends in the European Union".
Industry energy intensity: final energy consumption of industry (in kgoe) divided by gross value added of industry (in EUR).
Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP.
Recycling rate of municipal waste: ratio of municipal waste recycled over total municipal waste.
Public R&D for energy or for the environment: government spending on R&D (GBAORD) for these categories as % of GDP.
Share of GHG emissions covered by ETS: based on greenhouse gas emissions as reported by M ember States to EEA (excl LULUCF).
Transport energy intensity: final energy consumption of transport (in kgoe) divided by gross value added of industry (in EUR).
Transport carbon intensity:  greenhouse gas emissions in transport divided by gross value added of the transport sector.
Passenger transport growth : measured in %-change in passenger kilometres.
Energy import dependence: net energy imports divided by gross inland energy consumption incl. of international bunkers.

Diversification of oil import sources: Herfindahl index (HHI), calculated as the sum of the squared market shares of countries of origin.

Diversification of the energy mix: Herfindahl index over natural gas, total petrol products, nuclear heat, renewable energies and solid fuels.

Share of renewable energy in energy mix: percentage-share in  gross inland energy consumption, expressed in tonnes of oil equivalent.

36