REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Convergence Report 2013 on Latvia (Prepared in accordance with Article 140(1) of the Treaty on the functioning of the European Union at the request of Latvia)
Date: 2013-06-05
Institutions: European Commission
Subjects: Latvia, approximation of laws, balance of payments, budgetary equilibrium, exchange rate, inflation, interest, monetary union

EUROPEAN 
COMMISSION 

Brussels, 5.6.2013  
COM(2013) 341 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Convergence Report 2013 on Latvia 

(Prepared in accordance with Article 140(1) of the Treaty on the functioning of the 
European Union at the request of Latvia) 

{SWD(2013) 196 final} 

EN 

   EN 

 
 
 
 
  
 
 
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Convergence Report 2013 on Latvia 

(Prepared in accordance with Article 140(1) of the Treaty on the functioning of the 
European Union at the request of Latvia) 

1. 

PURPOSE OF THE REPORT 

Article  140(1)  of  the  Treaty  on  the  Functioning  of  the  European  Union  (hereafter 
TFEU) requires the Commission and the ECB to report to the Council, at least once 
every  two  years,  or  at  the  request  of  a  Member  State  with  a  derogation1,  on  the 
progress  made  by  the  Member  States  in  fulfilling  their  obligations  regarding  the 
achievement  of  economic  and  monetary  union.  The  latest  Commission  and  ECB 
Convergence Reports, relating to all Member State with a derogation, were adopted 
in May 2012. 

This  report  has  been  prepared  in  response  to  a  request  of  Latvia,  submitted  on 
5 March 2013. A more detailed assessment of the state of convergence in Latvia is 
provided in a Technical Annex to this report (SWD(2013) 196). 

The content of the reports prepared by the Commission and the ECB is governed by 
Article  140(1)  of  the  TFEU.  This  Article  requires  the  reports  to  include  an 
examination of the compatibility of national legislation, including the statutes of the 
national central bank, with Articles 130 and 131 of the TFEU and the Statute of the 
European  System  of  Central  Banks  and  of  the  European  Central  Bank  (hereafter 
ESCB/ECB  Statute).  The  reports  must  also  examine  whether  a  high  degree  of 
sustainable  convergence  has  been  achieved  in  the  Member  State  concerned  by 
reference  to  the  fulfilment  of  the  convergence  criteria  (price  stability,  public 
finances, exchange rate stability, long-term interest rates), and by taking account of 
other  factors  mentioned  in  the  final  sub-paragraph  of  Article  140(1)  of  the  TFEU. 
The  four  convergence  criteria  are  developed  in  a  Protocol  annexed  to  the  Treaties 
(Protocol No 13 on the convergence criteria). 

The  economic  and  financial  crisis  has,  in  general,  exposed  gaps  in  the  current 
economic governance of the Economic and Monetary Union (EMU) and showed that 
its  existing  instruments  need  to  be  used  more  fully.  The  present  examination  takes 
place within a context of the reform of EMU governance, which was undertaken over 
the past three years with the aim of ensuring a sustainable functioning of EMU. The 
assessment  of  convergence  is  thus  aligned  with  the  broader  "European  semester" 
approach  which  takes  an  integrated  and  upstream  look  at  the  economic  policy 
challenges  in  ensuring  fiscal  sustainability,  competitiveness,  financial  market 
stability  and  economic  growth.  The  key  innovations  in  the  area  of  governance 
reform, reinforcing the assessment of each Member States' convergence process and 
its  sustainability,  include  inter  alia  the  strengthening  of  the  excessive  deficit 
procedure by the 2011 reform of the Stability and Growth Pact and new instruments 

1 

The Member States that have not yet fulfilled the necessary conditions for the adoption of the euro are 
referred to as "Member States with a derogation". Denmark and the United Kingdom negotiated opt-out 
arrangements before the adoption of the Maastricht Treaty and do not participate in the third stage of 
EMU. 

EN 

2 

   EN 

 
 
                                                 
in  the  area  of  surveillance  of  macroeconomic  imbalances.  In  particular,  this  report 
takes  into  account  the  assessment  of  the  2013  update  of  Latvia's  Convergence 
Programme2  and 
the 
the  findings  under 
Macroeconomic Imbalances Procedure3. 

the  Alert  Mechanism  Report  of 

Convergence criteria 

The examination of the compatibility of national legislation, including the statutes 
of  the  national  central  bank,  with  Article  130  and  with  the  compliance  duty  under 
Article  131  of  the  TFEU  encompasses  an  assessment  of  observance  of  the 
prohibition  of  monetary  financing  (Article  123)  and  the  prohibition  of  privileged 
access  (Article  124);  consistency  with  the  ESCB's  objectives  (Article  127(1))  and 
tasks  (Article  127(2))  and  other  aspects  relating  to  the  integration  of  the  national 
central bank into the ESCB at the moment of the euro adoption.  

The  price  stability  criterion  is  defined  in  the  first  indent  of  Article  140(1)  of  the 
TFEU:  “the  achievement  of  a  high  degree  of  price  stability  […]  will  be  apparent 
from a rate of inflation which is close to that of, at most, the three best performing 
Member States in terms of price stability”. 

Article  1  of  the  Protocol  on  the  convergence  criteria  further  stipulates  that  “the 
criterion  on  price  stability  […]  shall  mean  that  a  Member  State  has  a  price 
performance  that  is  sustainable  and  an  average  rate  of  inflation,  observed  over  a 
period  of  one  year  before  the  examination,  that  does  not  exceed  by  more  than  1.5 
percentage points that of, at most, the three best-performing Member States in terms 
of price stability. Inflation shall be measured by means of the consumer price index 
on a comparable basis, taking into account differences in national definitions”4. The 
requirement of sustainability implies that the satisfactory inflation performance must 
essentially  be  attributable  to  the  behaviour  of  input  costs  and  other  factors 
influencing  price  developments  in  a  structural  manner,  rather  than  the  influence  of 
temporary  factors.  Therefore,  the  convergence  examination  includes  an  assessment 
of the factors that have an impact on the inflation outlook and is complemented by a 
reference  to  the  most  recent  Commission  services'  forecast  of  inflation5.  Related  to 
this, the report also assesses whether the country is likely to meet the reference value 
in the months ahead.  

The inflation reference value was calculated to be 2.7% in April 2013, with Sweden, 
Latvia and Ireland as the three best-performing Member States6.  

2 

3 

4 

5 

6 

Available at 
http://ec.europa.eu/economy_finance/economic_governance/sgp/convergence/programmes/2013_en.ht
m 
The Commission published its first Alert Mechanism Report (AMR) in February 2012 and the second 
AMR (under the cycle for 2013) in November 2012. Based on the conclusions of the two reports, Latvia 
was not subject to an in-depth review in the context of the Macroeconomic Imbalance Procedure. 
For  the  purpose  of  the  criterion  on  price  stability,  inflation  is  measured  by  the  Harmonised  Index  of 
Consumer Prices (HICP) defined in Council Regulation (EC) No 2494/95. 
All forecasts for inflation and other variables in the current report are from the Commission services' 
Spring 2013 Forecast. The Commission services' forecasts are based on a set of common assumptions 
for external variables and on a no-policy change assumption while taking into consideration measures 
that  are  known  in  sufficient  detail.  The  forecast  of  the  reference  value  is  subject  to  significant 
uncertainties given that it is calculated on the basis of the inflation forecasts for the three Member States 
projected to be the best performers in terms of price stability in the forecast period, thereby increasing 
the possible margin of error. 
The cut-off date for the data used in this report is 16 May 2013. 

EN 

3 

   EN 

 
                                                 
 
It  is  warranted  to  exclude  from  the  best  performers  countries  whose  inflation  rates 
could not be seen as a meaningful benchmark for other Member States. Such outliers 
were  in  the  past  identified  in  the  2004  and  2010  Convergence  Reports7,  as  their 
inflation rates differed by a wide margin from the euro area average. At the current 
juncture, it is warranted to exclude Greece from the best performers, as its inflation 
rate  and  profile  deviate  by  a  wide  margin  from  the  euro  area  average,  mainly 
reflecting  the  severe  adjustment  needs  and  exceptional  situation  of  the  Greek 
economy,  and  including  it  would  unduly  affect  the  reference  value  and  thus  the 
fairness of the criterion8. Greece is replaced by Ireland among the best performers. 

The  convergence  criterion  dealing  with  public  finances  is  defined  in  the  second 
indent  of  Article  140(1)  of  the  TFEU  as  “the  sustainability  of  the  government 
financial  position:  this  will  be  apparent  from  having  achieved  a  government 
budgetary  position  without  a  deficit  that  is  excessive  as  determined  in  accordance 
with  Article  126(6)”.  Furthermore,  Article  2  of  the  Protocol  on  the  convergence 
criteria  states  that  this  criterion  means  that  “at  the  time  of  the  examination  the 
Member State is not the subject of a Council decision under Article 126(6) of the said 
Treaty  that  an  excessive  deficit  exists”.  As  part  of  an  overall  strengthening  of 
economic  governance  in  EMU,  the  secondary  legislation  related  to  public  finances 
was  enhanced  in  2011,  including  the  new  regulations  amending  the  Stability  and 
Growth Pact9. 

The TFEU refers to the exchange rate criterion in the third indent of Article 140(1) 
as “the observance of the normal fluctuation margins provided for by the exchange-
rate  mechanism  of  the  European  Monetary  System,  for  at  least  two  years,  without 
devaluing against the euro”. 

Article  3  of  the  Protocol  on  the  convergence  criteria  stipulates:  “The  criterion  on 
participation in the exchange rate mechanism of the European Monetary System (…) 
shall  mean  that  a  Member  State  has  respected  the  normal  fluctuation  margins 
provided  for  by  the  exchange-rate  mechanism  of  the  European  Monetary  System 
without  severe  tensions  for  at  least  the  last  two  years  before  the  examination.  In 
particular, the Member State shall not have devalued its currency’s bilateral central 
rate against the euro on its own initiative for the same period”10. 

The relevant two-year period for assessing exchange rate stability in this report is 17 
May 2011 to 16 May 2013. In its assessment of the exchange rate stability criterion, 
the  Commission  takes  into  account  developments  in  auxiliary  indicators  such  as 
foreign  reserve  developments  and  short-term  interest  rates,  as  well  as  the  role  of 

7 
8 

9 

10 

Lithuania and Ireland, respectively. 
In April 2013, the 12-month average inflation rate of Greece was 0.4% and that of the euro area 2.2%, 
with the gap between the two forecast to increase further in the months ahead. 
A  directive  on  minimum  requirements  for  national  budgetary  frameworks,  two  new  regulations  on 
macroeconomic  surveillance  and  three  regulations  amending  the  Stability  and  Growth  Pact  (SGP) 
entered  into  force  on  13  December  2011  (one  out  of  two  new  regulations  on  macroeconomic 
surveillance and one out of three regulations amending the SGP include new enforcement mechanisms 
for  euro  area  Member  States).  Besides  the  operationalisation  of  the  debt  criterion  in  the  Excessive 
Deficit  Procedure,  the  amendments  introduced  a  number  of  important  novelties  in  the  Stability  and 
Growth  Pact,  in  particular  an  expenditure  benchmark  to  complement  the  assessment  of  progress 
towards the country-specific medium-term budgetary objective. 
In  assessing  compliance  with  the  exchange  rate  criterion,  the  Commission  examines  whether  the 
exchange rate has remained close to the ERM II central rate, while reasons for an appreciation may be 
taken into account, in accordance with the Common Statement on Acceding Countries and ERM2 by 
the Informal ECOFIN Council, Athens, 5 April 2003. 

EN 

4 

   EN 

 
                                                 
policy measures, including foreign exchange interventions, in maintaining exchange 
rate  stability.  The  analysis  also  takes  into  account  the  impact  of  external  official 
financing  arrangements  wherever  relevant,  including  their  size,  the  amount  and 
profile of assistance flows and the possible policy conditionality. 

The  fourth  indent  of  Article  140(1)  of  the  TFEU  requires  “the  durability  of 
convergence achieved by the Member State with a derogation and of its participation 
in  the  exchange  rate  mechanism  being  reflected  in  the  long-term  interest  rate 
levels”.  Article  4  of  the  Protocol  on  the  convergence  criteria  further  stipulates  that 
“the  criterion  on  the  convergence  of  interest  rates  (…)  shall  mean  that,  observed 
over  a  period  of  one  year  before  the  examination,  a  Member  State  has  had  an 
average  nominal  long-term  interest  rate  that  does  not  exceed  by  more  than  2 
percentage points that of, at most, the three best-performing Member States in terms 
of  price  stability.  Interest  rates  shall  be  measured  on  the  basis  of  long-term 
government  bonds  or  comparable  securities,  taking  into  account  differences  in 
national definitions”.  

The  interest  rate  reference  value  was  calculated  to  be  5.5%  in  April  2013.  The 
reference  value  is  based  on  the  long-term  interest  rates  in  Sweden,  Latvia  and 
Ireland11. 

In  the  2012  Convergence  Report,  the  long-term  interest  rate  of  Ireland,  one  of  the 
three best-performing Member States in terms of price stability, was not included in 
the calculation of the reference value for the long-term interest rate criterion due to 
the severe distortions in its sovereign bond market. However, the long-term interest 
rate of Ireland has converged significantly closer to that of other euro area Member 
States  since  then  and  Ireland's  bond  market  access  improved  considerably, 
suggesting  that  the  long-term  interest  rate  of  Ireland  has  become  a  meaningful 
benchmark again. 

Article 140(1) of the TFEU also requires an examination of other factors relevant to 
economic integration and convergence. These additional factors include financial and 
product  market integration, the  development of the balance of payments on current 
account and the development of unit labour costs and other price indices. The latter 
are  covered  within  the  assessment  of  price  stability.  The  additional  factors  are 
important indicators that the integration of a Member State into the euro area would 
proceed without difficulties and broadens the view on sustainability of convergence. 

2. 

LEGAL COMPATIBILITY 

In  the  2012  Convergence  Report,  the  assessment  on  legal  convergence  concluded 
that  legislation  in  Latvia,  in  particular  the  Law  on  the  Latvijas  Banka  (Bank  of 
Latvia, BoL), was not fully compatible with the compliance duty under Article 131 
of  the  TFEU.  Incompatibilities  notably  concerned  the  independence  of  the  central 
bank,  the  prohibition  of  monetary  financing  and  central  bank  integration  into  the 
ESCB  at  the  time  of  euro  adoption  with  regard  to  the  ESCB  tasks  laid  down  in 
Article 127(2) of the TFEU and Article 3 of the ESCB/ECB Statute. 

Following  the  assessment  of  the  Convergence  Report  from  2012,  the  Latvian 
Government, in cooperation with Latvijas Banka, prepared amendments to the BoL 
Law,  which  the  Latvian  Parliament  adopted  on  10  January  2013.  The  Law  on  the 

11 

The reference value for April 2013 is calculated as the simple average of the average long-term interest 
rates in Sweden (1.6%), Latvia (3.8%) and Ireland (5.1%).  

EN 

5 

   EN 

 
                                                 
Bank  of  Latvia  as  amended  is  fully  compatible  with  Articles  130  and  131  of  the 
TFEU. 

3. 

PRICE STABILITY 

In Latvia, the 12-month average inflation rate was above  the reference value at the 
time of the last convergence assessment in 2012. The average inflation rate in Latvia 
during the 12 months to April 2013 was 1.3%, i.e. well below the reference value of 
2.7%. It is projected to remain below the reference value in the months ahead. 

After  a  peak  of  annual  HICP  inflation  at  15.3%  in  2008,  significant  nominal  wage 
adjustment  and  a  correction  in  import  prices  led  to  a  period  of  negative  headline 
inflation in 2009 and 2010. As the cycle turned and a rising global commodity price 
trend set in, average inflation rose from -1.2% in 2010 to 4.2% in 2011, boosted also 
by  indirect  tax  increases.  As  these  temporary  effects  faded,  inflation  moderated  to 
2.3% in 2012 and by April 2013 annual inflation fell to -0.4%. 

Annual HICP inflation is expected to be 1.4% on average in 2013, according to the 
Commission services' Spring 2013 Forecast, due i.a. to falling energy prices and a 1 
percentage point reduction in the standard VAT rate as of July 2012. It is projected to 
pick up in 2014 to 2.1% on average, in the context of improving domestic demand 
and liberalisation of the electricity market. The price level in Latvia (around 71% of 
the euro area average in 2011) suggests potential for further price level convergence 
over the long term. 

Sustainable  convergence  implies  that  the  respect  of  the  reference  value  reflects 
underlying  fundamentals  rather  than  temporary  factors.  In  the  case  of  Latvia,  the 
VAT  reduction  of  July  2012  has  contributed  to  the  current  low  level  of  12-month 
average inflation. However, the analysis of underlying fundamentals and the fact that 
the reference value has been met by a wide margin support a positive assessment on 
the fulfilment of the price stability criterion. 

Medium-term  inflation  prospects  will  hinge  notably  on  wages  growing  in  line  with 
productivity  which  will  mostly  depend  on  continued  labour  market  flexibility. 
Looking ahead, it is essential that sustainable convergence is not jeopardised by a re-
emergence of a credit-fuelled expansion in domestic demand and an associated rise 
in asset prices – notably in the housing market. The prospects of such an outcome are 
reduced by Latvia's policy responses to the 2008-2009 crisis, while the combination 
of  factors  that  drove  buoyant  credit  expansion  in  the  past  (pent-up  credit  demand, 
accelerated financial deepening and integration, rapid risk spread compression) is not 
expected  to  recur  in  the  foreseeable  future.  Improvements  in  the  business 
environment,  progress 
investment,  addressing  remaining 
bottlenecks in the labour market and competitive price formation in product markets 
will be key to maintain price stability in the medium term. Price developments will 
also depend on maintaining a prudent fiscal policy, including cautious wage setting 
in  the  public  sector,  to  keep  domestic  demand  in  line  with  fundamentals  and  help 
anchor inflation expectations.  

in  attracting  new 

Latvia fulfils the criterion on price stability. 

EN 

6 

   EN 

 
4. 

PUBLIC FINANCES 

Latvia  is  at  present  subject  of  a  Council  Decision  on  the  existence  of  an  excessive 
deficit  (Council  Decision  of  7  July  2009).  The  Council  recommended  Latvia  to 
correct  the  excessive  deficit  by  2012.  The  general  government  deficit  in  Latvia 
reached  8.1%  of  GDP  in  2010,  but  decreased  to  1.2%  of  GDP  in  2012,  due  in 
particular  to  a  considerable  consolidation  effort.  The  Commission  services'  Spring 
2013  Forecast  projects  the  deficit-to-GDP  ratio  at  1.2%  in  2013  and  0.9%  in  2014 
under a no-policy-change assumption. The ratio of gross public debt to GDP fell to 
40.7% in 2012 and it is projected to fall further to 40.1% of GDP by end-2014. 

In March 2012, Latvia signed the Treaty on Stability, Coordination and Governance 
in the EMU, and the respective ratification law was approved by Parliament in May 
2012.  This  implies  an  additional  commitment  to  conduct  stability-oriented  and 
sustainable  fiscal  policies.  Moreover,  in  January  2013,  Parliament  approved  the 
Fiscal Discipline Law (FDL) in the final reading. The law establishes the principle of 
budgetary targeting throughout the cycle, with a benchmark structural deficit of 0.5% 
of  GDP,  and  will  provide  a  framework  for  a  rules-based  fiscal  policy,  in  particular 
through limiting pro-cyclical expenditure increases. The law also contains provisions 
regarding  the  establishment  of  an  independent  Fiscal  Council,  to  be  set  up  from 
1 January 2014, which will oversee compliance with the set of fiscal rules. Thorough 
implementation of the FDL will be crucial to counter the risks related to pressure to 
loosen fiscal policy after the successful adjustment programme.  

In view of these developments and the Commission services' Spring 2013 Forecast, 
the  Commission  considers  that  the  excessive  deficit  has  been  corrected  with  a 
credible and sustainable reduction of the budget deficit below 3% of GDP in 2012, 
which was the deadline recommended by the Council. The Commission has therefore 
recommended that the Council abrogate the decision on the existence of an excessive 
deficit for Latvia (SEC(2013) XYZ). 

If  the  Council  decides  to  abrogate  the  excessive  deficit  decision  for  Latvia,  Latvia 
will fulfil the criterion on public finances. 

EN 

7 

   EN 

 
 
Graph 2: Latvia - Government budget balance and debt
(in percent of GDP)
Inverted scale
-12

-10

-8

-6

-4

-2

0

60

50

40

30

20

10

0

2007

2008

2009

2010

2011

2012

2013(*) 2014(*)

Government balance (lhs)

Cyclically-adjusted balance (lhs)

Gross debt (rhs)

(*) Commission services' Spring 2013 Forecast.
Source: Eurostat, Commission services.

5. 

EXCHANGE RATE STABILITY 

The  Latvian  lats  has  participated  in  ERM  II  since  2  May  2005,  i.e.  for  more  than 
eight years at the time of adoption of this report. Upon ERM II entry, the authorities 
unilaterally committed to keep the lats within a ±1% fluctuation margin around the 
central rate. During the two years preceding this assessment, the lats exchange rate 
did  not  deviate  from  its  central  rate  by  more  than  ±1%  and  it  did  not  experience 
tensions.  The  lats  traded  mostly  on  the  strong  side  of  the  unilateral  band,  as  the 
Latvian Treasury converted its ample foreign currency funds on the market. The lats 
depreciated towards the middle of the band in late 2012 and early 2013, against the 
background  of  lower  foreign  currency  supply  by  the  Treasury  and  market 
expectations regarding euro adoption. Additional indicators, such as developments in 
foreign exchange reserves and short-term interest rates do not reveal pressures on the 
exchange  rate.  The  last  disbursements  by  the  IMF  and  the  EU  under  the  financial 
assistance programme took place in August and October 2010, respectively. In June 
2011,  Latvia  successfully  returned  to  the  international  bond  market  with  USD 
issuance, followed by further transactions, signalling good market access.  

Latvia fulfils the exchange rate criterion. 

6. 

LONG-TERM INTEREST RATES 

The  average  long-term  interest  rate  in  Latvia  in  the  year  to  April  2013  was  3.8%, 
below the reference value of 5.5%. The average long-term interest rate in Latvia had 
been  at  the  reference  value  at  the  2012  convergence  assessment  (5.8%)  and  it 
gradually  declined  further  since  then.  Latvia's  long-term  spreads  to  euro  area  long-
term benchmark bonds narrowed significantly in 2010, as confidence in the currency 
peg  was  regained,  fiscal  consolidation  yielded  results  and  the  conversion  of 
assistance programme funds created ample lats liquidity. After a pause in 2011, the 
spread  compression  continued  in  2012,  as  market  confidence  in  Latvia  improved 
further.  The  Treasury  returned  to  the  10-year  domestic  bond  market  with  several 
smaller  issues  during  the  first  half  of  2011.  In  2012,  the  Treasury  launched  a  new 
series  of  benchmark  10-year  bonds,  but  issued  only  a  relatively  limited  amount, 
benefitting  from  its  favourable  liquidity  position,  due  partly  to  its  successful  USD-
denominated issuances. 

Latvia fulfils the criterion on the convergence of long-term interest rates. 

EN 

8 

   EN 

 
 
7. 

ADDITIONAL FACTORS 

Additional  factors  have  also  been  examined,  including  balance  of  payments 
developments and integration of labour, product and financial markets. The external 
balance reversed in 2008-2009 from large deficits during the boom years to a surplus 
of around 11% of GDP in 2009, which contracted to around 1% of GDP in 2012. The 
trade  deficit  declined  substantially  from  2008,  but  deteriorated  somewhat  with  the 
recovery  since  2010.  However,  the  significant  correction  of  the  real  effective 
exchange  rate  in  2009-2010  has  remained  broadly  preserved  and  Latvia  has 
continued  to  gain  export  market  shares.  The  income  account  swung  into  surplus  in 
2009, reflecting the huge loan loss provisions made by foreign-owned banks and it 
returned  to  a  deficit  in  2011  when  most  banks  regained  profitability.  The  FDI 
balance gradually improved from 2009, but it declined somewhat in 2012. The EU-
IMF balance of payments assistance programme granted to Latvia in late 2008 was 
successfully concluded in January 2012. Latvia borrowed altogether about EUR 4.5 
billion  out  of  the  total  EUR  7.5  billion  that  was  available  under  the  programme. 
Reflecting  confidence  in  its  policies  and  its  regained  market  access,  Latvia  has  not 
requested  a  follow-up  programme.  By  December  2012,  Latvia  fully  repaid  its 
programme-related  liabilities  to  the  IMF,  while  repayments  to  the  European 
Commission will fall due between 2014 and 2025. 

Latvia's economy is well integrated within the EU economy through trade and FDI 
linkages while the labour market has demonstrated a high degree of mobility within 
the EU market and substantial flexibility although structural unemployment is high. 
On the basis of selected business environment indicators, Latvia performs broadly in 
line  with  the  average  of  euro  area  Member  States.  The  integration  of  the  domestic 
financial sector into the EU financial system is substantial, mainly thanks to a high 
level of foreign ownership of the banking system. In the context of the international 
financial  assistance  programme,  financial  supervision  has  been  strengthened 
considerably. Cooperation with home country supervisors has been further enhanced. 

Latvia  has  a  long  tradition  and  several  competitive  advantages  in  servicing  non-
resident  banking  clients,  mainly  corporates  from  CIS  countries.  The  supervision  of 
the non-resident banking business poses additional challenges, inter alia, due to the 
cross-border  nature  of 
transactions.  The  national  supervising  authority  has 
implemented  several  measures  to  reduce  the  specific  risks  of  this  business  activity; 
banks with a non-resident business model have to keep a high share of liquid assets 
and are subject to additional capital requirements. Going forward, close monitoring 
of financial stability risks, readiness to adopt further regulatory measures if needed, 
and determined implementation of anti-money laundering rules will remain key. 

*** 

In  the  light  of  its  assessment  on  legal  compatibility  and  on  the  fulfilment  of  the 
convergence criteria, taking into account the additional factors, and provided that the 
Council  will  follow  the  Commission's  recommendation  for  the  abrogation  of  the 
excessive  deficit  procedure,  the  Commission  considers  that  Latvia  fulfils  the 
conditions for the adoption of the euro. 

EN 

9 

   EN