REPORT FROM THE COMMISSION Latvia Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Latvia, budget deficit, budget policy, economic consequence, economic recession, epidemic, gross domestic product, infectious disease, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 549 final  REPORT FROM THE COMMISSION Latvia  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Latvia 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of  the 
general escape clause of the Stability and Growth Pact. The clause, as set out in Articles 5(1), 
6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/97  and  Articles  3(5)  and  5(2)  of  Regulation 
(EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic 
downturn.  In  its  Communication,  the  Commission  shared  with  the  Council  its  view  that, 
given  the  expected  severe  economic  downturn  resulting  from  the  COVID-19  outbreak,  the 
current  conditions  permit  activation  of  the  clause.  On  23  March  2020,  the  Ministers  of 
Finance of the Member States agreed with the assessment of the Commission. The activation 
of  the  general  escape  clause  allows  for  a  temporary  departure  from  the  adjustment  path 
towards  the  medium-term  budgetary  objective,  provided  that  this  does  not  endanger  fiscal 
sustainability in the medium term. For the corrective arm, the Council may also decide, on a 
recommendation  from  the  Commission,  to  adopt  a  revised  fiscal  trajectory.  The  general 
escape  clause  does  not  suspend  the  procedures  of  the  Stability  and  Growth  Pact.  It  allows 
Member States to depart from the budgetary requirements that would normally apply while 
enabling  the  Commission  and  the  Council  to  undertake  the  necessary  policy  coordination 
measures within the framework of the Pact. 

Data  notified  by  the  Latvian  authorities  on  31  March  2020  and  subsequently  validated  by 
Eurostat1 show that the general government deficit in Latvia reached 0.2% of GDP in 2019, 
while general government gross debt stood at 36.9% of GDP. According to the 2020 Stability 
Programme, Latvia plans a deficit of 9.4% of GDP in 2020, while debt is planned at 51.7% of 
GDP. 

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by  the Stability and Growth Pact. 

Against this background, t he Commission has therefore prepared this report, which analyses 
Latvia’s compliance with the deficit and debt criteria of the Treaty.The debt criterion can be 
considered to be met as the debt ratio is below the Treaty reference value of 60% of GDP. It 
takes  into  account  all  relevant  factors  and  gives  due  consideration  to  the  major  economic 
shock linked to the COVID-19 pandemic.  

1 

https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f  

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Table 1. General government deficit and debt (% of GDP)  

2016 

2017 

2018 

2019 

0.2 

-0.8 

-0.8 

-0.2 

2020 
COM 

-7.3 

2021 
COM 

-4.5 

40.9 

39.3 

37.2 

36.9 

43.1 

43.7 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 

Source: Eurostat, Commission 2020 spring forecast 

2. 

DEFICIT CRITERION 

Based  on  the  2020  Stability  Programme  Latvia’s  general  government  deficit  in  2020  is 
planned to reach 9.4% of GDP, above and not close to the Treaty reference value of 3% of 
GDP. 

The planned excess over the reference value in 2020 is exceptional, as it results from a severe 
economic  downturn.  Taking  into  account  the  impact  of  the  COVID-19  pandemic,  the 
Commission 2020 spring forecast projects a contraction of real GDP in 2020 by 7.0%. 

The  planned  excess  over  the  Treaty  reference  value  is  not  temporary  based  on  the 
Commission 2020 spring forecast, which projects the deficit to remain above 3% of GDP in 
2021.  

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%  of  GDP  Treaty 
reference value. The planned excess is considered exceptional but not temporary as defined 
by the Treaty and the Stability and Growth Pact. Hence, the analysis suggests that prima facie 
the deficit criterion as defined by the Treaty and Regulation (EC) No 1467/97 is not fulfilled. 

3. 

RELEVANT FACTORS  

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration.  

In the current  situation,  a key  additional factor to  take into consideration regarding 2020 is 
the economic impact of the COVID-19 pandemic, which has a very substantial impact on the 
budgetary situation and  results in  a highly  uncertain outlook. The pandemic has  also  led to 
the activation of the general escape clause. 

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3.1. 

 COVID-19 pandemic  

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Countries  have  already  adopted  or  are  adopting  budgetary 
measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those  individuals 
and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures  and  other 
guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the  competent 
statistical authorities are to examine whether those entail an immediate impact on the general 
government balance or not. Together with the fall in economic activity, those measures will 
contribute to substantially higher government deficit and debt positions. 

3.2  Medium-term economic position  

Latvia’s  real  GDP  grew  by  2.2%  in  2019,  driven  by  solid  private  consumption  but  with 
slowing  investment  and  export  growth.  In  2020,  real  GDP  is  projected  to  decline  by  7%, 
affected  by  the  COVID-19  outbreak  and  the  related  containment  measures,  based  on  the 
Commission  2020  spring  forecast.  Investments  and  exports  are  expected  to  suffer  the  most 
amid  border  closures  and  declining  foreign  demand,  while  consumption  is  expected  to  fare 
better  than  in  other  Member  States.  The  sharp  drop  in  GDP  is  a  mitigating  factor  in  the 
assessment of Latvia’s compliance with the deficit criterion in 2020. 

Macroeconomic projections are highly uncertain, as the impact of the COVID-19 pandemic 
will depend on the duration and severity of restrictive measures. The pandemic could become 
more  severe  and  last  longer  than  assumed,  requiring  more  stringent  and  longer  lasting 
containment  measures.  There  are  no  supply-side  restricitons  to  manufacturing  and 
construction. As a result, these sectors may prove more resilient than assumed should demand 
return.  However,  the  Union’s  recovery  path  may  not  be  as  robust  as  projected  and  may 
therefore result in a more protracted recovery in Latvia. 

3.3 

 Medium-term budgetary position 

In  2019,  based  on  the  outturn  data  and  the  Commission  2020  spring  forecast,  Latvia’s 
structural  deficit  of  1.7%  of  GDP  is  assessed  to  be  close  to  the  medium-term  budgetary 
objective of -1.0% of GDP, taking into account the allowance linked to the healthcare reform 
of  0.5%  of  GDP,  which  points  to  compliance  with  the  requirements  of  the  Stability  and 
Growth Pact. 

The Stability Programme projects the government deficit to deteriorate to 9.4% in 2020. The 
economic downturn is expected to reduce government tax and non-tax revenue by some 5% 
of  GDP.  A  pickup  in  unemployment  numbers  and  higher  demand  for  sick  leave  and  social 
assistance  benefits  is  expected  to  cost  some  1%  of  GDP.  Moreover,  support  measures  for 
businesses and households are estimated to increase the government deficit by 3% of GDP in 
2020.  The  crisis  response  measures  include  tax  deferral  options  up  to  three  years,  income 
support for idle workers and unemployed, as well as liquidity and sectoral support measures. 
Most of the stimulus measures are planned to end in 2021. 

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Based on the Commission spring forecast, the government deficit is projected to reach 7.3% 
of  GDP  in  2020.  This  assumes  a  similar  effect  of  the  stimulus  measures  as  in  the  Stability 
Programme,  but  the  drop  in  employment  is  projected  to  be  lower,  as  well  as  automatic 
stabilisers  on  the  expenditure  side  are  assumed  to  be  lower  in  2020.  The  differences  in  the 
macroeconomic and fiscal projections demonstrate the high uncertainty surrounding them.  

3.4 

Other factors put forward by the Member State 

On  15  May  2020,  the  Latvian  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous  sections  already  broadly  covers  the  key  factors  put  forward  by  the  authorities.  In 
particular, the excess of the government deficit over the Treaty reference value is exclusively 
due to the impact of the COVID-19 crisis.  

 4. 

CONCLUSIONS 

According  to  the  Stability  Programme,  Latvia’s  general  government  deficit  in  2020  is 
planned to increase to 9.4% of GDP, above and not close to the 3% of GDP Treaty reference 
value.  The  planned  excess  over  the  reference  value  is  considered  to  be  exceptional  but  not 
temporary.  

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors.  

Overall, since the planned deficit is well above 3% of GDP,the excess is not temporary and 
taking  into  account  all  relevant  factors,  the  analysis  suggests  that  the  deficit  criterion  as 
defined in the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled. 

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