Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Latvia
Date: 2025-06-04
Institutions: European Commission, Reform and Investment Task Force
Subjects: Latvia, budget policy, economic policy, economic recovery, economic reform, employment policy, energy policy, labour market, social policy, stability pact

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   EUROPEAN COMMISSION  Brussels, 4.6.2025  COM(2025) 214 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Latvia {SWD(2025) 214 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the economic, social, employment, structural and budgetary policies of Latvia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(2) and Article 148(4) thereof, 

Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council 
of  29  April  2024  on  the  effective  coordination  of  economic  policies  and  on  multilateral 
budgetary surveillance and repealing Council Regulation (EC) No 1466/971, and in particular 
Article 3(3) thereof, 

Having regard to the recommendation of the European Commission, 

Having regard to the resolutions of the European Parliament, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

General considerations 

(1) 

Regulation (EU) 2024/1263, which entered into force on 30 April 2024, specifies the 
objectives  of  the  economic  governance  framework,  which  aims  at  promoting  sound 
and  sustainable  public  finances  and  sustainable  and  inclusive  growth  and  resilience 
through reforms and investments, and preventing excessive government deficits. The 
Regulation  stipulates  that  the  Council  and  the  Commission  conduct  multilateral 
surveillance in the context of the European Semester in accordance with the objectives 
and requirements set out in the TFEU. The European Semester includes, in particular, 
the  formulation,  and  the  surveillance  of  the  implementation  of  country-specific 
recommendations.  The  Regulation  also  promotes  national  ownership  of  fiscal  policy 
and  emphasises  its  medium-term  focus,  combined  with  more  effective  and  coherent 
enforcement. Each Member State must submit to  the Council and the Commission  a 
national  medium-term  fiscal-structural  plan,  containing  its  fiscal,  reform  and 
investment  commitments,  over  4  or  5  years,  depending  on  the  length  of the  national 
legislative  term.  The  net  expenditure2  path  in  these  plans  has  to  comply  with  the 

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OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj. 
Net  expenditure  as  defined  in  Article  2,  point  (2),  of  Regulation  (EU)  2024/1263:  ‘net  expenditure’ 
means government expenditure net of (i) interest expenditure; (ii) discretionary revenue measures; (iii) 
expenditure  on  programmes  of  the  Union  fully  matched  by  revenue  from  Union  funds;  (iv)  national 
expenditure  on  co-financing  of  programmes  funded  by  the  Union;  (v)  cyclical  elements  of 
unemployment benefit expenditure; and (vi) one-offs and other temporary measures. 

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(2) 

(3) 

(4) 

Regulation’s  requirements,  including  the  requirements  to  put  or  keep  general 
government debt on a plausibly downward path by the end of the adjustment period, or 
for it to remain at prudent levels below 60% of gross domestic product (GDP), and to 
bring  and/or  maintain  the  general  government  deficit  below  the  3%-of-GDP  Treaty 
reference value over the medium term. Where a Member State commits to a relevant 
set  of  reforms  and  investments  in  accordance  with  the  criteria  set  out  in  the 
Regulation, the adjustment period may be extended by up to three years. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council3,  which 
established  the  Recovery  and  Resilience  Facility  (the  ‘RRF’),  entered  into  force  on 
19 February 2021.  The  RRF  provides  financial  support  to  Member  States  for 
implementing  reforms  and  investments,  delivering  a  fiscal  impulse  financed  by  the 
Union.  In  line  with  the  priorities  of  the  European  Semester  for  economic  policy 
coordination, the RRF fosters economic and social recovery while driving sustainable 
reforms and investments, in particular promoting the green and digital transitions and 
making  Member  States’  economies  more  resilient.  It  also  helps  strengthen  public 
finances  and  boost  growth  and  job  creation  in  the  medium  and  long  term,  improve 
territorial cohesion within the Union and support the continued implementation of the 
European Pillar of Social Rights. 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council4  (the 
‘REPowerEU  Regulation’),  which  was  adopted  on  27 February 2023,  aims  to  phase 
out the Union’s dependence on Russian fossil-fuel imports. This helps achieve energy 
security  and  diversify  the  Union’s  energy  supply,  while  increasing  the  uptake  of 
renewables,  energy  storage  capacities  and  energy  efficiency.  Latvia  added  a  new 
REPowerEU chapter to its national recovery and resilience plan in order to finance key 
reforms and investments that will help achieve the REPowerEU objectives. 

On  30  April  2021,  Latvia  submitted  its  national  recovery  and  resilience  plan  to  the 
Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant 
to Article 19 of that Regulation, the Commission assessed the relevance, effectiveness, 
efficiency  and  coherence  of  the  recovery  and  resilience  plan,  in  accordance  with  the 
assessment  guidelines set  out  in Annex V. On  13 July  2021, the Council adopted its 
Implementing Decision approving the assessment of the recovery and resilience plan 
for  Latvia5,  which  was  amended  under  Article  18(2)  on  8  December  2023  to  update 
the maximum financial contribution for non-repayable financial support, as well as to 
include  the  REPowerEU  chapter6.  The  release  of  instalments  is  conditional  on  the 
adoption  of  a  decision  by  the  Commission,  in  accordance  with  Article  24(5),  stating 
that Latvia has satisfactorily achieved the relevant milestones and targets set out in the 
the 
Council 

Implementing  Decision.  Satisfactory  achievement 

requires 

that 

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the  Recovery  and  Resilience  Facility 

Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12 February 2021 
establishing 
(OJ  L  57,  18.2.2021,  p.  17,  ELI: 
http://data.europa.eu/eli/reg/2021/241/oj). 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27 February 2023 
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans 
and  amending  Regulations  (EU)  No  1303/2013,  (EU)  2021/1060  and  (EU)  2021/1755,  and  Directive 
2003/87/EC (OJ L 63, 28.2.2023, p. 1, ELI: http://data.europa. eu/eli/reg/2023/435/oj). 
Council Implementing Decision of 13 July 2021 on the approval of the assessment of the recovery and 
resilience plan for Latvia (10157/2021). 
Council Implementing Decision of 8 December 2023 amending the Implementing Decision of  13 July 
2021 on the approval of the assessment of the recovery and resilience plan for Latvia (15569/2023). 

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(5) 

(6) 

(7) 

achievement  of  preceding  milestones  and  targets  for  the  same  reform  or  investment 
has not been reversed.  

On  21  January  2025  the  Council,  upon  the  recommendation  of  the  Commission, 
adopted a recommendation endorsing the national medium-term fiscal-structural plan 
of Latvia7. The plan was submitted in accordance with Articles 11 and 36(1), point (a) 
of Regulation (EU) 2024/1263, covers the period from 2025 until 2028 and presents a 
fiscal adjustment spread over four years. 

On  26 November 2024,  the  Commission  adopted  an  opinion  on  the  2025  draft 
budgetary  plan  of  Latvia.  On  the  same  date,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  the  Commission  adopted  the  2025  Alert  Mechanism  Report,  in  which  it 
did  not  identify  Latvia  as  one  of  the  Member  States  for  which  an  in-depth  review 
would  be  needed.  The  Commission  also  adopted  a  recommendation  for  a  Council 
recommendation on the economic policy of the euro area and a proposal for the 2025 
Joint  Employment  Report,  which  analyses  the  implementation  of  the  Employment 
Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights.  The  Council 
adopted  the  Recommendation  on  the  economic  policy  of  the  euro  area8  on  13  May 
2025 and the Joint Employment Report on 10 March 2025.  

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic framework that aims to boost the EU’s global competitiveness over the next 
five  years.  It  identifies  the  three  transformative  imperatives  of  sustainable  economic 
growth: (i) innovation; (ii) decarbonisation and competitiveness; and (iii) security. To 
close  the  innovation  gap,  the  EU  aims  to  foster  industrial  innovation,  support  the 
growth of start-ups through initiatives like the EU Start-up and Scale-up Strategy, and 
promote the adoption of advanced technologies like artificial intelligence and quantum 
computing.  In  pursuit  of  a  greener  economy,  the  Commission  has  outlined  a 
comprehensive Affordable Energy Action Plan and a Clean Industrial Deal, ensuring 
that  the  shift  to  clean  energy  remains  cost-effective,  competitiveness-friendly, 
particularly  for  energy-intensive  sectors,  and  is  a  driver  for  growth.  To  reduce 
excessive dependencies and increase security, the Union is committed to strengthening 
global  trade  partnerships,  diversifying  supply  chains  and  securing  access  to  critical 
raw materials and clean energy sources. These priorities are underpinned by horizontal 
enablers, namely regulatory simplification, deepening of the single market, financing 
competitiveness and a Savings and Investments Union, promotion of skills and quality 
jobs, and better coordination of EU policies. The Competitiveness Compass is aligned 
with  the  European  Semester,  ensuring  that  Member  States’  economic  policies  are 
consistent with the Commission’s strategic objectives, creating a unified approach to 
economic governance that fosters sustainable growth, innovation and resilience across 
the Union. 

(8) 

In  2025,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  implementation  of  the  RRF.  The  full  implementation  of  the 
recovery and resilience plans remains essential for delivering on the policy priorities 
under the European Semester, as the plans help effectively address all or a significant 
subset  of  challenges  identified  in  the  relevant  country-specific  recommendations 

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8 

Council  Recommendation  of  21  January  2025  endorsing  the  medium-term  fiscal-structural  plan  of 
Latvia, OJ C/2025/652, 10.2.2025. 
Council  Recommendation  of  13  May  2025  on  the  economic  policy  of  the  euro  area  (OJ  C, 
C/2025/2782, 22.5.2025, ELI: http://data.europa.eu/eli/C/2025/2782/oj). 

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issued  in  recent  years.  These  country-specific  recommendations  remain  equally 
relevant  for  the  assessment  of  amended  recovery  and  resilience  plans  in  accordance 
with Article 21 of Regulation (EU) 2021/241.   

(9) 

The  2025  country-specific  recommendations  cover 
the  key  economic  policy 
challenges that are not sufficiently addressed by measures included in the recovery and 
resilience  plans,  taking  into  account  the  relevant  challenges  identified  in  the  2019-
2024 country-specific recommendations. 

in 

progress 

(10)  On  4  June  2025,  the  Commission  published  the  2025  country  report  for  Latvia.  It 
assessed  Latvia’s 
country-specific 
recommendations  and  took  stock  of  Latvia’s  implementation  of  the  recovery  and 
resilience plan. Based on this analysis, the country report identified the most pressing 
challenges  Latvia  is  facing.  It  also  assessed  Latvia’s  progress  in  implementing  the 
European  Pillar  of  Social  Rights  and  in  achieving  the  Union  headline  targets  on 
employment, skills and poverty reduction, as well as progress in achieving the United 
Nations Sustainable Development Goals.  

addressing 

relevant 

the 

Assessment of the Annual Progress Report 

(11)  On 21 January 2025 the Council recommended the following maximum growth rates 
of net expenditure for Latvia: 5.9% in 2025, 3.6% in 2026, 3.4% in 2027, and 3.3% in 
2028,  which  corresponds  to  the  maximum  cumulative  growth  rates  calculated  by 
reference  to  2023  of  15.5%  in  2025,  19.7%  in  2026,  23.8%  in  2027,  and  27.9%  in 
2028. On 29 April 2025 Latvia submitted its Annual Progress Report9, on adherence to 
the recommended maximum growth  rates of net  expenditure  and the implementation 
of  reforms  and  investments  responding  to  the  main  challenges  identified  in  the 
European  Semester  country-specific  recommendations.  The  Annual  Progress  Report 
also reflects Latvia’s biannual reporting on the progress made in achieving its recovery 
and resilience plan in accordance with Article 27 of Regulation (EU) 2021/241. 

(12)  Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  recommended  to 
activate the national  escape clause  of the Stability and Growth Pact  in  a coordinated 
manner to support the EU efforts to achieve a rapid and significant increase in defence 
spending and this proposal was welcomed by the European Council of 6 March 2025. 
Following  the  request  of  Latvia  on  28  April  2025,  on  [date]  the  Council,  upon  the 
recommendation  of  the  Commission,  adopted  a  recommendation  allowing  Latvia  to 
deviate  from,  and  exceed,  the  recommended  maximum  growth  rates  of  net 
expenditure10.  

(13)  Based on data validated by Eurostat11, Latvia’s general government deficit decreased 
from 2.4% of GDP in 2023 to 1.8% in 2024, while the general government debt rose 
from 44.6% of GDP at the end of 2023 to 46.8% at the end of 2024. According to the 
Commission’s  calculations,  these  developments  correspond  to  a  net  expenditure 
growth rate of 4.5% in 2024. In the 2025 Annual Progress Report, Latvia estimates the 
net  expenditure  growth  in  2024  at  3.9%.  The  Commission  estimates  that  the  net 

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The  2025  Annual  Progress  Reports  are  available  on:  https://economy-finance.ec.europa.eu/economic-
and-fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en. 
Council  recommendation  allowing  Latvia  to  deviate  from,  and  exceed,  the  recommended  net 
expenditure  path  (Activation  of  the  national  escape  clause),  [Please  complete:  OJ  C/2025/xxx, 
x.x.2025].  
Eurostat-Euro Indicators, 22.4.2025. 

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expenditure  growth  was  higher  than  in  the  Annual  Progress  Report.  The  difference 
between the Commission’s calculations and the estimates of national authorities is due 
to  different  assessment  of  discretionary  revenue  measures  in  202412.  Based  on  the 
Commission’s  estimates,  the  fiscal  stance13,  which  includes  both  nationally  and  EU 
financed expenditure, was neutral in 2024. On 4 June 2025, the Commission adopted a 
report  under  Article  126(3)  of  the  TFEU14.  That  report  assessed  the  budgetary 
situation  of  Latvia,  as  its  planned  general  government  deficit  in  2025  exceeds  the 
reference value of 3% of GDP. The report concluded that, taking into account all the 
relevant  factors  as  appropriate,  the  deficit  criterion  is  assessed  as  being  fulfilled.  In 
light  of  this  assessment,  and  after  considering  the  opinion  of  the  Economic  and 
Financial Committee as established under article 126(4) TFEU, the Commission does 
not at this stage intend to propose in June to open an excessive deficit procedure.  

(14)  According to the Annual Progress Report, the macroeconomic scenario underpinning 
the  budgetary  projections  by  Latvia  expects  real  GDP  growth  at  1.2%  in  2025  and 
2.1%  in  2026,  while  HICP  inflation  is  projected  at  2.5%  in  2025  and  2.2%  in  2026. 
The  Commission  Spring  2025  Forecast  projects  real  GDP  to  grow  by  0.5%  in  2025 
and 2.0% in 2026, and HICP inflation to stand at 3.0% in 2025 and 1.7% in 2026.  

(15) 

In the Annual Progress Report, the general government deficit is expected to increase 
to  3.1%  of  GDP  in  2025,  while  the  general  government  debt-to-GDP  ratio  is  set  to 
increase  to  49.0%  by  the  end  of  2025.  These  developments  correspond  to  net 
expenditure growth of 5.7% in 2025. The Commission Spring 2025 Forecast projects a 
general  government  deficit  of  3.1%  of  GDP  in  2025.  The  projected  increase  of  the 
deficit in 2025 is driven by revenue and expenditure factors. Revenues are expected to 
be negatively affected by a reduction in income tax revenue, due to the reform of the 
personal  income  tax  system,  and  a  decline  in  property  income,  primarily  due  to  the 
normalisation  of  profitability  of  state-owned  companies  in  the  energy  and  forestry 
sectors,  as  a  result  of  lower  energy  prices.  On  the  expenditure  side,  growth  of 
compensation of employees, interest payments and social transfers are the main factors 
behind the increase in the deficit. According to the Commission’s calculations, these 
developments  correspond  to  net  expenditure  growth  of  5.7%  in  2025.  Based  on  the 
Commission’s  estimates,  the  fiscal  stance,  which  includes  both  nationally  and  EU 
financed expenditure, is projected to be expansionary, by 1.1% of GDP, in 2025. The 
general government debt-to-GDP ratio is set to increase to 48.6% by the end of 2025. 
The increase of the debt-to-GDP ratio in 2025 mainly reflects stock-flow adjustments 
and the projected primary deficit. 

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13 

14 

The  Commission  does  not  classify  certain  revenue  measures  as  discretionary  fiscal  measures,  e.g. 
additional dividend payments from state joint-stock companies and secondary tax revenue impacts. The 
second-round  revenue  impact  is  not  a  discretionary  fiscal  measure  but  does  enter  the  Commission 
forecast  via  macroeconomic  effects.  Additional  dividend  payments  from  state  joint-stock  companies 
also enter the Commission’s forecast but are not treated as discretionary fiscal measures as  they do not 
involve the changes in “normal” dividend policy, e.g., adjustments to dividend pay-out ratio. 
The fiscal stance is defined as a measure of the annual change in the underlying budgetary position of 
the  general  government.  It  aims  to  assess  the  economic  impulse  stemming  from  fiscal  policies,  both 
those  that  are  nationally  financed  and  those  that  are  financed  by  the  EU  budget.  The  fiscal  stance  is 
measured as the difference between (i) the medium-term potential growth and (ii) the change in primary 
expenditure net of discretionary revenue measures and including expenditure financed by non-repayable 
support (grants) from the Recovery and Resilience Facility and other Union funds. 
Report  from  the  Commission,  prepared  in  accordance  with  Article  126(3)  of  the  Treaty  on  the 
Functioning of the European Union, 4.6.2025, COM(2025) 615 final. 

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(16)  General  government  expenditure  amounting  to  1.8%  of  GDP  is  expected  to  be 
financed  by  non-repayable  support  (“grants”)  from  the  Recovery  and  Resilience 
Facility  in  2025,  compared  to  0.9%  of  GDP  in  2024,  according  to  the  Commission 
Spring 2025 Forecast. Expenditure financed by Recovery and Resilience Facility non-
repayable support enables high-quality investment and productivity-enhancing reforms 
without a direct impact on the general government balance and debt of Latvia. 

(17)  General government defence expenditure in Latvia amounted to 2.5% of GDP in 2021, 
2.4%  of  GDP  in  2022  and  3.1%  of  GDP  in  202315.  According  to  the  Commission 
Spring  2025  Forecast,  expenditure  on  defence  is  projected  at  3.0%  of  GDP  in  2024 
and 3.3% of GDP in 2025. This corresponds to an increase of 0.8 percentage points of 
GDP  compared  to  2021.  The  period  when  the  national  escape  clause  is  activated 
(2025-2028)  allows  Latvia  to  reprioritise  government  expenditure  or  increase 
government revenue so that lastingly higher defence expenditure would not endanger 
fiscal sustainability in the medium term.  

(18)  According  to  the  Commission  Spring  2025  Forecast,  net  expenditure  in  Latvia  is 
projected to grow by 5.7% in 2025 and 10.4% cumulatively in 2024 and 2025. Based 
on the Commission 2025 spring forecast, the net expenditure growth of Latvia in 2025 
is projected to be below the recommended maximum growth rate, both annually and 
when considering 2024 and 2025 together. 

(19) 

In the Annual Progress Report, the general government deficit is projected to decrease 
to 3.0% of GDP in 2026, while the general government debt-to-GDP ratio is projected 
to increase to 49.5% by the end of 2026.  After 2026, in the Annual Progress Report, 
the  general  government  deficit  is  projected  to  increase  to  3.2%  of  GDP  in  2027  and 
decrease to 2.3% of GDP in 2029. In turn, after 2026, the general government debt-to-
GDP ratio is projected to increase to 52.8% in 2027, and gradually decrease to 51.3% 
in  2029.  Based  on  policy  measures  known  at  the  cut-off  date  of  the  forecast,  the 
Commission Spring 2025 Forecast projects the government deficit to remain at 3.1% 
of GDP in 2026. These developments correspond to net expenditure growth of 4.4% in 
2026.  Based  on  the  Commission’s  estimates,  the  fiscal  stance,  which  includes  both 
nationally and EU financed expenditure, is projected to be expansionary, by 0.3% of 
GDP,  in  2026.  The  general  government  debt-to-GDP  ratio  is  projected  by  the 
Commission to increase to 49.3% by the end of 2026. The increase of the debt-to-GDP 
ratio in 2026 mainly reflects the projected primary deficit. 

Key policy challenges 

(20)  Latvia’s  tax  revenue  remains  below  the  EU  average,  at  32.9%  of  GDP  in  2023, 
compared  to  the  EU  average  of  39.0%.  Labour  and  consumption  taxes  are  Latvia’s 
main revenue sources, whereas taxes on capital – including corporate income tax, tax 
on income from capital and taxes on property – represent a relatively low share of total 
tax revenue and of GDP compared to other Member States. While this relative overall 
tax  revenue  gap  might  not  be  an  issue  per  se,  the  issue  of  new  structural  funding 
sources becomes relevant against the background of rising medium-term pressures on 
public  finances,  including:  (i)  the  government’s  commitments  to  considerably 
strengthen  internal  and  external  security;  (ii)  substantial  financing  needs  to  improve 
public services, in particular healthcare and social care; and (iii) the implementation of 
large-scale infrastructure projects co-funded by the EU (e.g. Rail Baltica).  

15 

Eurostat, government expenditure by classification of functions of government (COFOG).  

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(21)  While the tax reform that entered into force in January 2025  addressed some aspects 
related to capital taxation, the estimated fiscal impact on capital tax revenue is rather 
minor, amounting to less than 0.1% of GDP in 2025 and in 2026. Meanwhile, despite 
its commitment to transition to new land and property values for immovable property 
taxation from 2026, the government targets limited gains in terms of fiscal space and 
mainly plans to stabilise real estate tax revenue close to the historical average. 

(22)  According  to  surveys  of  company  owners  and  managers,  the  shadow  economy 
decreased in size in 2023, to 22.9% of GDP. This is 3.6 percentage points lower than 
in  2022,  marking  the  first  decrease  since  2019.  While  there  are  different  ways  of 
measuring  the  size  of  the  shadow  economy  and  it  is  difficult  to  establish  direct 
causality,  the  government’s  persistent  focus  on  implementing  policy  measures  to 
formalise  economic  activity  seems  to  have  reduced  companies’  tolerance  for  the 
shadow economy and their willingness to participate in it. At the same time, observed 
positive developments in reducing the informal economy warrant continued efforts to 
implement the current action plans. 

(23)  While  annual spending  reviews have  aimed to  make public spending  more effective, 
the current practice provides for a return of most savings (approximately 0.3% of GDP 
annually) to the sectoral ministries involved in the review process. Instead, redirecting 
the  resulting  funding  to  a  limited  number  of  priority  areas  –  such  as  defence, 
healthcare and social protection – should be considered.  

(24) 

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 
2.2  of  Annex  V  to  that  Regulation,  the  recovery  and  resilience  plan  includes  an 
extensive set  of mutually reinforcing  reforms and investments  to  be implemented by 
2026.  These  are  expected  to  help  effectively  address  all  or  a  significant  subset  of 
challenges  identified  in  the  relevant  country-specific  recommendations.  Within  this 
tight timeframe, finalising the effective implementation of the recovery and resilience 
plan  including  the  REPowerEU  chapter,  is  essential  to  boost  Latvia’s  long-term 
competitiveness  through  the  green  and  digital  transitions,  while  ensuring  social 
fairness. To deliver on the commitments of the recovery and resilience plan by August 
2026,  it  is  essential  for  Latvia  to  accelerate  the  implementation  of  reforms  and 
investments  by  addressing 
from 
strengthening  its  administrative  capacity  and  improving  execution  strategies  to  help 
mitigate delays and administrative hurdles. EU-funded construction projects are at risk 
of  delayed  delivery  due  to  the  construction  sector’s  strained  capacity,  caused  by 
competing  demands,  regulatory  burden  and  external  factors.  The  systematic 
involvement  of  local  and  regional  authorities,  social  partners,  civil  society  and  other 
relevant  stakeholders  remains  essential  in  order  to  ensure  broad  ownership  for  the 
successful implementation of the recovery and resilience plan. 

relevant  challenges.  Latvia  could  benefit 

(25)  The implementation  of cohesion  policy programmes,  which encompass support from 
the  European  Regional  Development  Fund  (ERDF),  the  Just  Transition  Fund  (JTF), 
the European Social Fund Plus (ESF+) and the Cohesion Fund (CF), has accelerated in 
Latvia. It is important to continue efforts to ensure the swift implementation of these 
programmes,  while  maximising  their  impact  on  the  ground.  Latvia  is  already  taking 
action under its cohesion policy programmes to boost competitiveness and growth. At 
the  same  time,  Latvia  continues  to  face  challenges,  including  those  relating  to 
economic  and  social  resilience,  including  addressing  poverty  and  social  exclusion, 
social  housing,  the  labour  market  integration  of  disadvantaged  groups,  as  well  as 
educational  supply,  energy  transition  and  regional  competitiveness,  especially  in  the 
eastern border regions. In accordance with Article 18 of Regulation (EU) 2021/1060, 

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Latvia is required – as part of the mid-term review of the cohesion policy funds – to 
review  each  programme  taking  into  account,  among  other  things,  the  challenges 
identified in the 2024 country-specific recommendations. The Commission  proposals 
adopted on 1 April 202516 extend the deadline for submitting an assessment – for each 
programme – of the outcome of the mid-term review beyond 31 March 2025. It also 
provides flexibilities to  help  speed up programme implementation  and incentives for 
Member States to allocate cohesion policy resources to five strategic priority areas of 
the Union, namely competitiveness in strategic technologies, defence, housing, water 
resilience and energy transition. 

(26)  The  Strategic  Technologies  for  Europe  Platform  (STEP)  provides  the  opportunity  to 
invest in a key EU strategic priority by strengthening the EU’s competitiveness. STEP 
is channelled through 11 existing EU funds. Member States can also contribute to the 
InvestEU programme supporting investments in priority areas. Latvia could use these 
initiatives  to  support  the  development  or  manufacturing  of  critical  technologies, 
including clean and resource-efficient technologies. 

(27)  Beyond the economic and social challenges addressed by the recovery and resilience 
plan  and  other  EU  funds,  Latvia  faces  several  additional  challenges  related  to  the 
business  environment,  access  to  finance,  research  and  innovation,  renewable  energy, 
energy  efficiency,  sustainable  transport,  resource  management,  labour  and  skills 
shortages, social protection, healthcare and housing.  

(28)  As  set  in  the  Competitiveness  Compass,  all  the  EU,  national,  and  local  institutions 
must  make  a  major  effort  to  produce  simpler  rules  and  to  accelerate  the  speed  of 
administrative  procedures.  The  Commission  has  set  ambitious  goals  for  reducing 
administrative burden: by at least 25% and by at least 35% for SMEs; and has created 
new  tools  to  achieve  these  goals,  including  systematic  stress  test  of  the  stock  of  EU 
legislation and enhanced stakeholders’ dialogue.  To match this ambition, Latvia also 
needs  to  take  action.  47%  of  businesses  consider  the  complexity  of  administrative 
procedures  to  be  a  problem  for  their  company  when  doing  business  in  Latvia17. 
Latvia’s regulatory framework presents a barrier to investment, for example due to an 
overly complex licensing system. These issues are particularly burdensome in sectors 
such  as  real  estate  development,  highlighting  the  need  for  reforms  to  improve  the 
business environment. Simplification and streamlining of administrative procedures is 
crucial  to  stimulating  economic  growth  and  boosting  competitiveness,  aligning  with 
broader EU-supported initiatives. It could also improve public trust in evidence-based 
governmental decisions, contribute to reducing the shadow economy, and, as a result, 
drive sustainable economic progress.  

(29)  Latvian businesses use the traditional sources of external financing, such as bank loans 
and  capital  market,  less  often  than  businesses  in  most  other  EU  countries.  Market 
lending  rates  are  high  and  collateral  requirements  stringent,  most  notably  in  the 
corporate  sector,  including  among  small  and  medium-sized  enterprises.  This 
undermines  the  capacity  of  businesses  to  scale  up  and  puts  at  risk  possibilities  for 
investments 
transition, 
commercialisation  of  innovations,  and  projects  for  regional  development.  Latvia’s 

in  areas  of  strategic 

importance,  such  as 

the  green 

16 

17 

Proposal  for  a  REGULATION  OF  THE  EUROPEAN  PARLIAMENT  AND  OF  THE  COUNCIL 
amending  Regulations  (EU)  2021/1058  and  (EU)  2021/1056  as  regards  specific  measures  to  address 
strategic challenges in the context of the mid-term review - COM(2025) 123 final. 
‘Businesses’ attitudes towards corruption in the EU’ Flash Report, Eurobarometer Report (April 2024). 

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eastern  border  region  merits  particular  attention,  with  increased  investment  to 
strengthen its societal and economic resilience. Stimulating competition in the banking 
sector and promoting public lending and guarantee schemes to facilitate investments in 
areas of strategic importance could improve the access to finance. 

(30)  Latvian  private  investment  in  research  and  innovation,  as  a  percentage  of  GDP,  is 
among the lowest in the EU. Businesses in Latvia employ fewer researchers than their 
counterparts  in  similar  countries.  The  valorisation  of  research  activities  and  the 
cooperation  between  private  business  and  academia  is  limited.  The  Latvian 
government  has  already  implemented  a  few  important  steps  to  reform  the  academic 
system.  For  example,  the  requirement  of  knowledge  of  the  Latvian  language  was 
relaxed  for  several  academic  positions,  which  gives  Latvian  universities  more 
possibilities for attracting talented foreigners. Latvia is in the process of reforming its 
research  and  innovation  system  to  improve  talent  creation  and  retention,  such  as  by 
increasing  the  salary  of  doctoral  students.  A  successful  implementation  of  these 
reforms, as well as increasing academic research funding, could increase the supply of 
well-trained researchers to businesses. In addition, Latvia should stimulate cooperation 
between  businesses  and  academia  and  could  consider  direct  R&D  incentives  for 
businesses, such as tax reductions for R&D investment or innovation procurement. 

(31) 

In  2024,  74%  of  Latvia’s  electricity  was  generated  from  renewable  sources,  with 
hydropower  accounting  for  51%  of  the  total.  However,  the  shares  of  solar  and  wind 
production, at 8% and 4%, respectively, were still significantly lower than in Lithuania 
and  Estonia,  and  below  the  EU  average.  There  is  scope  to  further  diversify  the 
country’s renewable energy mix by tapping into wind and solar power, and by scaling 
up  production  from  these  sources.  In  particular,  despite  some  limited  action  planned 
under  the  national  recovery  and  resilience  plan,  additional  efforts  are  needed  to 
expedite and streamline permitting procedures for new solar and wind energy projects. 
Latvia  should  also  take  further  action  to  promote  demand-side  flexibility,  such  as 
stimulating  energy  storage  owned  by  end  consumers  and  participation  in  distributed 
energy  resources  and  in  balancing  and  flexibility  services.  Additionally,  it  should 
clearly  define  the  roles  of  certain  energy  market  participants,  such  as  aggregators  of 
small-scale  demand.  Separately,  applications  for  grid  connection  permits  for 
renewable  energy  generation  facilities  considerably  exceed  the  electricity  network’s 
available  capacity,  which  is  why  the  issuance  of  new  permits  has  been  halted  since 
July 2023. Despite some positive legislative developments in 2025, there is scope for 
further regulatory action to improve grid queue management. 

(32)  The  buildings  and  transport  sectors  are  key  from  both  an  energy  and  climate 
perspective.  While  significant  energy  efficiency  schemes  are  currently  running  or 
being planned, they remain overly reliant on public, mostly EU, funding. Latvia could 
benefit  from  stepping  up  the  renovation  of  its  rather  old  building  stock  by: 
(i) attracting  additional  private  funding;  (ii)  favouring  financial  instruments  and 
de-risking options over grant-based energy efficiency schemes; and (iii) supporting the 
development  of  the  energy  services  sector  as  a  key  market-enabler  for  energy 
efficiency  investments.  In  the  transport  sector,  which  still  relies  heavily  on  oil 
products,  the  potential  for  further  electrification  and  overall  decarbonisation  is  also 
significant. Despite some positive measures, either in place or in the pipeline, Latvia 
could  do  more  to  promote  the  uptake  of  electric  vehicles  and  the  production  and 
uptake  of  renewable  and  low-carbon  fuels  for  both  public  and  private  transport.  In 
parallel,  additional  investment  to  expand  the  recharging  network  would  also  be 
beneficial.  Also,  outside  the  buildings  and  transport  sectors,  given  the  high  and 

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increasing  share  of  renewables  in  the  national  electricity  mix,  promoting  further 
electrification  could  be  an  effective  strategy  to  reduce  overall  carbon  intensity  and 
increase energy security. 

(33)  Latvia needs to accelerate its progress towards a circular economy in order to meet the 
EU’s  circular  economy  goals.  The  country’s  indicators  for  sustainable  economic 
growth  lag  behind  the  EU  average,  and  its  material  footprint  continues  to  increase. 
Although  Latvia  has  improved  its  waste  management  system,  it  still  landfills  almost 
half of its municipal waste and is at risk of not meeting the 2025 target for municipal 
waste recycling.   

(34)  Labour and skills shortages continue to weigh on economic growth and slow down the 
transition to an innovative, digital and green economy. The ageing of the population is 
leading to a decline in the labour force and there are high vacancy rates in key sectors 
such  as  construction,  manufacturing,  insulation,  forestry  and  healthcare.  Long-term 
forecasts  show  that  in  the  coming  decades,  these  shortages  will  grow  even  stronger. 
Improved working conditions could help attract and retain skilled workers, including 
in  sectors  such  as  healthcare  and  social  care.  The  low  proportion  of  graduates  in 
science, technology, engineering and mathematics (STEM), and the lack of researchers 
in  these  areas,  is  one  of  the  main  barriers  to  strengthening  Latvia’s  research  and 
innovation  capacity,  especially  in  the  private  sector.  Latvia  is  in  the  process  of 
developing  a  sustainable  adult  learning  framework;  however,  adult  participation  in 
learning  and  the  involvement  of  unemployed  people  and  people  at  risk  of 
unemployment in policy measures to help people find or stay in work is lower than the 
EU average. The relatively low and decreasing level of digital competency also poses 
a significant risk to productivity. To unlock the untapped labour supply, upskilling and 
reskilling  measures  could  be  more  targeted,  including  for  low-skilled  people  and 
across  regions.  Collaboration  with  employers  could  be  intensified  by  increasing  the 
uptake of work-based learning programmes and employer-led and financed employee 
training to further improve workers’ skills.  

(35)  Latvia still faces persistently high levels of inequality and significant risks of poverty 
and  social  exclusion,  particularly  impacting  older  people.  Expenditure  on  social 
protection in  relation  to GDP is  low and  decreased  from  14.0%  in  2022 to  13.5% in 
2023, while  the impact  of social transfers other  than pensions  in  terms of mitigating 
income inequality is still one of the lowest in the EU. In addition, ensuring adequate 
income  support  for  older  people  remains  a  key  challenge.  Consequently,  the  social 
protection  system  fails  to  lift  a  considerable  proportion  of  the  population  out  of 
poverty or social exclusion. In addition, significant socio-economic disparities across 
regions  affect  the  provision  of  social  services  by  municipalities  despite  the 
introduction  of  the  minimum  services  basket.  Lastly,  public  spending  on  long-term 
and home care remains inadequate given the demographic trends.  

(36)  Low  public  spending  on  healthcare  and  unhealthy  lifestyle  choices  are  the  main 
reasons  for  the  population’s  poor  health  outcomes.  Access  to  publicly  funded 
healthcare in Latvia is constrained by the limited scope of the state benefits package, 
resulting in  high  out-of-pocket  payments  for healthcare. The  financial burden  of this 
affects  low-income  households  disproportionately.  Consequently,  Latvia  has  one  of 
the  highest  rates  of  self-reported  unmet  needs  for  medical  care.  In  addition,  Latvia 
faces health  workforce shortages, especially  of nurses,  which  further undermines the 
delivery  of  health  services.  The  government  has  proposed  a  draft  law  to  reform  the 
financing  for healthcare; however, the  proposal  falls short of committing  to  a  higher 
share of GDP for the sector. 

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(37)  There  is  a  shortage  of  quality  affordable  housing,  mainly  due  to  low  investments  in 
housing. The shortage of housing undermines labour mobility and social inclusion. In 
addition, the existing housing stock is of poor quality, in particular in terms of energy 
efficiency, which puts financial pressure on households due to raising energy costs.  

(38) 

In view of the close interlinkages between the economies of euro-area Member States 
and  their  collective  contribution  to  the  functioning  of  the  economic  and  monetary 
union,  in  2025,  the  Council  recommended  that  the  euro-area  Member  States  take 
action,  including  through  their  recovery  and  resilience  plans,  to  implement  the  2025 
the  euro  area.  For  Latvia, 
Recommendation  on 
recommendations  (2),  (3),  (4)  and  (5)  help 
the  first  euro-area 
recommendation  on  competitiveness,  while  the  recommendations  (4)  and  (5)  help 
implement  the  second  euro-area  recommendation  on  resilience,  and  the  (1) 
recommendation  helps  implement  the  third  euro-area  recommendation  on  macro-
economic and financial stability set out in the 2025 Recommendation. 

the  economic  policy  of 

implement 

HEREBY RECOMMENDS that Latvia take action in 2025 and 2026 to:  

1. 

2. 

3. 

4. 

Reinforce overall defence spending and readiness in line with the European Council 
conclusions  of  6  March  2025.  Adhere  to  the  maximum  growth  rates  of  net 
expenditure recommended by the Council on 21 January 2025, while making use of 
the allowance under the national escape clause for higher defence expenditure. Make 
public  finances  fit  to  cope  with  rising  structural  spending  needs  including  for 
defence, healthcare and social protection, such as by broadening taxation to sources 
less detrimental to growth, moving informal or undeclared activities into the formal 
economy,  and  redirecting  expenditure  to  priority  areas  based  on  public  spending 
reviews. 

In  view  of  the  applicable  deadlines  for  the  timely  completion  of  reforms  and 
investments  under  Regulation  (EU)  2021/241,  accelerate  the  implementation  of  the 
recovery  and  resilience  plan,  including  the  REPowerEU  chapter.  Accelerate  the 
implementation  of  cohesion  policy  programmes  (ERDF,  JTF,  ESF+,  CF),  building, 
where  appropriate,  on  the  opportunities  offered  by  the  mid-term  review.   Make 
optimal use of EU instruments, including the scope provided by the InvestEU and the 
Strategic Technologies for Europe Platform, to improve competitiveness. 

Simplify  regulation,  improve  regulatory  tools  and  reduce  administrative  burden  on 
companies.  Improve  access  to  finance  for  small  and  medium-sized  enterprises, 
including by stimulating competition in the financial markets and promoting public 
lending  and  guarantee  schemes  to  facilitate  investments  of  strategic  importance,  in 
particular  in  the  areas  of  the  green  transition,  scaling-up  and  commercialisation  of 
innovations, and regional development. Facilitate private investment in research and 
innovation, including by pursuing further reforms in the higher education system to 
strengthen cooperation between businesses and academia. 

Reduce  reliance  on  fossil  fuels  and  increase  energy  security  by  accelerating  the 
deployment  of  renewable  energy,  particularly  wind  and  solar.  Improve  permit-
granting  procedures  and  electricity  grid  queue  management,  and  promote  energy 
storage,  demand  response  and  market-based  flexibility  solutions.  Reduce  primary 
and  final  energy  consumption,  and  carbon  intensity  by  strengthening  energy 
efficiency  measures,  especially  in  the  buildings  sector,  and  by  promoting  further 
electrification. Accelerate the decarbonisation of transport, especially road transport, 
by  promoting  the  uptake  of  electric  vehicles,  the  production  and  distribution  of 
renewable  transport  fuels  and  the  expansion  of  recharging  infrastructure.  Increase 

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5. 

resource efficiency and the transition to a circular economy through eco-innovation 
and sustainable resource management practices.  

Address labour and skills shortages, in particular in science, technology, engineering 
and mathematics (STEM) and in other specialisations needed for the green transition, 
for  research  and  for  digitalisation,  as  well  as  in  the  social  and  healthcare  sectors, 
including  through  targeted  upskilling  and  reskilling  and  improved  working 
conditions. Strengthen social protection to reduce inequality, including by improving 
the  adequacy  of  old-age  pensions  and  the  access  to  quality  social  services,  notably 
home  care,  while  maintaining  fiscal  sustainability.  Strengthen  the  adequacy  and 
accessibility  of  the  health  system  to  improve  health  outcomes,  including  by 
providing additional human and financial resources, broadening the statutory benefits 
package  and  reducing  out-of-pocket  payments.  Increase  the  availability  and  quality 
of social and affordable energy-efficient housing, including through renovations. 

Done at Brussels, 

For the Council 
The President 

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