Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Latvia
Date: 2026-06-03
Institutions: European Commission, Reform and Investment Task Force
Subjects: Latvia, budget policy, economic policy, economic recovery, economic reform, employment policy, investment, macroeconomics, social policy, stability pact

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   EUROPEAN COMMISSION  Brussels, 3.6.2026  COM(2026) 214 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Latvia {SWD(2026) 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 
Articles 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  1466/97  (1),  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: 

(1) 

Regulation  (EU)  2024/1263  specifies  the  objectives  of  the  economic  governance 
framework,  which  aims  at  promoting  sound  and  sustainable  public  finances, 
sustainable  and  inclusive  growth  and  resilience  through  reforms  and  investments,  as 
well  as  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 
Treaty  on  the  Functioning  of  the  European  Union  (TFEU).  The  European  Semester 
includes, in particular, the formulation and the surveillance of the implementation, of 
country-specific recommendations.  

(2) 

On  16 July 2025,  the  Commission  adopted  its  proposal  for  a  regulation  establishing 
the European Fund for economic, social and territorial cohesion, agriculture and rural, 
fisheries and maritime, prosperity and security for the period 2028-2034 and amending 
Regulation (EU) 2023/955 and Regulation (EU, Euratom) 2024/2509 (2). The proposal 

1 

2 

EN 

Regulation 

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 
ELI: 
http://data.europa.eu/eli/reg/2024/1263/oj). 
Proposal for a Regulation of the European Parliament and of the Council establishing the European Fund for 
economic,  social  and  territorial  cohesion,  agriculture  and  rural,  fisheries  and  maritime,  prosperity  and 
security for the period 2028-2034 and amending Regulation (EU) 2023/955 and Regulation (EU, Euratom) 

(EC)  No 

2024/1263, 

30.4.2024, 

1466/97 

(OJ 

L, 

1 

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(3) 

(4) 

(5) 

(6) 

aims to increase the effectiveness of Union funding by reducing the fragmentation of 
the  financial  architecture  and  to  support  Member  States  in  the  coordination  of  their 
economic policy in line with Article 175 TFEU.  

On  25 November 2025,  the  Commission  adopted  an  opinion  on  the  2026  draft 
budgetary  plan  of  Latvia.  On  the  same  date,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  the  Commission  adopted  the  2026  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,  a  recommendation  for  a 
Council recommendation on human capital in the European Union, and a proposal for 
the  2026  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 area (3) 
on  21 April 2026  and  the  Joint  Employment  Report,  and  the  recommendation  on 
human capital on 9 March 2026.  

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic  framework  that  aims  to  boost  the  Union’s  global  competitiveness  over  the 
next  five  years.  It  identifies  the  three  transformational  imperatives  of  innovation, 
decarbonisation  and  competitiveness,  and  security  as  critical  pillars  for  sustainable 
economic  growth.  The  European  Semester  is  aligned  with  the  Competitiveness 
Compass,  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. 

In  2026,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  final  stage  of  Recovery  and  Resilience  Facility  (RRF) 
implementation (4). Recovery and resilience plans (RRPs), along with cohesion policy 
funding, have been essential for delivering on the policy priorities under the European 
Semester, as the plans were required to effectively address all or a significant subset of 
challenges identified in the relevant country-specific recommendations issued in recent 
cycles, and programmes funded by the European cohesion policy were required to take 
country-specific recommendations into account. As the RRF approaches the end of its 
lifetime,  it  remains  essential  to  sustain  the  reforms  and  investments  supported  and 
implemented  under  the  RRF,  in  particular  those  that  contribute  to  addressing 
challenges identified in the country-specific recommendations. 

in 

progress 

addressing 

On  3 June 2026,  the  Commission  published  the  2026  country  report  for  Latvia.  It 
assessed  Latvia’s 
country-specific 
recommendations and took stock of Latvia’s implementation of the RRP. On the basis 
of  that  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.  

relevant 

the 

3 
4 

2024/2509 - COM(2025) 565 final. The proposed Regulation is currently the subject of negotiations with the 
co-legislators. 
OJ C, C/2026/2434, 28.4.2026, ELI: http://data.europa.eu/eli/C/2026/2434/oj. 
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12 February 2021 
(OJ  L  57,  18.2.2021,  p.  17,  ELI: 
establishing 
http://data.europa.eu/eli/reg/2021/241/oj). 

the  Recovery  and  Resilience  Facility 

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(7) 

(8) 

(9) 

On  21 January 2025,  the  Council,  upon  the  assessment  and  recommendation  of  the 
Commission, adopted a Recommendation endorsing the national medium-term fiscal-
structural  plan  of  Latvia (5).  The  plan  covers  the  period  from  2025  until  2028  and 
presents  a  fiscal  adjustment  spread  over  four  years.  The  Council  recommended  the 
following  maximum  growth  rates  of  net  expenditure:  5.9%  in  2025,  3.6%  in  2026, 
3.4%  in  2027  and  3.3%  in  2028,  which  correspond  to  the  maximum  cumulative 
growth rates calculated by reference to the base year of 2023 of 15.5% in 2025, 19.7% 
in 2026, 23.8% in 2027 and 27.9% in 2028.  

from 

recommendation 

Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  has  invited  Member 
States  to  request  the  activation  of  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 (6)  and  this  proposal  was  welcomed  by  the 
European Council of 6 March 2025. Following the request of Latvia, on 8 July 2025 
the  Council,  upon  a 
the  Commission,  adopted  a 
Recommendation allowing Latvia to deviate from the recommended maximum growth 
rates  of  net  expenditure  (7).  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.  
On 30 April 2026, Latvia submitted its 2026 Annual Progress Report8 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  implementing  its 
recovery  and  resilience  plan  in  accordance  with  Article  27  of  Regulation  (EU) 
2021/241.  

(10)  Real  GDP  growth  in  2025  was  2.1%  and  HICP  inflation  stood  at  3.8%.  The 
Commission  Spring  2026  Forecast  projects  real  GDP  to  grow  by  1.4%  in  2026  and 
1.6% in 2027, and HICP inflation to stand at 3.6% in 2026 and 2.2% in 2027.  
(11)  Based on data provided by Eurostat (9), Latvia’s general government deficit increased 
from  1.8%  of  GDP  in  2024  to  2.5%  of  GDP  in  2025.  The  increase  in  the  deficit  in 
2025 mainly reflects the adverse fiscal impact of the personal income tax reform and a 
reduction in property income, affected by lower dividend payments from state-owned 
enterprises and lower interest revenue. Based on policy measures known by the cut-off 
date of the forecast, the Commission Spring 2026 Forecast projects a  deficit of 3.3% 
of  GDP  in  2026  and  of  4.3%  of  GDP  in  2027. The  increase  in  2026  mainly  reflects 
higher  investment  (including  in  defence),  increasing  interest  costs,  and  continued 

5  Council  Recommendation  of 21 January 2025  endorsing  the  national  medium-term  fiscal-structural  plan  of 

Latvia (OJ C, C/2025/652, 10.2.2025, ELI: http://data.europa.eu/eli/C/2025/652/oj). 

6  Communication from the Commission,  'Accommodating increased defence expenditure within the Stability 

and Growth Pact’, Brussels, 19.3.2025, C(2025) 2000 final. 

7  Council Recommendation of 8 July 2025 allowing Latvia to deviate  from the  maximum growth rate  of net 
expenditure  as  set  by  the  Council  under  Regulation  (EU)  2024/1263  (Activation  of  the  national  escape 
clause), (OJ C, C/2025/3970, 20.8.2025, ELI: http://data.europa.eu/eli/C/2025/3970/oj). 

8  The  2026  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. 

9  Eurostat-Euro Indicators, 22.4.2026. 

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growth  in  social  transfers,  largely  due  to  pension  and  benefit  indexation  outpacing 
economic growth, and a rising  number of pension recipients. The  further increase in 
the deficit in 2027 mainly reflects the further effects of the personal income tax reform 
and diminishing property income, as well as a sharp increase in defence expenditure, 
alongside continued high growth of social transfers.  

(12)  Based  on  the  Commission’s  estimates,  the  fiscal  stance (10),  which  includes  both 
nationally and EU financed expenditure, was expansionary, by 1.1% of GDP, in 2025. 
It  is  projected to  be expansionary, by 1.5% of GDP,  in  2026, and broadly  neutral  in 
2027. 

(13)  Based on data provided  by Eurostat (11), Latvia’s  general government debt increased 
from  46.2%  of  GDP  at  the  end  of  2024  to  46.9%  of  GDP  at  the  end  of  2025.  The 
increase  in  the  debt  ratio  in  2025  mainly  reflects  the  budget  deficit  and  a  positive 
stock-flow  adjustment.  Based  on  policy  measures  known  at  the  cut-off  date  of  the 
forecast,  the  Commission  Spring  2026  Forecast  projects  the  debt-to-GDP  ratio  to 
increase to  48.8% by the end of 2026 and further to  53.8% by the end of 2027.  The 
increases in 2026 and 2027 mainly reflect high primary deficits and upward stock-flow 
adjustments impacted by upcoming Eurobond redemptions. 

(14)  Based  on  Eurostat  data (12),  total  general  government  defence  expenditure  in  Latvia 
amounted  to  3.2%  of  GDP  in  2025,  corresponding  to  an  increase  of  0.7  percentage 
points  of  GDP  compared  to  the  reference  year  2021.  According  to  the  Commission 
Spring  2026  Forecast,  it  is  projected  at  4.1%  of  GDP  in  2026,  corresponding  to  an 
increase of 1.7 percentage points of GDP compared to 2021. 

(15)  The  Union  continues  to  face  risks  of  energy  supply  disruptions  and  elevated  price 
volatility,  exacerbated  by  geopolitical  tensions  which  affect  global  oil  and  gas 
markets.  Experience  from  the  2022–2023  energy  crisis  has  shown  that  broad  and 
untargeted  measures  entail  large  fiscal  costs  and  are  socially  and  economically 
inefficient. Since the outbreak of the war in the Middle East in February 2026, Latvia 
adopted  fiscal  policy  measures  to  mitigate  the  impact  of  high  energy  prices  on 
households and firms (13). These include an untargeted reduction in the excise tax on 
diesel  and  a  targeted  reduction  in  the  excise  tax  on  agriculture  diesel,  both  from  1 
April to 30 June 2026. According to the Commission Spring 2026 Forecast, the fiscal 
cost  of  these  measures  is  projected  to  amount  to  less  than  0.1%  of  GDP  in  2026. 
According  to  Commission  estimates,  if  these  measures  were  to  remain  in  force  until 
end-2026, their fiscal cost would amount to 0.1% of GDP in 2026. 

(16)  Based on the Commission’s calculations,  net  expenditure in  Latvia grew by 5.0% in 
2025  and  10.2%  cumulatively  over  2024  and  2025.  The  net  expenditure  growth  in 
2025 is below the recommended maximum growth rate. When considering 2024 and 
2025  together,  the  cumulative  growth  rate  of  net  expenditure  is  also  below  the 
recommended maximum growth rate.  

10  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. 

11  Eurostat-Euro Indicators, 22.4.2026. 
12  Eurostat, government expenditure by classification of functions of government (COFOG). 
13  This reflects the situation at the cut-off date of the Commission’s Spring 2026 Forecast (4 May 2026). 

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(17)  Based  on  the  Commission’s  calculations,  net  expenditure  in  Latvia  is  projected  to 
grow  by  6.7%  in  2026,  and  17.5%  cumulatively  over  2024,  2025  and  2026.  The 
projected  net  expenditure  growth  in  2026  is  above  the  recommended  maximum 
growth  rate,  corresponding  to  a  deviation  of  1.2%  of  GDP  in  annual  terms.  When 
considering 2024, 2025 and 2026 together, the projected cumulative growth rate of net 
expenditure is below the recommended maximum growth rate (14).  

(18)  On  3  June  2026,  the  Commission  adopted  a  report  under  Article  126(3)  TFEU (15). 
That report assessed the situation of Latvia vis-à-vis the deficit criterion, as its planned 
general  government  deficit  in  2026  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 fulfilled by Latvia. In light of this and after considering the opinion 
of the Economic and Financial Committee as established under Article 126(4) TFEU, 
the Commission has not proposed to open an excessive deficit procedure. 

(19)  Public finances are under pressure to cope with structural spending needs. The current 
annual  budget  and  the  medium-term  budgetary  framework  include  commitments  to 
higher  debt-financed  defence  spending  but  do  not  provide  sufficient  funding  for 
healthcare  and  social  protection.  Low  public  spending  on  healthcare  continues  to 
negatively impact its accessibility, while pension adequacy is projected to remain very 
low  over  the  medium  to  long-term.  Ensuring  appropriate  financing  for  key  priorities 
while  maintaining  fiscal  sustainability  requires  a  comprehensive  approach  that 
includes  raising  additional  tax  revenue,  reducing  shadow  economy,  and  increasing 
spending efficiency. 

(20)  Furthermore,  as  a  Member  State  on  the  EU’s  eastern  external  border,  Latvia  faces 
spending pressures related to defence and resilience against hybrid threats, such as IT 
disruptions in critical infrastructure and drone incursions, and specific challenges that 
are impacting economic and social development dynamics. Russia’s war of aggression 
against  Ukraine  not  only  exacerbates  some  of  the  existing  structural  challenges,  but 
also  increases  security  pressures,  disrupts  cross-border  economic  activities  and 
decreases  investment  attractiveness.  While  Latvia  has  already  significantly  increased 
defence  spending,  security  challenges  require  further  investments  in  civil  protection 
and preparedness as well as military mobility. Such investments could have the double 
benefit of addressing security challenges and providing opportunities for the regions’ 
economies. 

(21)  Latvia’s tax revenue was 34.9% of GDP in 2024 and remained below the EU average 
of 39.4%. Latvia continues to rely heavily on consumption and labour taxes as its main 
revenue  sources.  Taxes  on  capital  (including  corporate  income  tax)  and  property 
account  for a smaller share of the tax mix than in other EU Member States. In 2025 
and  2026,  Latvia  has  modestly  increased  taxes  on  capital  and  various  taxes  on 
consumption that are less harmful to growth and serve policy goals (including excise 
duties on fuels, tobacco, alcohol and soft drinks; company car tax; and gambling and 
lottery  tax).  However,  the  additional  revenue  from  these  taxes  has  been  more  than 
offset by the revenue-decreasing impact of the 2025 labour tax reform. 

14 

15 

As  Latvia  benefits  from  flexibility  under  the  National  Escape  Clause,  the  assessment  of  compliance 
focusses on the latter comparison. 
Report  from  the  Commission,  prepared  in  accordance  with  Article  126(3)  of  the  Treaty  on  the 
Functioning of the European Union, 3.6.2026, COM(2026)302 final. 

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(22)  According to 2024 survey data, the shadow economy remains high at 21.4% of GDP, 
largely  due  to  the  high  proportion  of  undeclared  salaries  (‘envelope  wages’).  While 
Latvia  is  implementing  measures  to  better  detect  non-payment  or  evasion  of  taxes, 
such as mandatory e-invoicing for transactions and the taxpayer-rating system, further 
efforts  are  needed  to  enhance  digital  tools,  encourage  voluntary  compliance  and 
strengthen enforcement mechanisms. 

(23)  Contrary to previous years’ practice, in the preparation of the 2026 Budget most of the 
savings  identified  in  spending  reviews  were  directed  towards  financing  of  the 
government’s  key  priorities.  While  the  2026  process  marked  a  welcome  shift  in 
approach,  Latvia  could  benefit  from  further  institutionalising  this  practice  in  future 
budgets  as  well  as  expanding  the  scope  and  ambition  of  spending  reviews.  Further 
steps  to  implement  performance-based  budgeting  may  also  help  to  strengthen  the 
quality and efficiency of public spending. 

(24)  The systematic, meaningful and timely 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 Union’s funding 
instruments, as well as in the context of the European Semester. 

(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) in Latvia, is above 
the  average  pace  at  EU  level,  both  in  terms  of  project  selection  and  payments.  It  is 
important to keep current momentum, while maximising the impact of investments on 
the  ground.  Latvia  is  already  taking  action  under  its  cohesion  policy  programmes  to 
boost  competitiveness  and  growth.  Nevertheless,  some  areas  may  require  further 
strengthening in implementation, including those relating to large-scale infrastructure, 
transport,  as  well  as  scaling  up  SME  support  in  regions  outside  the  capital.  It  is 
essential to ensure that the new investments identified by Latvia in its mid-term review 
of the cohesion policy funds, notably those linked to the five priorities identified in the 
Mid-Term Review Regulation (16), are deployed rapidly and effectively. 

(26)  Latvia  faces  challenges  related  to  access  to  finance,  research  and  innovation,  energy 
efficiency,  sustainable  transport,  resource  management,  labour  and  skills  shortages, 
social protection, access to healthcare and housing. 

(27)  Although  lending  activity  has  increased  since  2024  due  to  eased  monetary  policy, 
there have been no significant structural changes in bank lending to companies. While 
government initiatives have improved lending conditions for households, in particular 
by  simplifying  mortgage  refinancing  conditions,  company  borrowing  terms  remain 
largely  unchanged.  Latvia  has  implemented  some  public  support  schemes,  primarily 
through  the  state  development  financial  institution  ALTUM,  including  a  public 
guarantee  framework,  large  investments  programme,  support  for  investments  in  the 
area  of  the  green  transition  (such  as  centralized  heating  supply  and  biomethane 
production), as well as initiatives in the fields of innovation, economic resilience, and 
military  or  dual-use  products.  More  efforts  are  needed  to  support  companies’ 
investments  in  digital  transition,  including  increasing  basic  digital  intensity.  Strict 
collateral  requirements  and  high  interest  rates  persist,  especially  outside  of  Riga, 

16 

Regulation  (EU)  2025/1914  of  the  European  Parliament  and  of  the  Council  of  18 September 2025 
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. 

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despite  the  strong  financial  health  of  banks.  Latvia’s  capital  market  remains 
underdeveloped. There continue to be challenges in expanding funding options beyond 
traditional sources, evidenced by low stock market capitalisation and limited reliance 
on  listed  shares  and  bonds  for  funding.  Venture  capital  investment  trails  the  EU 
average,  hindered  by  weak  private  funding  while  Latvian  pension  funds  are 
characterized  by  limited  domestic  investment  and  low  returns.  Promoting  borrower 
mobility  and  competition  in  the  corporate  lending  market,  continued  efforts  to 
enhancing public lending and guarantee schemes as well as activating capital markets 
could improve the access to finance. 

(28)  Latvia’s  low  levels  of  R&D  expenditure,  and  particularly  private,  continue  to  limit 
innovation, as evidenced by the number of patent applications per billion GDP, which 
remains  lower  than  half  of  the  EU  average.  Cooperation  between  businesses  and 
academia  remains  limited,  slowing  knowledge  transfer.  Companies  report  long, 
complex procedures when engaging with research institutions, while researchers lack 
incentives  for  engaging  in  applied  projects.  These  challenges  have  led  to  weak 
productivity growth, particularly outside of the capital region, which is aggravated by 
low capital intensity and limited sectoral reallocation. Startup activity also lags behind 
Estonia  and  Lithuania  with  fewer  new  registrations  per  year.  Despite  the  favourable 
regulatory environment, the start-up and scale-up ecosystems remain underdeveloped, 
due  to  fragmented  and  low  financial  support.  To  address  these  issues,  strategically 
designed financial support, such as those requiring private co-financing or mandating 
the  employment  of  researchers,  and  progress  on  a  higher  education  reform  to 
encourage  industry  collaboration,  could  help  build  capacity  and  foster  innovation, 
thereby  broadening  R&I  engagement  and  improving  productivity  levels.  Long  term 
policies to help startups growing in Latvia and incentivise business R&D investment, 
including support for private-sector R&D employment, would also strengthen longer-
term TFP growth over time. 

(29) 

In  2025,  Latvia  generated  73%  of  its  net  electricity  from  renewables  –  one  of  the 
highest shares in the EU – with hydropower accounting for most of this output. While 
installed  solar  capacity  has  grown  in  recent  years,  wind  capacity  has  increased  only 
marginally.  With  limited  scope  to  expand  hydropower  further,  scaling  up  wind  and 
solar  energy  is  critical  to  reduce  exposure  to  the  volatility  of  fossil  fuel  prices  and 
dependencies. While recent legislative and regulatory initiatives have alleviated some 
grid congestion, grid queue management could be improved, for example by  moving 
away from the ‘first come, first served’ approach towards one that prioritises shovel-
ready, financially viable projects. Furthermore, action is required to reduce permitting 
times  for  renewable  energy  projects.  Finally,  despite  ongoing  efforts,  the  process  of 
designating renewables acceleration areas could be sped up.  

(30)  Latvia’s  electricity  consumers  remain  exposed  to  volatile  price  spikes,  particularly 
during periods of low renewable output when the system relies more heavily on costly 
fossil-fuel generation and imports, highlighting the continued importance of promoting 
non-fossil flexibility solutions, such as energy storage and demand-response. In 2025, 
two battery energy storage systems supported by EU funding were commissioned and 
began  providing  key  flexibility  services.  Recent  regulatory  updates  simplified 
permitting  for  co-located  storage-renewable  projects.  More  could  be  done  to  enable 
consumers  and  operators  to  provide  flexibility  to  Latvia’s  electricity  system,  for 
example  by  promoting  independent  aggregators  of  small-scale  demand,  a  shift  to 
dynamic-price electricity contracts, and by testing pilot flexibility projects with larger 
players. 

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(31)  Although  the  final  energy  consumption  attributable  to  the  buildings  sector  has  been 
decreasing  in  the  recent  years,  this  sector  remains  a  major  energy  consumer  in  the 
country and further action is needed to meet the 2030 renovation and energy efficiency 
targets. In 2025, regulatory and legislative initiatives were implemented to accelerate 
renovation  rates,  including  revisions  to  voting  and  decision-making  rules  in  multi-
large  stock  of 
apartment  buildings.  This 
multiapartment  buildings  built  before  1990.  Support  schemes  for  energy  efficiency 
remain  reliant  on  public  funding,  primarily  from  the  EU.  Latvia  could  benefit  from 
attracting  additional  private  funding,  for  example  by  offering  more  financial 
instruments  and  de-risking  options,  while  targeting  grant-based  support  at  more 
vulnerable households. Particular efforts are needed to promote electrification and the 
adoption of energy-efficient, low-carbon technologies for heating and cooling, which 
account for the majority of residential final energy consumption. 

is  particularly  relevant  given 

the 

(32)  While  Latvia  took  steps  to  decarbonise  its  transport  sector,  it  remains  one  of  the 
largest sources of greenhouse gas (GHG) emissions in the country. Road transport is 
92%  fossil-fuel-dependent  and  responsible  for  83%  of  transport  emissions.  The 
Transport  Energy  Law,  adopted  in  late  2025  and  effective  as  of  1  January  2026, 
provides the framework to meet REDIII targets in the transport sector. The uptake of 
private  electric  vehicles  rose  slightly  from  0.8%  in  2024  to  1.05%  in  2025,  while 
charging infrastructure for light-duty vehicles doubled in 2025, though starting from a 
low base and remaining limited for heavy-duty vehicles. Latvia could therefore benefit 
from  further  promoting  the  uptake  of  low-  and  zero-emission  vehicles,  including  for 
its  commercial  fleet,  and  expanding  its  recharging  infrastructure,  particularly  for 
heavy-duty  vehicles.  On  rail  transport,  while  90%  of  passenger  rail  is  electrified, 
freight services still rely on diesel, with Latvia’s overall rail electrification at just 14% 
compared  to  the  average  57%  EU  coverage.  The  completion  of  Rail  Baltica  is 
expected  to  strategically  integrate  Latvia  into  the  EU’s  rail  network,  significantly 
improve  rail  coverage,  while  facilitating  the  switch  from  road  to  rail  and  therefore 
supporting to further reduce GHG emissions from transport. 

(33)  Latvia  is  facing  challenges  in  its  transition  to  a  circular  economy,  and  its  resource 
productivity  is  currently  standing  at  around  half  the  EU  average.  Latvia  has 
significantly  reduced  its  GHG  emissions  in  the  manufacturing  sector  but  the  energy 
intensity of the Latvian manufacturing industry remains among the highest in the EU. 
Although  Latvia  has  improved  its  waste  management  system,  introducing  separate 
collection  of  textile  goods  in  2025  and  launching  an  e-cigarette  deposit  system  in 
2026,  and  has  a  good  recycling  rate  for  specific  waste  streams  (plastic  packaging, 
construction and demolition waste), its circular material use rate in 2024 was only half 
the  EU  average  (6.8%  compared  to  12.2%  for  the  EU)  and  could  therefore  benefit 
from  further  improvement.  Almost  half  of  Latvia’s  municipal  waste  is  still  sent  to 
landfills.  Latvia  is  not  on  track  to  reach  its  carbon  removal  target.  In  2020-2023  the 
increase  of  GHG  emissions  in  LULUCF  sector  are  cumulative  result  of  higher 
harvesting rates and higher mortality rate in mature forests. 

(34) 

In light of the crucial role of human capital in enhancing the Union’s competitiveness 
and  strategic  autonomy,  in  2026  the  Council  recommended  that  Member  States  take 
action  to  urgently  address  human  capital  related  structural  challenges  in  the  areas  of 
skills  and  education,  which  hamper  competitiveness.  The  2026  country-specific 
recommendations  addressed  to  Latvia  can  contribute  to  the  implementation  of  the 
Council Recommendation on human capital in the Union. 

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(35)  Labour  and  skills  shortages,  including  in  STEM  sectors,  teaching,  research  and 
digitalisation,  as  well  as  in  the  social  and  healthcare  sectors,  continue  to  hamper 
competitiveness.  Labour  shortages  in  sectors  such  as  energy  production  and 
manufacturing remain high and are set to intensify in the coming decades. Improving 
working conditions could help attract and retain skilled workers, including in sectors 
such as teaching, healthcare and social care. Furthermore, the low number of graduates 
in science, technology, engineering and mathematics (STEM) and labour shortages in 
research  undermine  Latvia's  innovation  capacity  and  competitiveness.  Latvia  is 
performing low on digital skills, particularly basic digital skills, where it ranks as the 
fourth-worst in the EU, which also impacts the digitalisation of SMEs. Despite recent 
efforts,  Latvia's  adult  learning  system  remains  fragmented  and  not  fully  adapted  to 
labour market needs. Latvia could benefit from strengthening its long-term planning in 
adult education by adopting a national strategy in human capital development. Active 
labour  market  policies  (ALMPs)  and  vocational  education  training  (VET)  could  be 
better  linked  with  labour  market  needs  through  close  cooperation  with  employer 
organisations and trade unions. 

(36)  Latvia continues to face high levels of inequality, with the income quintile share ratio 
increasing  from  6.28  in 2024 to  6.68 in  2025, significantly above the EU average of 
4.62.  Furthermore,  while  the  rate  of  people  at  risk  of  poverty  and  social  exclusion 
decreased  in  2024  to  24.3%,  it  remains  above  the  EU  average  of  21%.  The  risk  of 
poverty rate is especially high for vulnerable groups, such as the elderly, people with 
disabilities and single parent households. This reflects the relatively low coverage and 
the low adequacy of social protection, particularly with regards to the non-contributory 
benefits. The impact of social transfers other than pensions, which was already one of 
the lowest  in  the EU, has decreased for a second consecutive year.  For persons with 
disabilities, the coverage of the special care allowances is low and existing allowances 
have  not  been  increased  to  keep  pace  with  inflation.  Despite  some  recent  measures, 
old-age  pension  adequacy  remains  among  the  lowest  in  the  EU,  with  the  aggregate 
replacement ratio expected to deteriorate further in the coming years without a policy 
response.  Social  services  and  long-term  care,  particularly  home  care,  remain 
in  economic  and  social 
underdeveloped.  Furthermore, 
development  persist.  Regions  bordering  Russia  and  Belarus,  especially  Latgale,  and 
rural  areas  are  particularly  affected  by  depopulation,  lower  educational  attainment, 
limited  access  to  healthcare  and  social  services,  which  exacerbates  social  exclusion 
and  poverty  risks.  Addressing  these  challenges  would  also  contribute  to  supporting 
upward  social  convergence,  in  line  with  the  Commission  services’  second-stage 
country analysis of the Social Convergence Framework (17). 

territorial  differences 

(37)  Health outcomes in Latvia show little improvement, with the country recording one of 
the  lowest  rates  of  life  expectancy  in  the  EU,  and  high  rates  of  avoidable  mortality. 
Despite  some  additional  funding,  low  public  spending  on  healthcare  continues  to 
hamper  access  to  quality  care,  as  evidenced  by  long  waiting  times  and  high  out-of-
pocket  (OOP)  payments  due  to  a  limited  statutory  benefits  package.  While  the 
government  has  taken  some  measures  to  address  high  OOP  spending,  including  an 
expansion of the list of reimbursable medicines and increasing the reimbursement rate, 
high  OOP  payments  continue  to  place  a  disproportionate  financial  burden  on  low-
income households, thereby exacerbating inequalities in health outcomes and resulting 

17 

SWD(2026)122  –  Second-stage  country  analysis  on  social  convergence  in  line  with  the  Social 
Convergence Framework (SCF), 2026. 

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in  high  levels  of  unmet  medical  needs  across  the  entire  population.  Additionally, 
medical  institutions  face  a  severe  shortage  of  healthcare  workers,  where  recruitment 
and  retention  are  deterred  by  poor  working  conditions.  Addressing  high  workloads, 
structurally  increasing  remuneration  in  the  public  healthcare  sector,  and  improving 
career outcomes could help attract staff to the sector. Behavioural risk factors - such as 
excessive  alcohol  consumption,  smoking,  and  low  physical  activity  -  remain  key 
drivers of poor health outcomes. This could be mitigated by strengthening preventive 
health policies, including screening and public health campaigns. 

(38)  Latvia’s  housing  stock  remains  outdated  and  inadequate,  in  particular  in  terms  of 
energy efficiency, due to years of underinvestment and high stock of multiapartment 
buildings built before 1990. This puts financial pressure on households, especially in 
light  of  rising  energy  costs.  Strong  regional  and  socio-economic  disparities  limit 
housing  development  and  renovations,  in  particular  outside  Riga.  In  addition,  the 
rental  market  and  social  housing  market  remain  underdeveloped.  Access  to  social 
housing  is  primarily  provided  based  on  income  level  and  is  not  well-adapted  to  the 
needs of persons with disabilities. The housing first approach is underdeveloped and is 
limited to the capital region of Riga. Overall, homelessness remains a persistent social 
challenge and is not being sufficiently addressed by national policies. The shortage of 
quality  and  affordable  housing  undermines  labour  mobility  and  social  well-being. 
Latvia  has  implemented  some  schemes  to  support  the  construction  of  affordable 
housing  in  the  regions,  primarily  through  the  state  development  financial  institution 
ALTUM,  but  more  efforts  are  needed  to  expand  social  housing  stock  and  improve 
quality  and  adequacy  of  housing  including  through  renovations  and  energy 
improvements, in particular outside the capital region.  

(39) 

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  2026  the  Council  recommended  that  the  euro-area  Member  States  take 
action, including through their RRPs, to implement the 2026 Recommendation on the 
economic policy of the euro area. For Latvia, the recommendation (1) helps implement 
the first, the second and the third recommendations on the euro area, recommendation 
(2) helps implement the fourth recommendation on the euro area, recommendation (3) 
helps  implement  the  seventh,  ninth  and  tenth  recommendations  on  the  euro  area, 
recommendation  (4)  helps  implement  the  seventh  recommendation  on  the  euro  area 
and  the  recommendation  (5)  helps  implement  the  fifth  recommendation  on  the  euro 
area. 

HEREBY RECOMMENDS that Latvia take action in 2026 and 2027 to:  

1. 

Continue adhering to the maximum growth rates of net expenditure recommended by 
the  Council  on  21 January 2025,  while  making  use  of  the  flexibility  under  the 
national  escape  clause  for  higher  defence  expenditure.  Reinforce  defence  readiness 
while  ensuring  spending  efficiency  and  gradually  adapting  the  budget  to  sustain 
structurally higher defence spending. Ensure that any measures taken to mitigate the 
impact of the hike in energy prices are temporary, targeted at protecting vulnerable 
households or at addressing the needs of energy-intensive firms, preserve incentives 
for  energy  savings  while  ensuring  that  their  fiscal  cost  is  compatible  with  the 
commitments under the EU fiscal framework. Make public finances fit to cope with 
structural spending needs including for defence and resilience against hybrid threats, 
healthcare  and  social  protection,  such  as  by  broadening  taxation  to  sources  less 
detrimental to growth, promoting measures to move informal or undeclared activities 
into  the  formal  economy,  and  embedding  the  practice  of  redirecting  expenditure  to 

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2. 

3. 

4. 

5. 

priority  areas  based  on  public  spending  reviews,  while  expanding  their  scope  and 
ambition.  

Ensure continuity of reforms and investments implemented under the Recovery and 
Resilience  Facility.  Sustain  implementation  momentum  under  cohesion  policy 
programmes,  building,  where  appropriate,  on  the  reallocation  to  strategic  priorities 
and flexibilities  in the mid-term  review  of the cohesion  policy framework. Address 
the  unique  socio-economic,  security  and  civil  preparedness  challenges  particularly 
affecting regions on the EU's external eastern border. 

Improve access to finance for small and medium-sized enterprises, also outside of the 
capital  region,  including  by  stimulating  competition  in  the  financial  sector  and  by 
developing the capital market. Facilitate the digitalisation of businesses, in particular 
small  and  medium-sized  enterprises.  Encourage  private  investment  in  research  and 
innovation, 
including  by  strengthening  cooperation  between  businesses  and 
academia,  reducing  administrative  burden  in  public-private  partnerships,  and 
supporting commercialisation of research and scaling up innovation. 

Continue  the  deployment  of  renewable  energy,  including  by  improving  permitting, 
designating  renewable  acceleration  areas,  and  promoting  non-fossil  flexibility 
solutions.  Scale  up  energy  efficiency  and  decarbonisation  in  buildings.  Accelerate 
the  decarbonisation  of  transport,  including  by  accelerating  the  completion  of  Rail 
Baltica. Increase resource efficiency and the transition to a circular economy through 
eco-innovation and sustainable resource management practices. 

Address  labour  and  skills  shortages,  including  through  targeted  upskilling  and 
reskilling  of  adults to  meet  labour  market  needs  and  improved  working  conditions. 
Strengthen  social  protection  to  reduce  poverty  and  inequality,  including  by 
improving the adequacy of old-age pensions and the access to quality social services. 
Strengthen  the  adequacy  and  accessibility  of  the  health  system  to  improve  health 
outcomes,  including  by  providing  adequate  human  and  financial  resources, 
broadening  the  statutory  benefits  package,  reducing  out-of-pocket  payments,  and 
strengthening  preventive  health  measures.  Increase  the  availability  and  quality  of 
affordable and social housing, in particular outside the capital region. 

Done at Brussels, 

For the Council 
The President 

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