in a nutshell, developed jointly by the finance ministry and the central bank. it is our opinion that only a consistent and sequential implementation of the steps i have just outlined constitutes the optimum strategy meeting the relevant requirements : it is transparent, economically sound and understandable, it prevents discrimination and any, even theoretical, possibility of speculation. we believe that any other option would be a violation of the principles of transparency, equal access or stability and therefore would not be optimal. another scenario that has been often suggested in relation to the re - peg envisions pegging the lats to the euro not in accordance to the market rate of the given day but on the basis of the average exchange rate of the entire year 2004. this scenario is based on the argument that on the last days of any year there are always increased fluctuations on the currency markets. first, i should point out that data at our disposal seem to indicate that this is not quite the case ( fig. 8 * ). second, such a solution would violate the requirement that the re - peg be transparent : it would be very hard or even impossible to justify choosing the average exchange rate of the last 12 months over, say the last six or sixteen. moreover, given the exchange rate dynamics between the lats and the euro this year, it is quite possible that the existing market rate would only differ from the average rate for the whole year for less than one santims ( a few base points ) ( fig. 9 * ). it is highly doubtful that correcting the exchange rate in this small amount would have a serious effect on the economic processes. at the same time, implementing this scenario would set a needless precedent of the exchange rate of the lats undergoing desultory changes as soon as it has been re - pegged. that would be in direct contradiction to the objective of stability and predictability and would give rise to needless speculations. therefore we believe that implementing this scenario would also be less than feasible. to recapitulate, i would like to stress once more that since latvia ’ s accession to the european union one of the main tasks shared by the bank of latvia and other state institutions is to ensure that latvia join the euro area in a timely and balanced manner and to replace the lats with the euro. the currently adopted euro introduction strategy envisions that under successful cooperation between the government, the bank of latvia and commercial banks, latvia will be able to meet all relevant criteria and begin

results along with ones where the results would be seen after several years. as a scandinavian, mr. hansen could have reminded us, inter alia of the unpleasant consequences – price adjustments – after the real estate bubble burst in the nordic countries at the beginning of the 1990s he could have reasonably suggested that the government agenda should include a surplus budget sooner than is currently planned and a balanced budget as early as 2008 instead of 2009 - 2010. by way of illustration, he could have shown the real possibilities for slowing down the growth rate of lending, one of the drivers of high inflation, as they have been used in other eu member states, including ireland. mr. hansen could surely have talked about the promotion of exports and strengthening of domestic competition, including increasing the number of small and medium businesses and augmenting their efficiency as essential for the stability of the economy and currency. finally, he could have discussed restructuring latvian exports to the advantage of goods and services with a higher value added, which would have a strong beneficial impact on the ability to compete. instead, the economist has regrettably chosen another route : to play with fire in the pages of diena and to frighten the population of latvia. as a solution for the loss of ability to compete he offers devaluing the lats, i. e. reducing its value. his pronouncements have not gone unnoticed in the public space and for that reason i will henceforth outline the central bank ’ s position on this issue. the loss of ability to compete is a factor that is unequivocally detrimental to the latvian economy : we are in full agreement here, yet i categorically oppose his suggestion that devaluation would be the right medicine here. it would be poison! what consequences would devaluing the lats produce? reducing the value of the lats would drive the prices up even more and everybody would be affected. imported goods, raw materials, energy would all become more expensive. the potential relief to entrepreneurs would thus be short lived or nonexistent. the rise in the standard of living would become more remote because the value of savings in lats would decrease accordingly. in addition – and this is of crucial importance – confidence in the lats as a payment and savings instrument, which has taken years to build, would disastrously diminish both in latvia and abroad. about 75 % of the loans granted to latvian households are in euro whereas the income is in lats. should the lats