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Latvia and the Euro

Latvia and the Euro. Ilmārs Rimšēvičs Governor . Latvijas Banka. October , 2013. Despite loud ex ante warnings of protracted recession risks under internal adjustment scenario, a strong “V” shaped recovery followed. Real GDP growth , %. Source: CSB.

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Latvia and the Euro

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  1. LatviaandtheEuro Ilmārs Rimšēvičs Governor. Latvijas Banka October, 2013

  2. Despite loud ex ante warnings of protractedrecession risks under internal adjustment scenario,a strong “V” shaped recovery followed Real GDP growth, % Source: CSB

  3. Latvia has implemented sizable fiscal consolidation underpinned by structural reforms Breakdown of budget consolidation measures, % of GDP Source: Ministry of Finance; Bank of Latvia staff calculations

  4. CurrentlyLatvia’seconomyisbalancedandgrowsatthefastestpacein EU Annual GDP growthin 2Q 2013, %

  5. Euro brings a change of perspective 5

  6. Why euro on 1 January2014? • Crucial decisions are made within the euro area, Latvia will participate in making decisions that affect our daily life • Why not to take advantage of the benefits as soon as possible? • Euro area isnotcollapsingbutgettingstronger • Credible compliance with Maastricht criteria Source: Bank of Latvia, * - Convergence report of May 2013

  7. Latvia will benefit fromEuro introduction in manyways Long term interest rate ↓ Credit rating↑ Government debt service↓ Investment↑ Exports↑ Budget balance↑ GDP ↑ Income account↑ Consumption↑ Direct taxes↓ Current account↑ Disposable income↑ Net foreign assets↑ Welfare↑

  8. Euro will help save government money by lowering debt servicing costs Additional annual interest payments failing to introduce the euro and continuing to borrow and refinance the debt in the financial market (EUR million) Savings of EUR 787 million in 10 years Source: Bank of Latvia’s estimates

  9. Ratings of countries that joined the euro area in the latest enlargement rounds have improved by up to 3 notches Change in major credit rating agency ratings a year before and after the country joined the euro area Source: Bloomberg

  10. Otherthingsbeingequal, euro will raise Latvia’s credit rating Long-term foreign currency credit ratings for Latvia and Estonia AAA AA+ AA+ AA– A+ A+ A– BBB+ BBB+ BBB– BB+ BB+ BB– B+ B+ B– AAA AA+ AA AA– A+ A A– BBB+ BBB BBB– BB+ BB BB– B+ B B– Source: Reuters

  11. The "devaluation ghost" and the related costs will cease to exist RIGIBOR indices RIGIBOR and EURIBOR indices Avots: BankofLatvia

  12. Euro will save transaction and conversion costs (EUR 650 million in the last 6 years) EUR/LVL foreign exchange conversion for customers of bank and currency exchange offices (EUR million) Source: Bank of Latvia, costs have been calculated on the basis of turnover and exchange rate difference in cash and non-cash EUR/LVL transactions in banks and currency exchange offices

  13. Had the euro been introduced in 2008, the financial crisis in Latvia would have been less severe

  14. Impact of introduction of euro on prices in previous cases was small relative to other factors (oil prices, tax increases etc.) Impactofeurointroductiononinflation InflationinEstonia (%) ConsumerprotectionactivitieslaunchedalreadyinLatvia Source: Eurostat

  15. Long-term benefits will outweigh short-term costs

  16. InfacteuroisalreadywidelyusedinLatvia Source:BankofLatvia

  17. To whatextent do youagreewiththefollowingstatements? TheGovernmentshouldnotspendmorethan it earns 91,2% 4,5% 4,3% Inthecomingyears, thenational debtanddebtserviceburden shouldbereduced 87,3% 5,4% 7,3% Lowinterestratesonloansare importantforthedevelopmentofthecountryandforindividualborrowers 86,1% 3,6% 10,3% Intheeconomicsphere, Latviashould activellycollaboratewiththestrongestpartners 82,7% 8,7% 8,6% Latviamustshowsolidarityto otherEuropeancountries becauseinthelongrun it willbebeneficialalsoforus 78,7% 10,4% 10,8% 0% 25% 50% 75% 100% Fully + more agree Fully+ more disagree Don’tknow/NA Population in Latvia generally welcome the implicit benefits from the euro and share euro zone's main working principles Source: Latvijas Fakti

  18. Public support for euro is steadily increasing Respondents attitudetowardseurochangeoverinLatvia Source: TNS Latvia

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