Latvian inflation rates, 2004 – present. Source: Central Statistical Bureau of Latvia
A very small window of opportunity
In the ?fat years' it was the high rate of inflation that precluded Latvia from joining the eurozone. Today it is the budget deficit (still far above 3% of GDP), long-term interest rates (still too high; the Maastricht criterion stipulates that it should be less than the average of the three lowest (currently Germany, Denmark and the Netherlands) plus two percentage points. At 7.55% for Latvia this still exceeds a criterion of around 5% (1/3*(2.91 + 3.01 + 3.16) + 2 = 5.03%) and, technically, the exchange rate criterion due to the support from international lenders. Only the debt-to-GDP criterion (max. 60% of government debt to GDP) has never been broken.
The IMF-EU package envisages the budget criterion to be fulfilled by 2012. If so, Latvia should have gained credibility from financial markets thereby lowering borrowing costs and thus also fulfilling the interest rate criterion and the road to the eurozone lies open.
