Conference "Real Convergence on the Road to the Euro: Experience and Prospects"

Overall, the speakers at the conference voiced the opinion that specific action plans should be developed and implemented, first, to ensure the compliance with the Maastricht criteria and successful changeover to the euro as soon as possible, and, second, to improve labour productivity on the basis of knowledge economy and innovation.

In his introductory remarks, Governor of the Bank of Latvia Ilmārs Rimšēvičs brought to the fore the most important arguments already voiced in support of the euro changeover, emphasising the importance and pressing nature of the changeover as well as the need to set the nearest possible target date. The Governor appealed to the economic policy makers to set the year 2012, or 2013 at the latest, as the target for the euro changeover and to develop a concrete plan for the attainment of this target, one that would be realistic and trustworthy.

The benefits offered by the euro changeover are best seen in the light of euro absence and its effects on the economy. Without the euro Latvia is merely a European outback and it is exactly what the investors, rating agencies and cooperation partners think of us. Without the euro, borrowing is more costly for the Government, companies and private persons. The corporate sector needs the euro to boost their trade potential. The euro is a crucial guarantee for the country's macroeconomic stability whose worth can be clearly seen amid the ongoing global financial market turmoil. The Governor figuratively described the euro changeover as leaving a small boat of the billowing economy and climbing aboard a big and safe liner.

Slovakia is a country that has succeeded in taking advantage of the upswing in the global economic cycle to enhance its real economy, boost gross domestic product and achieve macroeconomic indicators consistent with the Maastricht criteria. It was noted during the discussion that the compliance with the criteria in a converging economy cannot occur on its own or be allowed to slide: resolute action on the part of economic policy makers and timely involvement of various institutions and interest groups, including employers and employees, are needed. In the four years after the launch of the euro changeover plan Slovakia has recorded notable achievements in lowering its problem indicator, inflation, from 8.9% to 2.2% and in implementing the reforms supporting a stable long-term development.  It proceeded in the environment of a buoyant growth when the goals of balanced development, price stability and euro introduction were underpinned by an appropriate macroeconomic policy, including a lower budget deficit and government debt, and restricting the wage growth to match improvements in labour productivity.

Juraj Sipko, Advisor to the Governor of Národná banka Slovenska, not only gave a detailed analysis of the steps taken by his country toward the euro changeover, but also dealt with the issues to be addressed in the future so that the new euro area country can reap the benefits provided by the single currency and to converge with the levels of economic development in other euro area countries as soon as possible (convergence in 18 years according to the basic scenario). Mr. Sipko noted that the euro gains do not come automatically; therefore the euro changeover must be accompanied by a supportive national macroeconomic policy, movement toward knowledge economy, higher labour market flexibility and similar economic policy solutions.

In his opening address Anrijs Matīss, State Secretary of the Ministry of Economics, diagnosed Latvia's real convergence and also outlined the direction for the conference discussions to follow: the boisterous growth in GDP in Latvia has not been supported by similarly strong growth in productivity; in that respect Latvia lags far behind the industrial countries, and the preconditions for sustainable long-term growth are therefore yet to be created.

Mr. Kazāks emphasised the interrelation between real convergence and compliance with the Maastricht criteria as a precondition for the euro changeover: in order to attain good macroeconomic indicators real economic convergence is indispensible, and, vice versa, the compliance with the criteria is a must to attain income growth and broad real convergence. Notwithstanding the argument that a longer preparation period might theoretically result in a better economic convergence with the euro area countries, the speakers at the conference noted that in reality it would actually mean a process opposite to integration, as in terms of investment and trade partnership Latvia's links with the euro area countries are weaker than those of the other new EU Member States.

The impact of nominal and real convergence is vividly illustrated by the correlation between inflation and real convergence. The analysis by Reiner Martin, an ECB economist, showed to what extent the structure of Latvia's real economy is reflected in consumption patterns of the population and hence also the inflation rate, which in Latvia more than in developed countries is currently driven by expenditure for food and energy, both in terms of population expenses and energy consumption unit costs. As a consequence, food and energy price rises in the global markets have a stronger impact on inflation in Latvia.

Productivity is crucial for Latvia's economic development and income growth. Mr. Rutkaste and Mr. Kazāks emphasised that, despite data-supported productivity growth in the major sectors of the economy, the respective improvements have so far been associated with large capital inflows whose potential has not been used efficiently to boost competitiveness at the sector and national levels.

Panel II analysis of economic indicators was followed by a discussion of adjustments needed to improve labour productivity in Latvia, with a central focus on raising the level of education and knowledge. The conference participants arrived at a unanimous conclusion that along with an adequate assessment of the situation and the ideas that abound in Latvia, resolute and prompt actions of the involved institutions are necessary. The delayed launching and operation of the National Support Programme for Promoting Exports served as a negative illustration to the statement.