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Address by Prime Minister Valdis Dombrovskis at the Euro Conference – Latvia


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Address by Prime Minister Valdis Dombrovskis at the Euro Conference – Latvia

  1. 1. 12.09.2013. Address by Prime Minister Valdis Dombrovskis at the Euro Conference – Latvia. Ladies and Gentlemen, Welcome to Latvia and Euro Conference – Latvia! On 1 January 2014, Latvia will become the 18th euro area member state. It will become the first euro area country that has been successful in overcoming the state financial and competitiveness crisis under conditions of a fixed exchange rate. Thus Latvia has not only fulfilled the Maastricht criteria but also demonstrated its ability to deal with the same problems now plaguing a number of euro area countries. In a week, it will be 10 years since the Latvian people voted in a referendum to join the European Union: two thirds of the voters then supported joining the EU, which demonstrated unequivocally and clearly that the population supports Latvia's integration with the European Union. In these past ten years, we have managed to learn from our mistakes, gain experience and strengthen Latvia's international presence – the most important contribution in that regard was made by Latvian entrepreneurs who have managed to establish brands recognized in Europe and elsewhere in the world. As a result of its structural reforms, Latvia is currently among the countries with the greatest potential of growth in the EU. As the European Commissioner for the budget Mr Lewandovsky just noted, the Directorate of Monetary and Economic Affairs of the European Commission has ranked Latvia among the four countries of Central and Eastern Europe with the greatest potential for growth and convergence by 2022. That is confirmation of our achievements in straightening out our economy and creating conditions favourable for growth, where euro introduction plays an essential role Latvia is joining the euro area at a time when the latter is experiencing the deepest crisis in its history. It is no surprise that the question I am asked most often is why Latvia has chosen this
  2. 2. 2 particular moment to join. If ten years ago the euro area was an exclusive club that everyone wanted to join, nowadays countries proceed with much more caution. And it is understandable: the euro area crisis that has lasted already four years has given rise to much doubt and scepticism regarding the monetary union. To answer the question of why Latvia chose this very moment to join, however – there were a number of practical considerations. Yet I would like to stress something else: in such situations, it is important to be able to distinguish between short-term instability from long- term trends. The current crisis, albeit unpleasant, is a natural part of a tighter economic integration process. Because the conditions of global competition, countries will have to form ever closer mutual economic ties; regional economic integration is an essential precondition for their competitiveness in the future. This particularly applies to small countries and it is particularly important in Europe where there are many relatively small countries. It is very hard to imagine how a fragmented Europe, with dozens of small currencies and different strategies for increased competitiveness, could successfully compete in the future. And because the future of Europe is unimaginable without the euro area, it is in Latvia's interest to become a part of the monetary union, thus substantially improving its long-term chances for economic growth. But just as important as to distinguish fluctuations from tendencies is to realize that a tighter economic integration is just a precondition for competitiveness and that in and by itself it is no guarantee of success. Concerning the current crisis, we therefore have to admit that it is fundamentally a crisis of competitiveness. The extra attention that Latvia receives now that it is poised to join the euro area, will once again serve to remind the world of the actual reason for our success. It was not austerity policy but the straightening of state finances and structural reforms that allowed us to regain competitiveness. I hope that our experience will serve to inspire and push forward long since needed reforms at the EU level. First, it involves establishing a banking union. It is an essential precondition for the euro area to be able to return to healthy growth. The weak balances of euro area banks prevent them from resuming lending. Without lending, resumption of stable growth is not likely. Formation of a banking union would cut the noose of mutual dependence of weak banks and countries suffering under burdens of debt.
  3. 3. 3 Second, speaking of increasing our long-term competitiveness, we are planning to actively support the faster implementation of such initiatives essential for European competitiveness as the establishment of a digital single market, completion of single market for services as well as signing free trade agreements with the USA and other partners. A full implementation of these initiatives would provide additional growth in the amount of 7% of GDP. At a time when most of the euro area countries are stagnating or experiencing growth that does not exceed 1% of GDP, introduction of these initiatives would ensure resolving the crisis as well as much more favourable conditions for further growth in the EU. I would like to note that expanding and perfecting the digital single market will be one of the priorities of Latvian EU presidency in 2015. Much has already be said about the many concrete economic benefits that adopting the euro will bring: a more stable financial environment, lower interest rates, lower trade costs and simply a more comfortable life. However essential these benefits, they will not by themselves raise Latvia's prosperity in the longer term. That is why it is not wrong to say that euro introduction is no magic wand and that it does not mean that the work is over. These benefits in and of themselves do not free us of the need to continue to take measures that would increase our competitiveness and raise our prosperity level in the long term. The most important challenges for Latvia's competitiveness in the near future will be increasing the role of the exporting sector in Latvian economy and narrowing the inequality gap. Since it is a rise in productivity that will be the main source of increased prosperity for the population, it will be particularly important to ensure an increased proportion of manufacturing and other exporting sectors in our economy. It is these very sectors where the potential for productivity growth is the greatest. Concentrating our resources in support of the industries that are capable of producing and granting services with a high value added is the most effective way to raise the overall prosperity level in the country. Secondly, we should pay attention to the high inequality as an important factor that has a negative impact on Latvia's competitiveness. Latvia is among the countries with the highest inequality of income in the EU and this fact has merited a special emphasis in the 2011 evaluation report regarding Latvia's competitiveness. The high inequality prevents Latvia from fully using its growth potential. Consequently, reduction of inequality has been set as one of the goals in the National Development Plan. Addressing this problem, the bulk of resources in the post-crisis period has been concentrated on reducing inequality. Much work
  4. 4. 4 is being done to relieve the tax burden of employees, raise the minimum wage and raising the lower salaries in the public sector. Means have likewise been allotted to raise the quality of healthcare as well as to improve various social services, thus improving the quality of life of the least protected part of the society. In the context of next year's budget, an agreement has been reached to raise the minimum wage to LVL 225 (EUR 320), relief for dependents to LVL 136 (EUR 193.51 and the untaxed minimum to LVL 54 (EUR 76.83). Reducing inequality is not an issue to be solved through one budget, however. If we really want to have a more equal society in ten years, we will have to invest in education and healthcare, implement employment stimulating tax policies as well as continue to incrementally raise the minimum wage Just as, without any rational reason, the turn of the year often seems to serve as a point of reference for getting rid of bad habits or starting a new life, introduction of the euro tends to be considered in part as an opportunity to begin a new period in Latvia's development, symbolically closing the post-crisis or recovery period. Yet there is some rational reason why euro introduction could stimulate the beginning a new era in Latvia's development. The experience of the crisis and post-crisis periods has led us to several essential conclusions that will be particularly useful to us in the euro area. This experience has changed our understanding of how a country achieves prosperity and on what it should be based – i.e. an increase in real wages supported by increased productivity; budget expenditures that do not exceed revenues and a resolve to always observe these rules. It is my great hope that the introduction of the euro will serve Latvia as a springboard for a higher quality and more inclusive growth in the future. Additional information: Mārtiņš Panke Prime Minister's Press Secretary Tel.: +371 67082865, +371 26556965 E-mail: