• How can Latvia afford to help out indebted nations? Slovakia, for example, has given Ireland 320 million euro.

Latvia as a country who was severely hit by global economic and financial crisis and was in need of financial assistance which was provided to us by our international partners highly appreciates common solidarity principles and stands ready to provide financial support to other countries in financial trouble within margins of our financial possibilities. One way how Latvia will ensure stipulation of these principles will be joining European Stability Mechanism (ESM), similarly like our Baltic neighbor Estonia did. On one hand by making this step Latvia will provide its contribution to pay back solidarity debt once provided to us when it was so materially needed. On other hand ESM members, if such need emerges could receive support from ESM for possible future turbulences in their own economies and this aspect is of high importance from point of view of stability and prudence of all Eurozone.

Further help to indebted nations will be provided through the ESM (European Stability Mechanism), no bi-lateral loans are envisaged. Latvia’s contribution to the ESM would be approximately 200 million EUR over a five-year period and EUR 115-120 million after the first 12 years. The current stance of the ESM and EFSF is that the ongoing EFSF lending programmes for Ireland, Portugal and Greece will remain with the EFSF. The ESM does not intend to assume the obligations of the EFSF.

• As Latvia has never made a surplus, has received massive bailouts, and has seen two major banks fail - which were paid for by the tax payer - is euro adoption a sensible move for a nation prone to record inflation in the past?

There were different views in both international and domestic society about Latvia’s decision to adopt euro in time when EU and Eurozone is facing economic and financial difficulties. Now gazing back from current perspective we can say the following:

• Euro adoption in Latvia from 1st January 2014 has been defined as a crisis exit strategy during international loan progrmme. Therefore it was substantial factor when taking decisions on mechanisms to overcome adverse effects of financial and economic crisis – internal devaluation, fiscal consolidation, sound exchange rate policy. Key element was stability of defined policy course.
• It is important to notice that euro adoption is in line with Latvia’s strategic interests both economic and social – ensure productivity-oriented economic development and deepen well-being of our citizens in every aspect of everyday life.
• Similarly, it is worth mentioning that developments in Latvian economy is in line with sustainability rules set by Maastricht criteria thus signaling on good economic shape without economic overheating risks.
• Inflation is indicator which describes activity and stability of domestic market. It has to be pointed out that inflation is directly correlated to economic growth and most probably we may see in future that both inflation and growth rates in Latvia on average will be higher than in old Europe but convergence of prices will be more connected with productivity growth and less with other factors.
• In recent years Latvia has been country with low core inflation majority of price increases stemming from global price developments and adjustments of tax policy. Past unsustainable inflation trends were direct effect of different one-off factors which realized in single period of time: low private debt level, undeveloped financial sector and weak regulation, aggressive struggle of foreign banks for market shares, structural character of demand for housing, pro-cyclical fiscal policy etc.
• To ensure sustainable inflation developments and prevent further real estate price bubbles there have been made significant improvements in regulation of financial sector as well as in tax policy. Also other factors – more cautious crediting policy, still high indebtness of private sector and increase in housing fund - have to be taken into account which in practice exclude supply side adverse shocks.
• With the adoption of Fiscal Discipline Law in the beginning of 2013 the further fiscal policy framework is based on the conception of balanced budget over the business cycle thus reinforcing counter-cyclical fiscal policy principles both in tax and budget expenditure planning thus minimizing pro-cyclical developments in national economy.

• According to data from Eurostat, nearly 60% of the Eurozone members don?t hit the debt-to-GDP criteria as setup by Maastricht (since 1999). Why join such a group? Moreover, nearly 50% of the Eurozone members don?t hit the annual deficit-to-GDP criteria as setup by Maastricht (since 1999). Again, why join such a group?

Judgments arising just from statistics and raw numbers not always provide full picture of economic development and well-being of particular country. It has to be taken into account that majority of Eurozone countries are far ahead Latvia in terms of economic and technical development, economic complexity and welfare state.

Other aspect is that European policy agenda in recent years have been much dedicated to overcome economic and financial difficulties by strengthening fiscal regulation with introduction of six-pack, two-pack and Fiscal compact, making further steps to create Banking union, deepening of European Monetary union in several aspects.

Important issue is that all these ambitions are mainly elaborated for Eurozone countries therefore choice to be made is distantly clear – to be in European core or stay in periphery.

• Why have the UK, Denmark and Sweden opted out of the euro despite being in the EU?

Every of upper mentioned countries has its own unique reasons and conditions why to still stay out of Eurozone. But it has to be mentioned that conjunctive factor which allowed all these countries keep their own currencies is that these are much larger economies with bigger monetary base thus reducing currency devaluation and speculative attack risk. In Latvia’s case, we have to take into account that our economy is relatively small and very open in terms of trade meaning that our potential development could much depend on success in international trade.  Also substantial factors are our geographical location and deep integration in European economy.

• Is Latvia accepting too great a risk to suffer losses by joining the euro area should the economic problems in the euro area deepen?

Should the economic problems in the euro area deepen, Latvia would suffer additional losses anyway. As a member of the euro area, we can participate in solving these problems.

By joining the euro area, we have committed ourselves to participate in the common euro area`s problem solving both in other euro area countries and, if necessary, in our own country. The other euro-area countries have made a similar commitment, so the issue of possible rescues should not be viewed one-sidedly, i.e. from the point of view of costs.

Any deepening of the economic problems in the euro area would mean that Latvia would incur additional losses in any case, because the Latvian economy is open and integrated with the European Union. Being in the euro area, the Latvian financial system will more protected against any possible negative impact. Moreover, only as a member of the euro area Latvia will be able influence decision-making on possible solutions to euro area’s problems , whereas outside the euro area we would have to implement decisions made by others.

• Will Latvia may have to pay for debts of other euro area countries after the introduction of the euro?

Latvia will not have to pay for the debts of other euro area countries.

The hitherto used help instruments (bilateral loans to Greece and the European Financial Stability Facility) have already fulfilled their objectives and Latvia will not be involved in funding assurance.

The population of Latvia can rest assured: we won`t have to be involved in Greece, Portugal, Ireland problems antedate.

Henceforth, the support will be provided by a permanent crisis resolution mechanism - the European Stability Mechanism (ESM).

By joining the euro area, Latvia will become an ESM "shareholder". In substance, the ESM is an insurance policy where the euro area countries participate as shareholders and if necessary receive financial support. To decide on the ESM operating framework change (for example, changes in capital and stock structure), a unanimous decision of all the euro area finance ministers is needed, including, potentially, Latvian.

The myth is not justified that the Greek Government debts are written off: in fact, only private investors were forced to write off part of the Greek government debt, the liabilities to official lenders will still have to be met.

Guidances for more information: Articles www.bank.lv and www.macroeconomics.lv on the European Stability Mechanism and Greece