FRANKFURT (MNI) – A Eurozone enlargement appears off the table as
the European Central Bank is concerned over long-term inflation
developments in the most likely accession country, Latvia, the ECB’s
2012 Convergence Report showed on Wednesday.

Of the eight countries the ECB assessed in its biannual report,
only Latvia and Lithuania have tied their currencies to the European
Exchange Rate Mechanism II. Any country adopting the euro must keep its
currency within the exchange rate band for at least two years.

Latvia has reaffirmed its intention to join the euro in 2014, while
Lithuania has kept its cards closer to its chest. The uncertainty over
the Eurozone’s future may well dampen the previous rush to join the

According to the report, Latvia only meets two of the five key
convergence criteria — namely staying successfully in ERM II and
meeting the 5.8% reference value for long-term interest rates.

Latvia failed to meet government budgetary requirements since its
2011 general government budget balance showed a deficit of 3.5% of GDP,
exceeding the 3% threshold. The country also did not meet all
requirements “for central bank independence, the prohibition on monetary
financing, and legal integration into the Eurosystem,” the report said.

Most importantly, however, the ECB appeared very concerned about
Latvia’s prospects for sustainable inflation convergence. Latvia not
only failed to meet the criteria in 2011, but may find it hard to do so
in future, the ECB said.

“The catching-up process is likely to have a bearing on inflation
over the medium term, given that the GDP per capita level is still
significantly lower in Latvia than in the euro area and that the price
level in Latvia is still approximately 30% lower than in the euro area,”
the report said.

“Given the tightly pegged exchange rate and the limitations of
alternative counter-cyclical policy instruments, it may be difficult to
prevent macroeconomic imbalances, including high rates of inflation,
from building up again,” the ECB cautioned.

Just as potential new member states may be more cautious in joining
the currency union, the ECB will likely be more careful in their
convergence assessment, suggesting Latvia may find it hard to gain euro
membership in 2014.

In the press release accompanying the report, the ECB stressed its
focus on “sustainability of convergence.” In a hint that it will not
repeat mistakes of the past, the central bank also said that it would
take “due account of both the new enhanced economic governance framework
of the EU and the strength of the institutional environment in each
country, including in the area of statistics.”

–Frankfurt newsroom +49 69 72 01 42; Email:

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