June 5, 2013 / 11:11 AM / 7 years ago

Factbox: How Latvia met criteria for euro zone entry

BRUSSELS (Reuters) - Latvia will enter the euro zone and become the bloc’s 18th member on January 1, 2014, receiving a green light from the European Commission and the European Central Bank on Wednesday.

European Union countries aspiring to adopt the single currency need to fulfill criteria in four areas: inflation, public finances, the exchange rate and long-term borrowing costs.

INFLATION

* Inflation in the candidate country needs to be close to that in the three best performing EU members for a period of one year before examination of the country’s bid. The upper limit for inflation is calculated as the average of the three best performers, plus 1.5 percentage point.

* Latvia’s inflation was 1.3 percent, well below the reference value of 2.7 percent.

DEFICIT/DEBT

* A country’s budget deficit must be below the European Union’s limit of 3 percent of gross domestic product (GDP) in a sustainable way.

* Latvia’s deficit fell to 1.2 percent of GDP in 2012 and is expected to stay at that level in 2013.

* Latvia’s general government debt stood at 40.7 percent of GDP in 2012, below the European Union’s official limit of 60 percent of GDP.

EXCHANGE RATE

* A candidate country’s currency must remain relatively stable against the euro over two years, in what is called the Exchange Rate Mechanism (ERM-2). The currency can appreciate, but should not devalue in a significant way.

* Latvia joined ERM-2 in May 2005. Its exchange rate has been within the plus/minus 1 percent band around the central rate and has not experienced significant tensions.

* The final exchange rate at which Latvia’s currency, the lat, will be irrevocably converted into the euro will be set at a meeting of European Union finance ministers on July 9.

LONG-TERM BORROWING COSTS

* Yields on long-term government bonds issued by the candidate country should not be more than 2 percentage points above the average of the three European Union countries with the lowest inflation, which were used for setting the price stability criterion.

* Latvia’s average long-term interest rate over the year to April 2013 was 3.8 percent, below the reference value of 5.5 percent.

Reporting by Martin Santa; editing by Rex Merrifield

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