“The first impression of the Latvian economy is very positive, with the highest growth rate in Europe … But at the same time, this has created imbalances, (which) should be tackled to sustain growth,” Almunia told journalists after meeting Latvia’s Prime Minister Aigars Kalvitis and Finance Minister Oskars Spurdzins. “My suggestion to the Latvian authorities is to use a more active fiscal and budgetary policy in a counter-cyclical way,” he added.
Since Latvia joined the EU in May 2004 it has recorded one of the fastest economic growth rates in the Union’s history, topping 11% growth for six quarters in a row. But that rapid growth has been matched by stubbornly high inflation – 8.8% annually in June – together with wage growth of an average of 34.6% in 2006, and a current-account deficit which topped 22% of GDP last year. The figures have caused alarm in financial markets, with rating agency Standard & Poor’s downgrading its estimate of Latvia’s financial outlook earlier this year. “If the authorities are not able to tackle (these problems), they won’t be able to deliver sustainability, and in years to come, their citizens will ask why,” Almunia said.
The issue of economic overheating has been a topic of debate in Latvia since spring 2005, with economists advising the government to cut spending, take steps to tame rampant domestic consumption, boost industrial productivity and cool an exuberant property market. In spring the government unveiled a long-awaited anti-inflation plan. The plan received mixed reviews, with some economists praising its scope and others saying that it was too limited and too late. In his speech, Almunia also welcomed the plan, but called on the government to take more decisive action, particularly in the terms of its own budget. The government currently plans to present a balanced budget this year, with a surplus of 0.1% of GDP next year and 0.3% in 2009, Spurdzins said. Given Latvia’s current rapid growth, “a balanced budget is equivalent to a pro-cyclical policy. A counter-cyclical policy would require a budget surplus,” Almunia pointed out.
Latvia currently hopes to join the euro-zone in 2012-13, Spurdzins said. (eux.tv)
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