On March 11, 2011 the Heads of State or Government of the Eurozone endorsed the Pact for the Euro. At the 24/25 March 2011 European Council, the same Heads of State or Government agreed on the Euro Plus Pact and were joined – hence the ‘Plus’ – by six others: Bulgaria, Denmark, Latvia, Lithuania, Poland, Romania (leaving only the UK, Czech Republic, Sweden and Hungary out).
The objective of the pact is to foster competitiveness, foster employment, contribute to the sustainability of public finances and reinforce financial stability. In the Euro-Plus-Pact the Heads of State or Government have entered into commitments on a number of policy areas, in which member states are competent.
What political/legal difficulties did Latvia encounter in the negotiation of the Euro-Plus-Pact, in particular in relation to the implications of the Pact for (budgetary) sovereignty, constitutional law, socio-economic fundamental rights, and the budgetary process.
There is no information concering any difficulties encountered in the negotiation process.
The Prime Minister of Latvia (Valdis Dombrovskis) in the European Council meeting on 24-25 March 2011 confirmed that Latvia is ready to join the Euro Plus Pact. He argued that by joining this Pact Latvia participates in increasing the EU competitiveness and will be part of the EU strategy for economic growth.
From the Informative Report from April 2011 it follows that Latvia joined the Euro Plus Pact because of its aim to join the Eurozone on 1 January 2014. The Report further states that Latvia will identify the necessary actions to reach the aims of the Pact and will implement them into the Convergence Programme and the National Reform Programme.
In general Latvia aspired to realise a more effective Euro Plus Pact and was in favour of determining specific objectives and/or reference indicators for the courses of action established by the pact. Latvia supported the current European semester process and the individual recommendations for the Member States. The general national position concerning the Pacts which can be found on the webpage of the Ministry of Foreign Affairs states that the tax policy is considered a very important instrument for Latvia for attracting investments; therefore it wants to maintain national competence over tax policy. At the same time Latvia agrees to continue the coordination of tax policy questions among the Member States. It’s position was that it could support initiatives in the area of direct taxation, if they are based on non-binding recommendations. In addition, Latvia was in favour of actions aimed at coordinating the needs of labour markets with the skills of workforce.
The positions of Latvia approved by the Government remained unchanged after the approvals in the Parliamentary Committee for European Affairs (PCEA). From the minutes of the meeting of the PCEA on 23 March 2011 it follows that the Foreign Affairs Minister (G.V. Kristovskis) informed the MPs that because the competitiveness and convergence have to be improved in the EU as a whole and not just in the Eurozone, and Latvia aims at joining the euro in 2014, Latvia is ready to join the Euro-Plus-Pact. The minutes state that Latvia supported the Pact’s aims to facilitate competitiveness, employment and sustainability of state finances and financial stability by at the same time taking into account that the choice of measures remains with the Member States. G.V. Kristovskis stressed that he appreciates that the Pact remains within the framework of the existing procedures and instruments. It was planned to include the actions for fulfilment of the Pact in the National Reform Programme and Convergence Programme.
The position of Latvia concerning particular aspects:
– The competitiveness objective: The national exclusive competence has to be fully respected in the social area regarding determination of wage levels and development of pension systems. The different practice and situation in various Member States has to be taken into account. Investments in research and development in Latvia are one of the lowest in the entire EU; therefore availability of EU funds was considered to be very important here.
– The employment objective: Latvia supported tax reforms with an aim to facilitate employment.
– Sustainability of state finances objective: Latvia welcomed the determination to strengthen sustainability of state finances. The position stated that Latvia has already implemented various activities towards strengthening fiscal sustainability in the legal framework (e.g. a Law on Fiscal Discipline). Latvia fully supported that fiscal discipline should be embedded at all levels.
– Financial stability objective: Latvia intended to continue active participation in developing initiatives in the area of financial stability and in case of necessity undertook to implement them in the national legal framework.
The position for the European Council of 23-24 June 2011, approved in the Parliamentary Committee for European Affairs (PCEA) on 21 June 2011, provided that Latvia agrees that in the future the Euro-Plus-Pact Member States should strive to better reflect the measures for fulfilment of the Pact’s requirements. At the same time the position stressed that the choice of these measures remains the individual responsibility of each Member State in light of the particular situation and available resources. 
What other information is relevant with regard to Latvia and the Euro-Plus-Pact?
There is no information concerning any changes to the rules and practices of the budgetary process specifically aimed at complying with the Euro Plus Pact. However, in general the adoption of the Law on Fiscal Discipline has been mentioned as an example for implementing Euro Plus Pact requirements.
Latvia dealt with the consideration of the necessary actions which should be undertaken in order to comply with the Euro Plus Pact in the Convergence Programme and the National Reform Programme. The compliance with the Euro Plus Pact was done together with compliance with the Memorandums of Understanding (MoU). There was no clear separation in the dealing with both of these instruments. The Convergence Programme stated that
“At the same time with carrying out the measures foreseen in the MoU, Latvia respects the Annual Growth Report and macroeconomic and fiscal guidelines, as well as the commitments under the Euro Plus Pact”.
Inter alia, the Convergence Programme provided that the obligations under the Euro Plus Pact have been dealt with and will be dealt with as follows:
– The task to ensure the sustainability of state finances
The general budget deficit in 2011 was 3.5% GDP. The budget for 2012 was prepared with a planned deficit of 2.1% GDP. Latvia had ensured the achievement of governmental budget and has tried to ensure a smaller budget deficit than requested by the international financial assistance programme in order to ensure the obeyance of the Mastricht criteria concerning budget deficit and to ensure the termination of the excessive deficit procedure. During the financial assistance procedure the cooperation with the European Commission and the IMF has been very active and any essential decision having fiscal impact has been discussed with them. During the preparation of the 2012 budget a list of measures for reducing the deficit was prepared. The draft law for the 2012 budget was submitted to the Parliament in the end of November 2011 and not the beginning of September as originally planned due to the emergency elections in October 2011 (see in more detail Question I.1). The Programme states that with all this the tasks under the Memorandum of Understanding, the Annual Growth Report and the Euro Plus Pact have been fulfilled.
In order to ensure the sustainability of the social insurance system which is one of the commitments for Latvia under the Euro Plus Pact, it was planned to increase the retirement age to 65 years, increase the early retirement age and increase the minimal record of service for eligibility for state pension to 15 years. This has been done with the changes in the Law on Pensions which provided that starting in 2014 the retirement age will increase for three months every year. From 2025 on the retirement age will be 60 years and the minimal record of services for eligibility for state pension – 20 years.
– The strengthening of the financial sector
The work concerning bank restructuring was continued, as well as the work to strengthen the stability of the financial sector in compliance with the Memorandum of Understanding and Euro Plus Pact.
An Advisory Council for State aid for program coordination and development had been established based on the government decision of 1 November 2011. The main task of the Council is to evaluate all existing state aid instruments. The Council evaluates the state aid programmes which fully or partly are implemented in the form of financial instruments.
In 2011 the Government approved the strategy for selling Parex bank and Citadele bank. It was planned to sell one of the banks in an auction but due to the situation in the financial markets this decision has been deferred. It is planned to sell this bank before the end of 2014.
It has been decided to change the status of the Parex bank and waiver its credit institution licence. In accordance with the restructuring plan approved by the European Commission the bank will continue the asset development to maximally regain the state investments. The working period for Parex bank has been determined until 2017.
According to the Convergence Programme the stability measures for the financial sector are being continued. The Financial and Capital Market Commission continues to improve the normative framework in order to promote strengthening of the capital base of the banks. Alongside individual ‘horizontal’ bank checks are carried out in order to evaluate banking loan restructuring processes, market risk management and implementation of policies in accordance with Financial and Capital Market Commission provisions.
In the fall of 2011 the Financial and Capital Market Commission suspended the activity of AS ‘Latvijas Krājbanka’ and the bankruptcy procedure was started in the beginning of 2012.
The licencing of consumer credit providers (non-bank) began on 1 November 2011 in order to increase the protection of consumers.
The Convergence Programme foresaw that in 2012 and in the following years legislative measures will be taken in the financial sector connected with implementation of EU instruments adopted in this area and in order to improve the legal framework in general. In order to improve the legal framework for insolvency and liquidation of credit institutions, the Law on Credit Institutions will be amended. It was planned to improve the framework for supervision of credit institutions.
– The facilitation of competitiveness and growth
Measures to ensure effective and transparent use of EU funds and to improve the quality of evaluations (e.g. seminars, workshops) were carried out. The question of optimization of implementation of EU funds was incorporated in the Government Declaration for the 2014-2020 planning period (for example, consolidation of work of institutions dealing with EU funds).
Measures to ensure more effective use of energy and natural resources have been carried out. The work in progress is “the Strategy for Energetics 2030”. The EU measures in this area are being implemented, especially concerning the liberalization and integration of EU energy markets.
– The Employment
Measures to implement effective active labour market policy with an aim to reduce the high risk of structural unemployment and to increase the employment and the level of economic activity were carried out. In addition, measures to reduce the black economy are being implemented and as well it is planned to reform the tax system of labour market.