EU envoy warns Latvia its economy is at risk

July 15, 2007 - 0:0

RIGA (AFP) -- Latvia must do more to avoid risks posed by its overheating economy, EU commissioner Joaquin Almunia said Thursday, adding his voice to growing warnings about the situation in the Baltic state.

"Global financial markets are not in the same mood as they were two years ago," Almunia, the EU economic and monetary affairs commissioner, told reporters during a visit to Latvia. An economy lacking "stable fundamentals" is at major risk, he warned. "I'm impressed with the dynamic growth of Latvia. But we cannot ignore that rapid growth has created imbalances," he said. The Latvian economy grew by 11.9 percent last year, the fastest rate since independence from the Soviet Union in 1991 and the strongest growth rate in the then 25-member EU. But Riga is now struggling to keep inflation under control. On Monday, the Latvian national statistic bureau announced that 12-month inflation had climbed to 8.8 percent in June, from 8.2 percent in May. There are increasing fears that Latvia, which joined the EU in 2004, is heading for a "hard landing." To ward off a potential crisis, the government in March unveiled a plan to slash inflation, largely by tamping down consumption through measures including restricting the issuance of personal loans and mortgages. Almunia commended Riga's move, but said that "more efforts are needed to put inflation in line in the medium term." "One third of consumption is based on credit, and this is a source of risk," he said, adding: "Internal demand is not based on the capacity to finance growth, but on crediting." Finance Minister Oskars Spurdzins said that the impact of the anti-inflation plan would only be visible within six months, and that the government would take stock thereafter. But Almunia urged the Latvian government to do more to get its books in order, saying: "There needs to be a more ambitious budget target to anticipate a surplus." Riga has set the goal of a balanced budget this year, though a slight surplus is a "realistic target," according to Spurdzins. "The IMF says we need to create a surplus of 4.0 percent next year. This figure is considerable. Given our needs, it would be very hard to achieve it," he said.