Inflation stalls euro for Baltics

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Double-digit inflation rates are forcing the three Baltic nations, Lithuania, Latvia and Estonia, to delay plans to adopt the euro, which they view as key to long-term economic stability.

"Inflation seems to be a problem now all over Europe, not only in those [new EU member] countries," said Federiga Bindi, a visiting fellow at the Brookings Institution in Washington. "The raise in oil prices certainly is one of the reasons."

Economists said another factor is the need for price levels in new EU countries to match those in longtime member states, many of which use the euro.

"In order to converge in the price level, divergence within the inflation rate is unavoidable," said Toomas Moor, head of the economic division at the Estonian Embassy in Washington.

A key criteria for EU membership is a stable market economy that can compete within a single economic market.

Latvia, which joined the European Union in 2004 with its two Baltic neighbors, had the highest annual inflation rate in January at 15.8 percent.

Rates in Estonia and Lithuania were not far behind, at 11.0 percent and 9.9 respectively.

Former Eastern bloc countries — Bulgaria, with a 12.5 percent annual inflation rate, and Romania, with 7.2 percent — also face difficulties adopting the euro, which is used by 15 of 27 EU member states.

Economists expect the inflation rates to increase this year as nations dismantle price controls on some items and raise taxes on fuel and other products to meet EU levels.

"Latvian inflation rate is determined by many, sometimes mutually unrelated, factors," said Olegs Baranovs, a senior official in the Latvian Economics Ministry. "Among them, structural changes related to membership in the EU, rise of world prices for energy resources and food product prices, changes of administratively regulated prices."

The most important factor, he said, is rapidly growing domestic demand.

The average monthly wage in Latvia last year was $750. Meanwhile, prices for staples such as dairy products increased by 6.1 percent and grain products by 5.6 percent.

To adopt the euro, nations have to meet criteria established by the 1991 Maastricht agreement that set requirements for an economic and monetary union.

The requirements demand that inflation rates not exceed by more than 1.5 percentage points the average of the three member states with the lowest inflation rates.

By the EU method of calculation, the inflation rate was 3.2 percent in January, the Guardian newspaper reported.

Estonia faces price increases as it adjusts energy levies and so-called "sin taxes."

"The increase of excise tax on tobacco, alcohol, fuel and natural gas altogether raised the overall Estonian price level by almost 1 percent in January 2008," Mr. Moor said.

Ms. Bindi noted that high inflation forces national banks to increase interest rates.

Interest-rate increases barely slow inflation in the new EU countries while making life especially difficult for people with mortgages and loans. High interest rates also contribute to sluggish economic growth in many EU countries, she said.

Many new EU countries now have set a 2011-13 time frame to adopt the euro.