Latvians spend at least 20% of their monthly income on food. The EU average is significantly lower – about 14%. On the other hand, our housing costs are lower. But in the end, after covering all expenses, Latvians often have no money left: Latvia is among the poorest EU countries in terms of average income. About a quarter of the population lives on less than 600 euros per month. Delfi Bizness tells us whether Latvia is approaching the average European standard of living and whether this process can be accelerated. Reaching the average European standard of living is often mentioned as an important starting point in Latvia's development. But things are not so smooth. Experts believe that Latvia is currently at the level of well-being that the EU average was ten years ago. This means that it will take Latvia a long time to reach the EU average, and this will only happen if we find our own formula for success – and outpace the rate of economic growth in Europe. We must admit that Europe itself does not always achieve what it expects. After a period of high inflation, the EU economy is experiencing a certain stagnation, and rapid growth is not expected in the near future. In the spring, the European Commission (EC) predicted that the EU economy would grow by only 1% this year, with growth in the euro area at 0.8%. On the positive side, almost all EU countries will return to economic growth this year. However, economic growth in a particular region may be faster, experts believe. "Over the past 15 years, the well-being of Europe, especially in the new EU countries, has been growing," says Peteris Strautins, an economist at Luminor Bank. But the standard of living in this part of the world is increasing more slowly than in the world as a whole. The main reason is the lag behind China and the US in a number of important technological areas. Strautmanis believes that this is due to excessive caution and unwillingness to take risks in both business culture and public policy. This is confirmed by a study by the European Investment Bank (EIB). It emphasizes that Europe must increase competitiveness in order to keep up with the US and China in development and innovation. This should be done in a comprehensive manner, by increasing productivity, promoting innovation and developing new technologies. According to the EIB, policy instruments at the European level are particularly important, as they help maintain a level playing field in the single market. According to forecasts, Europe will also grow more slowly than other regions of the world this year. It seems that increasing competitiveness will be one of the priorities for the European Parliament (EP) in the near future. Roberta Metsola, the recently re-elected President of the EP, stressed that "Europe's competitiveness is of decisive economic and political importance: Europe's place on the world stage must be strengthened". "We must redouble our efforts to ensure open, balanced, fair trade based on international rules and expand the network of trade agreements with partners", she said, stressing that only by increasing productivity and accelerating investment in its industrial potential can the EU reduce its strategic dependence and at the same time support economic growth. The European Parliament emphasizes that in order to eliminate economic inequalities between EU countries and help them grow faster, a number of large-scale initiatives have been implemented in Europe in recent years. The goal is to improve the standard of living and quality of life of people living in Europe faster and to reduce inequalities between countries. This work will be continued in the future. Aims to transition Europe to a climate-neutral economy by 2050 and includes measures to mitigate climate change, improve resource efficiency and preserve biodiversity. In addition, the Green Deal creates jobs and improves the health of citizens by reducing pollution and improving environmental quality. A third of the more than €2 trillion invested in the NextGenerationEU recovery plan and the EU budget will finance the Green Deal. Focuses on social protection and the inclusion of citizens. It includes 20 key principles and rights related to equal opportunities and access to the labour market, fair working conditions and social protection. It aims to ensure that all citizens, regardless of their social status, can benefit from economic growth. Objectives: Aims to support economic recovery from the Covid-19 pandemic. The programme includes a wide range of investments and reforms aimed at supporting the digital and green transition, improving access to public services and strengthening Europe's economic resilience. The programme aims to improve digital infrastructure and skills in Europe. It supports the development of artificial intelligence, cybersecurity and high-performance computing, as well as the digital skills of citizens and businesses. The programme promotes the digitalisation of the economy and the introduction of new technologies that can improve access to the labour market and people’s quality of life. Cohesion policy aims to reduce regional development differences and socio-economic inequalities between EU countries and regions. It includes funding for infrastructure projects, education, training, employment and business development, especially in less developed regions. Source: European Parliament, European Commission The level of social protection in Europe is currently the highest in the world. And this affects the quality of life and well-being of people. Surveys of EU residents show that the majority feel quite comfortable. For example, according to an EC survey conducted in the spring of this year, eight out of ten Europeans (82%) consider the quality of life in their region to be good. 65% of Europeans consider the current economic situation in their region to be good. At the same time, people are concerned about the financial situation and the cost of living, and surveys show that the crises of recent years have nevertheless worsened the quality of life in general. The average income level in Latvia is now almost 30% below the EU average, and the gross domestic product (GDP) per capita in 2023 was 70.7% of the EU average (based on purchasing power parity). This means that in terms of welfare, Latvia has now reached the EU average of 10 years ago. Germany, for example, was at this level of welfare 20 years ago, compares Olegs Krasnoperovs, an economist at the Bank of Latvia. Although the standard of living in Latvia is lower than the EU average, it has improved significantly in the long term. Unfortunately, this trend has slowed down since the onset of the pandemic, says Strautins. Since 2020, regression has been noticeable in all three Baltic countries, but Estonia and Lithuania are ahead of Latvia. According to economists, the main explanation for the Baltics’ difficulties is the war in Ukraine, which has affected the region much more than other EU countries. The Baltics have suffered more than others from rising energy prices, and trade with Russia has taken up a large share of the economy. Geopolitical risks have affected tourism and investment, Strautins adds. He believes that 2024 will be another year of slow growth. The trend towards convergence with the EU standard of living may begin in 2025. However, there are also positive trends. Strautins notes that actual individual consumption in Latvia has increased from 70.6% of the EU average in 2018 to 76.7% in 2023. There is another indicator that looks surprisingly good in Latvia and other Baltic countries. This is the low share of people living in absolute poverty (they do not have enough money to pay for part of their basic needs), Strautins notes. In 2023, 8.4% of people in Latvia lived in absolute poverty, while in 2018 this figure was 12.2% and in 2014 – 23.4%. In the EU as a whole, the situation has improved more slowly: 12.9% lived in absolute poverty 10 years ago. The low level of absolute poverty seems at least unexpected, since Latvian society is both relatively poor and unequal. Strautiņš explains this by the fact that the majority of households in Latvia – three quarters – own the house they live in. If people with low incomes have to rent an apartment, this complicates the situation. At the same time, the relative poverty rate in Latvia is quite high and has changed little in the long term, Strautiņš notes. This figure is affected by the significant inequality of the population, which the Chair of the Fiscal Discipline Council Inna Šteinbuka considers a very painful problem. In 2022, 25.6% of Latvia's residents (476,000 people) were at risk of poverty or social exclusion. In 2014, under the influence of the economic crisis, this figure reached 30%, but the situation can hardly be considered very good. According to the Central Statistical Bureau, every fourth resident of Latvia lives on less than 560 euros per month. The income of the richest 20% is more than six times higher than the income of the poorest 20%. Such sharp differences in income levels not only have economic consequences, but also lead to the growth of populism and extremism, Šteinbuka notes. What is the cause of this situation? Inequality increased sharply at the beginning of Latvia's independence, and every crisis has had a negative impact on the situation, Šteinbuka says. The high level of poverty and income inequality is growing due to problems related to the pandemic and high inflation. Income inequality is also affected by slow economic growth, which limits the possibilities of state support. Migration and demographic trends are also not in Latvia's favor, say economists. The consequences of the fall in the birth rate in the early 1990s are now reflected in people aged 30-40, says Strautins. This age group is characterized by high labor productivity – people still have energy, but also experience. These people often buy housing, thereby stimulating economic activity. But if a solution is not found, the situation will worsen over time. However, the rest of Europe also faces demographic challenges. It is impossible to quickly reach the EU average, experts believe. "Small steps every day in the long term – this is what the process of economic growth looks like," says Krasnoperovs. According to him, individual steps may go unnoticed, but they accumulate over time and lead to an increase or decrease in the gap between countries. If the Latvian economy grew one percentage point faster than the economies of Lithuania and Estonia, we would reach the income level of our neighbors only by 2040. "The question is what needs to be done to make the Latvian economy grow one percentage point faster. In the long term, starting today. If it were easy, it would have been done long ago," the Bank of Latvia economist emphasizes. "For example, improving human capital alone (i.e. increasing the number of economically active, educated and healthy people) can accelerate Latvia's economic growth by two percentage points per year." To do this, it is necessary to deal with premature mortality among the working-age population; return 73,000 people who are not working to the labor market; improve the quality of the education and healthcare systems; and stimulate the influx of young talent into the country. Other tools for accelerating economic development include encouraging investment, innovation and the production of complex products, the expert believes. At the same time, Šteinbuka notes that there are currently no preconditions for accelerating economic growth, not only in Latvia, but also in the EU. European monetary policy is still restrictive, she says. The European Central Bank (ECB), having minimally reduced interest rates, has decided to wait and not take further steps in this direction for now. This means that loans will remain expensive for some time, which has a negative impact on consumption and makes it difficult to do business. Limiting budget expenditure is already on the agenda of the eurozone countries. In several EU countries, the economy is unable to generate sufficient revenue. The budget deficit procedure has been initiated for France, Belgium, Italy, Hungary, Malta, Poland and Slovakia – in these countries, the budget deficit exceeds 3% of GDP, which is contrary to EU requirements. The budget deficit of Belgium and Italy will be 4.4% this year, and their public debt will be 105% and 138.6% of GDP, respectively. When drawing up the Stability Program, the Latvian Ministry of Finance predicted that the budget deficit in 2024 would be 2.9% – almost at the level of the Maastricht criteria (3%). According to Steinbuecki's forecasts, the deficit will remain close to 3% for the next two years. Another problem is the low productivity and competitiveness of the EU, which makes exports difficult. In Latvia, where labour productivity is only about 60% of the EU average, the situation is even more difficult. One of the main challenges is to implement innovations to increase productivity, competitiveness, growth and prosperity. Innovation requires investment, including in research and development, as well as in improving the knowledge and skills of people. In parallel, it is necessary to expand the access of businesses to bank financing. The lack of business financing is one of the main reasons why Latvia has lagged behind Lithuania and Estonia in growth rates over the past decade. Finally, Latvia faces a major challenge to use the state budget as efficiently as possible and to direct all available EU funds, including the Recovery and Resilience Mechanism, to improve the competitiveness of the economy, Šteinbuka said. In addition, according to her, the health of the population, which is negatively affected by delays in diagnosis and access to medical care, can hinder economic growth both now and in the long term. The quality of education is also one of the constraints. The results of primary and secondary school examinations in recent years indicate that many young people will not be able to find highly qualified jobs and enter the labour market with such a specialty in the coming years, Šteinbuka believes. This creates serious problems for the Latvian economy, where the labour market is very active and the unemployment rate is low even in the context of slow economic growth. In 2023, the unemployment rate in Latvia will be 6.5%, and in the EU as a whole – 6.1%. In Spain and Greece, for example, the unemployment rate is chronically higher: last year it was 12.2% in Spain, and 11.1% in Greece. Šteinbuka emphasizes that the eurozone must ensure inclusive growth and remain competitive in the global market, while eliminating disparities between countries and promoting equalization between EU member states. The project is co-financed by the European Union through the European Parliament's Communications Grant Programme. The European Parliament has not participated in its preparation and any information or opinions expressed in connection with this project do not imply any responsibility or liability for it; the sole responsibility for the project lies with the authors of the programme, the interviewees, the editors or the distributors, in accordance with the applicable law. The European Parliament also does not accept liability for any direct or indirect damage that may arise from the implementation of this project.
