Latvia weighs up Brexit knock-on effect

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Brexit will probably have an insignificant direct effect on Latvia's economic growth in the short term but indirect effects of the British withdrawal from the EU will be more serious, according to a Foreign Ministry document reported by the LETA news agency November 25.

Brexit may slow down growth in Europe and the world, affecting Latvia's growth in the future, according to the document which considers Latvia's position ahead of EU talks with the United Kingdom which are expected after the UK formally begins its exit.

The document says that the UK is Latvia's most important economic cooperation partner both in trade and investment, after the countries of the Baltic Sea region.

The UK ranks eighth among Latvia's key foreign trade partners and also is the eight largest foreign investor with €334 million invested in Latvia, mostly in the finance sector, real estate, wholesale, pharmaceutical industry and wood-processing.

If terms similar to those of the European Free Trade Association (EFTA) applied in the EU-UK relations in the future, this will not result in any substantial changes in the relations between the UK and the EU single market. However, a different cooperation model may have both direct and indirect effects on export and investment.

In addition, the UK is one of the biggest contributors to the EU budget. EU funds so far have been very helpful in promoting economic growth, employment and social inclusion in Latvia but the amount of the EU funding available to Latvia may decrease after Brexit. This is a major risk to investment as well as social and economic growth in Latvia, the report says.

Brexit is expected to start affecting Latvia's budget in 2019 if the UK stops paying its contributions to the EU budget and other member states compensate for this by increasing their contributions.

In this scenario, Latvia’s contributions to the EU budget would grow by 32 percent, or €80-€83 million per year. The amount of EU funding available to Latvia would remain unchanged.

According to another scenario, which the Foreign Ministry considers to be the most likely, the EU budget would be reduced by the about 5 percent, or the net share of the Brtitish contribution. The budget's expenditures would be reduced accordingly, cutting funding for Latvia by €52-56 million in 2019 and 2020.

Under the third scenario, the bloc's budget would be kept at 1 percent of the EU's GDP, but that would reduce the EU budget even more, which means that the funding available to Latvia would shrink by €177-200 million a year.

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