The European Free Trade Association (EFTA) was founded in 1960 to promote free trade as a means of achieving growth and prosperity among its Member States, closer economic co-operation between the Western European countries, and the expansion of global trade. Today the EFTA members are Iceland, Liechtenstein, Norway and Switzerland.

In order to continue a close co-operation between European countries in trade area the European Economic Area (EEA) was established. The EEA Agreement entered into force on 1 January 1994. The EEA 18 became the EEA 28 on 1 May 2004, when 10 new countries became members of the EU. The two financial mechanisms were created as part of the EEA Enlargement Agreement.

The EEA comprises the 25 EU Member States and three EEA EFTA States: Iceland, Liechtenstein and Norway. These states participate in an Internal Market in which the same basic rules apply. The objective is to enable goods, services, capital, and persons to move freely throughout the EEA in an open and competitive environment, and to establish a legal framework for the "four freedoms".

Under the EEA Enlargement Agreement two new financial instruments will be available for several EU countries, including Latvia: EEA Financial Mechanism and Norwegian Financial Mechanism. The implementation process of those mechanisms is regulated by the EEA Financial Mechanism Rules and Procedures and the Norwegian Financial Mechanism Rules and Procedures.

The ten new Member States will be eligible for assistance from both Mechanisms. The EEA Financial Mechanism will also grant assistance to Spain, Portugal and Greece. The objective of the assistance is to contribute to the reduction of social and economic disparities within the EEA, and to support the new EU member states in their efforts to participate fully in the enlarged internal market. The Mechanisms will make commitments for 5 years period from 1 May 2004 to 30 April 2009. The EEA Financial Mechanism donors are Norway, Iceland and Liechtenstein. The Norwegian Financial Mechanism Donor is Norway.

Although the two Mechanisms are closely coordinated, decisions on the granting of assistance are taken separately with each entity being responsible for the management of its own decisions. Decisions on the granting of assistance by the EEA Financial Mechanism are taken by the EEA Financial Mechanism Committee (the FMC) in Brussels. Decisions on the granting of assistance by the Norwegian Financial Mechanism are taken by the Norwegian Ministry of Foreign Affairs. To unify the implementation of both Financial Mechanisms EFTA secretariat has established Financial Mechanism office (FMO) in Brussels, which administrates both Financial Mechanisms.

To ensure the implementation of the Norwegian Financial Mechanism and the EEA Financial Mechanism two Memorandums of Understanding - between the Kingdom of Norway and the Republic of Latvia (on the subject of the Norwegian Financial Mechanism) and between the Republic of Iceland, the Principality of Liechtenstein, the Kingdom of Norway and the Republic of Latvia (on the subject of the EEA Financial Mechanism) have been signed.

On November 16, 2004 the Norwegian Financial Mechanism’s Memorandum of Understanding (MoU) has been signed and approved by the Cabinet of Ministers Rules Nr. 924 on November 9, 2004.

On December 2, 2004 the EEA Financial Mechanism’s Memorandum of Understanding (MoU) has been signed and approved by the Cabinet of Ministers Rules Nr. 948 on November 16, 2004.

Both MoUs includes three Annexes, from which Annex A states managerial set-up for the implementation of the Financial Mechanisms, Annex B – the programming framework of the Financial Mechanisms, Annex C – specific forms of grant assistance for Norwegian Financial Mechanism and EEA Financial Mechanism. In Annex B Latvian national priorities are set (see Documents).