Euro or bust insists Lithuanian PM

By bne IntelliNews January 15, 2014

Tim Gosling in Prague -

Attempting to face down a potentially damaging split in the coalition, and intense opposition among the population, Lithuania's prime minister threatened on January 14 that he will quit unless the country follows through on plans to join the euro in 2015.

Algirdas Butkevicius told local media on February 15 that he plans to resign if the Baltic nation fails to win approval to adopt the euro in a year's time. "Naturally there can be no doubt" that I will resign if Lithuania fails to win approval to join the single currency, he told Baltic News Service. "I can confirm that looking you in the eyes."

The only Baltic state outside the euro since Latvia joined on January 1, Lithuania is also the only country to have been turned down for membership of the single currency. It's application to join was rejected after its inflation rate broke limits in 2006.

Bouncing back strongly from the dire economic straits it fell into in 2009, and benefitting from Europe's rising tensions with Russia, Lithuania has encountered more encouragement for its bid this time round. On January 11, European Commissioner for Economic and Monetary Affairs and the Euro Olli Rehn reaffirmed the European Commission's support, and presented a tentative accession timeline.

Vilnius says it plans to launch a formal application in the spring. The European Commission expects to receive a convergence report in April, with an official decision on acceptance of the bid then possible by June, with approval to follow the next month.

However, this time round, the partners of Butkevicius' Social Democratic Party (LSDP) in the governing coalition are making waves instead. A week ago, the speaker of the country's parliament - a member of the Labour Party (DP) - said the Baltic country is not ready.

Loreta Grauziniene sowed confusion when she said on television that issues such as pensions, wages and the size of the public sector meant Lithuania should not join in 2015, reported the Wall Street Journal. She also said that the four parties in government had not signed off on the date.

The PM sought to quash that debate, insisting that his government is united in its commitment to a 2015 entry date. "Lithuania will have the euro on January 1 2015 - and this coalition will implement this."


However, Otilia Dhand at Teneo Intelligence notes that alongside DP, coalition partners Order and Justice (TT) and Electoral Action of Poles in Lithuania (LLRA) have also recently expressed their opposition, "despite the fact that it is one of the cornerstones of their coalition agreement." That was sparked by a row over economic policy inside the centre-left government, she notes.

"DP expressed their opposition to euro adoption earlier this month, soon after PM Algirdas Butkevicius rejected their flagship proposal for a substantial minimum wage increase in 2015," she writes. "This conflict prompted other coalition parties to step in: the TT called for a nation-wide referendum, while the LLRA expressed concerns over a potential spike in inflation."

With polls suggesting over 50% of the population is also against joining the single currency, the PM sought to rally more forces to the cause. He called on the country's central bank to start a publicity campaign as soon as possible. It's a role the Bank of Lithuania is already playing. On January 13, as Latvia prepared a new Eurobond, it sent out analysis illustrating the huge benefit joining the euro has had on its neighbour's borrowing costs.

"It is obvious that our neighbours for a long time have been benefiting from the euro adoption - the assessments of the market participants created preconditions to borrow cheaper in international markets. Although the economic indicators of both countries are similar, the interest of Latvia's debt securities in euro since 2012 has been less than in Lithuania," said a central bank official, Sigitas Siaudinis.

That kind of advantage, alongside self preservation, is likely to persuade the coalition partners to support the move, suggests Dhand. However, she notes that "while differences among the parties are likely to be resolved this time, the episode underlines the persisting political risks to the goal of adopting the euro."

At the same time, the issue is so divisive that it risks weakening Lithuania's strict fiscal policy, which was adopted in the depths of the crisis, and could also help destabilise the country's political scene.

"The debate inside the coalition will continue later this week and it is likely that after some compromising (e.g. on the minimum wage) all three dissenting parties will fall back in line with the agreed policy," Dhand suggests. "However, 55% of Lithuanians oppose euro adoption and the issue makes a popular campaigning line ahead of the 11 May presidential elections. The risk remains that these tactics may be used again during the accession process and the context may change dynamically, especially in the run up to the elections."

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