Lithuania gets the nod to round out the Baltic euro club

By bne IntelliNews June 5, 2014

Tim Gosling in Prague -


Lithuania on June 4 got the green light on its bid to become the 19th member of the Eurozone. Pending remaining political formalities, the country will make it a Baltic sweep when it joins the single currency on January 1, 2015 - just five years after the economy of the region went down the tubes, and eight after Lithuania became the only country to have an application to join the euro rejected.

Convergence reports released by the European Central Bank (ECB) and the European Commission (EC) both said Lithuania is ready to adopt the European currency area next year. Like Baltic cousins Estonia and Latvia - which joined the euro in 2011 and 2014 respectively - since the economy went into meltdown in 2009 Vilnius has maintained strict austerity to meet the conditions - which involve limits on deficit, debt and inflation. 

The reports say the country fulfils all Maastricht criteria with a healthy margin. Over the 12 months since May 2013, average inflation sits at just 0.6%, well below the 1.7% threshold; the budget deficit stood at 2.1% of GDP versus a 3.0% limit; and state debt was at 39.4%, leaving clear daylight to the 60.0% requirement. Approval was, therefore, "not a surprise", said the governor of Lithuania's central bank, Vitas Vasiliauskas, in a statement. "Having done our homework responsibly, and after regular monitoring of our compliance with the convergence criteria, we expected exactly such an assessment," he insisted.

Approval in the convergence reports is seen as the green light in reality, although there are formal steps Lithuania must go through. The issue will be discussed at several Eurozone and EU meetings this month, before a final decision is announced by the Council of Europe on July 23.

Remarkable recovery

Seven other member states were also covered by the convergence reports. However, despite being officially obligated to adopt the euro at some point, none of Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden currently fulfil all of the criteria, the European Commission report noted. They will be reassessed in two years. Of the bloc's 28 member states, only the UK and Denmark have negotiated formal opt-outs and therefore do not have to strive to hit the targets.

EU Economic Commissioner Olli Rehn praised Lithuania for its efforts, saying the approval "reflects its long-standing support for prudent fiscal policies and economic reforms. That reform momentum, driven in part by Lithuania's EU accession ten years ago, has led to a striking increase in Lithuanians' prosperity: the country's per capita GDP has risen from just 35% of the EU28 average in 1995 to a projected 78% in 2015." 

Dragged down by the collapse of a real estate market bubble that crippled major banks, Lithuania saw GDP contract by 16% in 2009. Estonia (-20%) and Latvia (-24%) were in a similar boat, but the trio swiftly launched tough programmes to get their finances back on track. Some say the Baltic model is one to learn from; others condemn it for piling misery onto the population. "The Baltic recovery story from the near collapse in 2008/09 has been nothing if not remarkable," suggests Tim Ash at Standard Bank.

While the ECB also praised Lithuania, it offered a note of caution on several fronts, including inflation, energy dependence, labour markets and corruption. Vasiliauskas said that in order to take advantage of the opportunities inherent in joining the euro, financial prudence, transparency and discipline need to be maintained.

A better life

The recent Eurozone crisis, from which many periphery countries in particular are still struggling to recovery, has done little to promote the single currency. It's little wonder then that Brussels is so happy to have seen the Baltic states push to join. Yet it's not one-way traffic. While larger member states clearly prefer to maintain their independence in order to be free to adapt to global conditions, the smaller members of the EU have significant gains to make by signing up.

"The Economic and Monetary Union remains an attractive community to be in," insisted Rehn. "The euro area today has more effective economic policy coordination, a robust financial firewall to safeguard stability and, from this year, a banking union. All of these Lithuania is committed to participating in and to further strengthening. Thanks to the efforts of the past five years, this ship is far better placed to navigate rough seas than it was at the outbreak of the crisis." 

"The euro adoption is an economically and politically measured strategic step by Lithuania aiming at more rapid economic growth, and also a better life for all the residents of the country," Lithuanian Prime Minister Algirdas Butkevicius proclaimed.

Lithuania's push to adopt the euro has already seen significant movement on the financial markets. While Vilnius sold 10-year bonds at 3.425% at the start of the year, the yield on that debt is now at 2.72%, reports Bloomberg. Late last year, Lithuanian central bank chief Vasiliauskas had noted that next-door Latvia was paying less to borrow despite lagging on many macro-economic measures. Equivalent Latvian bonds are trading at 2.77%.

Security blanket

However, the push to plug deeper into Europe has taken on greater significance for the member states at the eastern end of the EU due to the Ukraine crisis. Fearing Russian expansionism, the Baltic states have been at the forefront of calls for the West to take a tough line with Moscow, despite the fact that their exposure to the Russian economy is far higher as a percentage of GDP than any other European states.

"The euro adoption, given the circumstances beside Lithuanian borders, is gaining a still greater significance," remarked Butkevicius. "It is one more step towards our country's greater economic, financial and political security."

Estonian central bank Governor Ardo Hansson said recently: "We're not only expanding the borders of the single currency area, but also firmly securing the place of the Baltic states within Europe and the prospects for economic strengthening of the region as a whole," according to Bloomberg.

The worry in the region is so strong that talk of joining the Eurozone is even raising its head in Warsaw. Poland has regularly rejected suggestions it could join anytime soon, but President Bronislaw Komorowski called on June 4 for a discussion to start next year. "I think the Lithuanians also likely now rather like the idea of single currency membership, writes Ash. "Membership of as many Western clubs as possible is seen as the best possible defence against perceived Russian expansionism in the region. I heard the same argument recently in Poland in favour of joining the euro ASAP."

However, the argument is yet to convince the wider population in either country. Euro adoption remains unpopular amongst well over half of Lithuanians, according to Swedbank. "According to the most recent polls, only around 40% of Lithuanians approve," note the analysts. However, they say they expect "the rates are likely to increase as the date of adoption comes closer."

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