Tuesday

30th May 2017

Focus

Lithuania in second attempt to join euro

  • Lithuania missed joining the euro in 2006, but is determined to join in 2015 (Photo: guysie)

Around eight years ago Lithuania was the first among the Baltic states in line to join the euro. The economy had been growing fast after the country re-gained its independence from the Soviet Union and it was planning to be a part of the single currency from 1 January 2007.

But in spring 2006, the EU commission took an unprecedented decision and said Lithuania was not fit to join. Inflation was too high, standing at 3.5 percent instead of the target of 2.7 percent.

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The inflation bump was partly due to a hike in gas prices, feeding speculation in the country that Russia was ultimately to blame for the euro blockade. Lithuania has been heavily dependent on Russian gas imports since shutting down its Soviet-era nuclear plant in Ignalina in order to join the EU.

In 2011, Estonia became the first of the Baltics to join the euro. And neighbouring Latvia is on track to make the same step next year.

Despite the setback, Lithuania is still pressing ahead with its second attempt to join the eurozone, eyeing 2015 as a target date.

"At the time there was political unwillingness to enlarge the eurozone. I think probably it was a miscalculation because Lithuania at that time was responsible in its fiscal policies," President Dalia Grybauskaite - who at the time of the decision was an EU commissioner - told this website in an interview.

Struck hard by the financial and economic crisis of 2009, Lithuania saw its economy shrink by 15 percent. "Lithuania managed without any bailouts, we didn't ask anybody to help except of course the EU structural funds that had been agreed before," Grybauskaite said.

She gave up her commissioner post in 2009 and became president, working with a centre-right government that implemented deep budget cuts.

"In two years, we consolidated 12 percent of our GDP. It was painful, but we managed it so fast that in two years we started to grow again and now in the first quarter of this year we had 3.6 percent growth," Grybauskaite said.

While the president is still popular and is considering running again for elections next year, the centre-right government was voted down last year and replaced with a coalition of liberal and centre-left parties.

Finance minister Rimantas Sadzius, a Social Democrat, told this website that the government is committed to meeting the 2015 deadline. This contrasts with its neighbour and regional powerhouse Poland, which is waiting to see how the euro crisis plays out.

"Lithuania basically has no own monetary policy. We have pegged our currency to the euro since 2002 and before that it was pegged to the dollar just one year after the lita was introduced, in 1993. So if we have no monetary instrument in our toolbox, the only logical option is to change this quasi-euro into a real euro," Sadzius said.

He admitted that with Estonia already a eurozone member and Latvia joining next year, there is also a certain external pressure to not be the only Baltic state outside the common currency.

Adopting the euro, Sadzius argues, will boost foreign investment and create more jobs in the country - as was the case with Estonia.

This time around, the minister said, Lithuania will make it into the euro. "There are huge differences now compared to 2006 - the size of the construction sector is smaller, we are now exporting quite intensely and there is no problem of current account deficit."

Lithuania is also taking steps to become more energy independent. It will open a liquified natural gas terminal in 2015 and is exploring the possibility of extracting shale gas to reduce its dependency on Russian energy supplies. "In 2006, there was a sudden spike in gas and oil prices that affected our inflation, but now the outlook is more stable," Sadzius said.

Opposition to the euro

Meanwhile, support among Lithuanians for the euro has again dropped below 50 percent. A referendum is not required, however.

"We had a referendum in 2003 about EU membership, which also includes euro membership. But of course we need to explain to our people, so instead of a referendum we will have an information campaign," the finance minister said.

As for Lithuania contributing to bailouts for richer countries, Sadzius said euro membership "has advantages but also obligations."

"We can persuade people that this is an investment rather than an expenditure," he said.

But for Vytautas Zukauskas, an economist with the Vilnius-based Free Market Institute, euro membership is not a good idea.

"I am sceptical about the euro. Lithuania needs a stable and reliable currency, but the path the euro is taking now is not that. There is a lack of discipline and a huge lack of structural reforms. The European Central Bank is increasing money supply. In the long run there are no strong growth prospects. Instead the path they are taking is redistribution," he said.

Opinion

Lithuania's remarkable recovery

One of the best kept secrets in Europe is how well the current Lithuanian government has managed the nation’s economy, writes Anders Åslund.

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