Thursday

19th Jan 2017

Opinion

Is there a positive case for Lithuania to join the euro?

  • The euro is no longer a symbol of stability (Photo: Valentina Pop)

There are several arguments for Lithuania joining the single currency, but they don't all stand up.

I will take a look at some of them. The list is not complete, but it encompasses most of the conventional wisdom regarding the benefits of euro adoption in Lithuania.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

One of the arguments is that adoption of the euro is a logical step as Lithuania operates a currency board with a peg to the euro. But this is not so.

The currency board was established in 1994 for the sake of stability of the currency, fighting inflation, and to prevent government from meddling with the supply of money.

One could argue whether the currency board achieves those goals perfectly. But if one said that the logical conclusion of the currency board is to adopt the peg currency, then one would have to argue that Lithuania was on the road to adopt the US dollar ( prior to the euro-peg, the Lithuanian litas was pegged to the US dollar).

This, of course, is not the case.

Adoption of the peg currency is not the only logical conclusion of the currency board. A currency board system does not presuppose eventually adopting the reserve currency. Moreover, the reliability of the currency board stems partly from the fact that the reserve currency can be changed if it stops being reliable.

The second argument states that adoption of the euro would lead to cheaper borrowing. It might. But the interest rates (especially if we are talking about borrowing by the government) are, among other things, derived from the economic performance of the country, and the estimated ability of the government to pay the loans back.

If cheaper borrowing is the objective, a prudent budget policy by the government would do more to lower the cost of borrowing than the adoption of the euro.

Whether adoption of the euro leads to a more prudent budget policy is a question for economic historians.

Were southern European countries inclined to overspend before joining the euro? Or was it the euro, which enabled their spending? Currently it is possible to find EU member states that have not joined the euro and have cheaper borrowing rates compared to certain eurozone members.

The third argument cites 'stability' derived from joining a widely-used currency. From a very superficial point of view, the days when the euro was a synonym for stability are long gone.

Whether the 'stability' of the currency exchange rate of the country’s trading partners is such an important factor is questionable. But there are two facts that make this argument irrelevant.

First, the exchange rate of the euro and litas can be kept stable by the currency board just as is the case now.

Second, even with the euro, we still have fluctuations of other currencies, (e.g. US dollar) which are important to the Lithuanian economy of Lithuania (because imports like natural gas and crude oil are paid in US dollars). So the adoption of the euro does not eliminate the risk of currency fluctuations.

Finally, currency fluctuations on their own are seldom barriers to trade. Elimination of currency rate fluctuations, even if beneficial, is insignificant compared to other issues. From the economic (the aforementioned risk) to the more emotional (the sentiments attached to the national currency).

All this brings us to the final, and probably the most decisive argument.

This suggests that if Lithuania does not join the euro, the currency board would be dismantled, and local politicians would try to conduct their own monetary policy, which would lead to irresponsible printing of money and inflation.

That is certainly a possibility. But there is no real reason why local politicians would want to mess up the national currency. More importantly isn't Europe doing just that? Why is the printing of money by the European Central Bank better than the printing of money by the local Central Bank?

It seems that the question boils down to which politicians we distrust with monetary policy more: Lithuanian or European ones? (Let’s not start the argument about the independence of Central Banks).

In other words, the argument turns to a negative scenario. Instead of the positive (“What benefits would the euro bring?”), we are dealing with the negative (“Would we be even worse off without the euro?”).

Such arguments will put the local politicians in quite an interesting position. In order to convince the public to adopt the euro, they would have to argue that they themselves cannot be trusted with monetary policy.

Sooner or later the question will have to be discussed publicly.

The narrative of poor thrifty Lithuanians paying for spendthrift Southern Europe will be one of the rallying points of the opponents (regardless of whether this is true). The question could even go to a referendum.

The lack of positive arguments should worry the proponent of the euro. The lack of more in-depth discussions should worry those in favour of informed decision making by the public.

The writer is president of the Lithuanian Free Market Institute.

Opinion

The 89ers and the battle against populism

It falls to the Europeans who were born around 1989 and grew up in a peaceful Europe to build a fresh new vision for the EU that transcends the ideological, educational and national cleavages of the past.

Stakeholders' Highlights

  1. Caritas EuropaEU States to Join Pope Francis’s Appeal to Care for Migrant Children
  2. UNICEFNumber of Unaccompanied Children Arriving by sea to Italy Doubles in 2016
  3. Nordic Council of Ministers"Nordic Matters" Help Forge Closer Bonds Between the UK and the Nordic Region
  4. Computers, Privacy & Data ProtectionThe age of Intelligent Machines: join the Conference on 25-27 January 2017
  5. Martens CentreNo Better way to Lift Your Monday Blues Than to Gloss Over our Political Cartoons
  6. Dialogue PlatformThe Gulen Movement: An Islamic Response to Terror as a Global Challenge
  7. European Free AllianceMinority Rights and Autonomy are a European Normality
  8. Swedish EnterprisesHow to Create EU Competitiveness Post-Brexit? Seminar on January 24th
  9. European Jewish CongressSchulz to be Awarded the European Medal for Tolerance for his Stand Against Populism
  10. Nordic Council of Ministers"Adventures in Moominland" Kick Off Nordic Matters Festival in London
  11. PLATO15 Fully-Funded PhDs Across Europe on the Post-Crisis Legitimacy of the EU - Apply Now!
  12. Dialogue PlatformInterview: Fethullah Gulen Condemns Assassination of Russian Ambassador to Turkey

Latest News

  1. EU cannot copy Australia's offshore asylum model
  2. Brexit men launch anti-EU website
  3. Germany details its 'Marshall Plan' for Africa
  4. IMF predicts 'pain' for UK, as banks prepare London exit
  5. EP deal could help Tusk keep Council job
  6. UN struggles to monitor fate of readmitted Syrians in Turkey
  7. European space chief: Moon village is 'more or less a fact'
  8. May's speech was not a war declaration, Malta says

Stakeholders' Highlights

  1. Zero Waste EuropePublic Support Needed to Promote Zero Waste in More Municipalities
  2. Belgrade Security ForumEU Cannot Afford to Ignore the Western Balkans as Populism Surges
  3. Dialogue PlatformFethullah Gulen Calls for an Investigation on the Assassination of Russian Ambassador to Turkey
  4. World VisionAmid EU Talks on Migration, Children on the Move Remain Forgotten and Unprotected
  5. Centre Maurits CoppietersAlex Salmond Receives Coppieters Award for His Service to Scotland and Europe
  6. International Partnership for Human RightsStrong Support for Hamburg Declaration on Human Rights Defenders
  7. Swedish EnterprisesHow to Use Bioenergy Coming From Forests in a Sustainable Way?
  8. Counter BalanceReport Reveals Corrupt but Legal Practices in Development Finance
  9. Swedish EnterprisesMEPs and Business Representatives Debate on the Future of the EU at Winter Mingle
  10. ACCAFifty Key Factors in the Public Sector Accountants Need to Prepare for
  11. UNICEFSchool “as Vital as Food and Medicine” for Children Caught up in Conflict
  12. European Jewish CongressEJC President Breathes Sigh of Relief Over Result of Austrian Presidential Election