LITHUANIA: On an Obstacle Course to the Euro Zone

By IPS Correspondents Reprint | | Print |

Giedrius Blagnys

VILNIUS, Mar 23 2006 (IPS) - A rise of inflation in Lithuania may disturb the country’s aspirations to join the euro currency zone next year and to become one of the first new EU member states to adopt the euro.

In February, the twelve-month annual inflation average stood at 2.7 percent, one percentage point above EU limits. A one-off rise in energy prices, a real estate boom in the country and the fact that the general consumers price level is catching up with the rest of the European Union have had a major impact on the current inflation level.

Jean-Claude Trichet, governor of the European Central Bank is refraining so far from any comments whether Lithuania could join the euro zone in 2007. The European Central Bank and the European Commission will produce an evaluation report only in May this year. The report will comment on performance on the Maastricht criteria, which underpin introduction of the euro with rules on budget deficit, national debt, inflation, long-term interest rates and currency stability.

But a hot debate has opened up already after EU Commissioner Joaquin Almuniaís and Austrian finance minister Karl Heinz Grasser’s expressed doubts about Lithuania’s preparedness for the euro by January 2007. The Austrian finance minister told the European parliamentthat “Regarding Estonia and Lithuania, as the figures stand, things look bad.” Austria holds the current EU presidency.

EU budget commissioner Dalia Grybauskaite, former Lithuanian finance minister, also recommended that Lithuania must cut inflation if it still plans to join the euro zone next year. “I think that inflation has to be reduced. With economic growth at just over 7 percent, its current level is somewhat too high,” Dalia Grybauskaite told the daily Lietuvos Rytas.

In late February, the article ‘Monetary union is not for poor’ in the Financial Times magazine fuelled strong emotions. Journalist Wolfgang Munchau, believes the decision about enlargement of the euro zone will have a purely political character. According to Munchau, “these inflation rates pose no economic problem at all, neither for them, nor for the rest of the euro zone. But as the rest of the euro zone does not want them to join for other reasons, the inflation criterion comes in handy.”

Lithuanian officials reacted by asking the European Commission for a “fair game”, and said they believe that the inflation criterion would not prevent Lithuania from adopting euro.

“I believe that the European Commission officers are precipitating the events with statements that one country complied with the criteria and the other did not,” said the governor of the Bank of Lithuania, Reinoldijus Sarkinas. “Such evaluations should not be spelled out – Lithuania has not applied to have such an assessment worked out.”

According to the governor, “we believe that inflation will not exceed the required rate and that we shall start using the euro in January next year.”

The International Monetary Fund and the World Bank have joined the debate. According to the World Bank’s latest Quarterly Economic Review, “inflation pressures in the Baltic create uncertainty about euro adoption prospects.” But the World Bank believes that Baltic States could fare well in the euro zone.

“By measures of firm entry and exit as well as the operation of labour markets, they fare substantially better than many richer countries of the euro zone. Estonia and Lithuania have successfully operated currency boards for over a decade – navigating through fair and foul circumstances, including the Russia crisis, with growth rates among the highest in Europe,” said Christoph Rosenberg, IMF senior resident representative for Central Europe and the Baltics.”

There is no pre-defined timetable for adoption of the euro by the EU’s new member states although they are all obliged to adopt the common currency.

Lithuania made a formal request Mar. 16 to the European Commission and the European Central Bank for an early assessment of its readiness to join the euro zone in January 2007.

The expected advantages of adopting the euro include eliminating the transaction costs associated with keeping a national currency, cutting interest rates and reducing the exchange-rate risk for businesses. This should help attract additional investment and stimulate real convergence of economy.