2015 Lithuania’s Euro Odyssey

Since its accession to the EU in 2004 Lithuania’s road to the euro may have been considered as one of the most elongated among the club’s newcomers. Some till now remember Lithuania’s 12-month average inflation of 2.7 percent, noted in March 2006, just by 0.1 percent missing a reference ceiling of 2.6 required to adopt the euro. This assessment then gave a green light to the other candidate, Slovenia, which in 2007 successfully entered the eurogroup.

At that time Lithuania’s nearly two-digit export driven economic growth could have hardly coincided with low levels of inflation. Economic theory knows the Balassa-Samuelson effect, explaining that countries with higher incomes and export driven growth have a rise in productivity which pushes up wages also in non-tradable sector, which on contrary is not matched by a productivity increase. This raises costs and prices leading to a rise in inflation.

A bit later, in 2008, with a global financial crisis on the rise, the export markets were shut-down, this time bringing a new challenge to Baltic economies of keeping budget deficits constrained. In 2009, the economy of Lithuania contracted by more than 10 percent, budget revenues fell and deficits exploded also adding up to the public debt. The following years of 2009-11 were crucial to balancing state revenues with expenditure and to restoring the confidence in public finances.

During that period one could have suspected economic data and theory, global economic trends and even a bad luck standing against Lithuania’s aspirations to join the eurogroup. Euro hopes slowly returned in 2012-13 with exports taking off and inflation resting at moderate levels. Fighting back the global crisis with economic reforms was helpful as it evenly increased productivity across the sectors and gave an extra breathing space to economic growth while sustaining low prices. On the same time Europe has embarked on a deflationary path signaling that a window of opportunity for the euro entry could be closing soon.

Back at home, the end of 2012 Parliamentary elections, a new coalition agreement and change of Government were fueling a new debate on costs and benefits of the euro. Euro entry of neighbouring Baltic country Latvia brought more evidence to the debate. In March 2013, when Latvia requested for an assessment in the convergence report of ECB and ECFIN, Lithuania was ready too. After years of preparations it has returned to a safe zone for both targets of inflation and of budget deficit. This opportunity is not to be missed.

The forthcoming decision on Lithuania’s euro entry will take place in months of March to June 2014. Today economic figures, macro environment, global trends are supportive to Lithuania’s chances. Regardless of scenarios on inflation reference value to be used by ECB and ECFIN, Lithuania’s 12-month inflation forecast of 0.6 percent remains in the tunnel and below a forecasted Maastricht euro reference, which could be at least 0.9 percent (graphs available).

The accession to the eurogroup on 1 January 2015 would mark a saut qualitatif in Lithuania’s European economic integration by joining a new euro odyssey in the waters of global markets.

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