Lithuania should become the 19th country to use the euro, the European Commission said, paving the way for the Baltic state to join the currency bloc Jan 1.
The former Soviet republic, the only nation to have been turned down for euro-area membership, now meets the economic criteria to join the monetary union, according to the commission, the European Union’s executive arm.
“Euro adoption will be a major, hard-earned and well-deserved achievement for Lithuania and its people,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels. “European integration has been and must remain the powerful driving force for stabilisation, democracy and increased prosperity.”
Lithuania, whose bid to adopt the common currency was rejected eight years ago, completes a clean sweep for the Baltic region, with neighbours Estonia and Latvia switching in 2011 and 2014. The move comes as the region is battling to restore growth, counter low inflation and reduce unemployment.
“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,” Prime Minister Algirdas Butkevicius said.
EU summit
The official recommendation by the commission, after consultation with the European Central Bank, needs the EU’s national ministers to make a formal decision next month after leaders discuss the issue at a summit on June 26-27.
“The news is not a surprise,” Lithuanian central bank Governor Vitas Vasiliauskas said. “Having done our homework responsibly, and after regular monitoring of our compliance with the convergence criteria, we expected exactly such an assessment.”
Lithuania is fully prepared to abandon the litas in favour of the euro, according to Vasiliauskas. Inflation through May 15 was 0.6 per cent, lower than the 1.1 per cent to 1.7 per cent adoption requirement, while the fiscal shortfall was 2.2 per cent of gross domestic product and government debt was 39.4 per cent of GDP.
The low level of inflation in Lithuania “reflects mainly temporary factors, including the fall in global commodity prices and the associated lower growth in administered and energy prices,” and maintaining low inflation rates on a sustainable basis “will be challenging in the medium term,” according to the ECB.
Crimea annexation
The Baltic country has looked past public skepticism about the euro, reining in its budget deficit and taming inflation to meet EU thresholds — policies that have been rewarded with credit-ratings boosts. Lithuania is also seeking to cement its place in Europe amid heightened security concerns stemming from Russia’s annexation of Ukraine’s Crimean peninsula.
Investors have recognised Lithuania’s efforts to overhaul its economy. The yield on the government’s euro-denominated debt due 2024 has plunged to 2.719 percent from 3.425 per cent when it was sold at the start of the year. That compares with 2.773 per cent for comparable bonds issued by neighboring Latvia.
Lithuania failed in its bid to adopt the euro on Jan. 1, 2007, after inflation missed the EU’s target by 0.1 percentage point and the commission said prices would jump further. That prediction proved right as inflation peaked at 12.5 per cent in 2008.
ECB Oversight
Adopting the euro requires that candidates fix their currencies to it for two years, keep their budget gaps within three per cent of GDP, debt at less than 60 per cent of economic output and inflation “sustainably” within 1.5 per centage points of the average of the EU’s three lowest rates.
Joining the euro also means that Lithuania will become a member of the EU’s fledgling banking union, including a centralised supervisory system that starts in November and a resolution mechanism that begins next year. — Bloomberg