VILNIUS - Lithuania and Estonia officially joined the exchange rate mechanism (ERM2) on June 27, the first major step in adopting the euro, while keeping their existing currency boards in place. The parity rate of the Estonian kroon was set at 15.6466 per euro, while that of the Lithuanian litas was fixed at 3.4528 per euro.
The announcement that the two countries, along with Slovenia, would join was made after a special meeting of finance ministers of the 12 euro zone nations and the president of the European Central Bank.
Finance Minister Algirdas Butkevicius and Reinoldijus Sarkinas, governor of Lithuania's central bank, confirmed the news on June 27. "I can formally confirm that Lithuania is a member of the ERM2," Butkevicius said.
Sarkinas said this meant that Lithuania could theoretically adopt the euro in the second half of 2006, provided it met all the requirements.
"Our position has not changed. We will make all efforts to make Lithuania part of the euro zone as soon as possible, but it is hard to say if this will happen exactly in two years' time," Sarkinas said. "We will have to solve many technical problems, such as minting euro coins."
ERM2 is a multilateral agreement that facilitates exchange rate stability in Europe. Countries which are part of it must keep their national currency stable against the euro and meet the Maastricht criteria on inflation, interest rates, fiscal balance and national debt. Each country wishing to adopt the euro must be a member of ERM2 for at least two years.
Lina Adakauskiene, Finance Ministry undersecretary, said that ERM2 membership gave Lithuania a theoretical chance of adopting the euro in two years.
"The best timing for replacing the litas with the euro will depend on the state's economic and financial situation, and it will be chosen only after the impact of this decision on the economy and possible after-effects have been assessed," she said.
Currencies of EU member states participating in ERM2 are allowed to fluctuate within the standard fluctuation band of plus/minus 15 percent. In Lithuania, for example, the upper limit is 3.9707 litas per euro and the lower limit is 2.9348 litas per euro.
Still, Lithuania has committed itself to sticking to the existing fixed exchange rate regime and maintaining the current exchange rate of the litas against the euro within a zero fluctuation band. According to the central bank, the country has stuck to this commitment since the fixed exchange-rate regime has served as a key factor in ensuring noninflationary and stable macroeconomic growth since 1994.
Specifically, ERM2 participants must bring their budget deficits to below 3 percent of gross domestic product, keep debts to within 60 percent of GDP and hold inflation to within 1.5 percentage points of the average of euro zone countries with the lowest inflation rate for a period of two years.
Lithuania currently complies with all the criteria.
In Estonia, government officials hailed the decision.
"Today's [June 27] decision to approve our application to join the exchange rate mechanism is historic for Estonia, as it creates a possibility for us to be technically ready for the single currency by the middle of 2006. It is primarily a recognition to the viability of our economic and budgetary policy principles in a united Europe," Estonia's Finance Minister Taavi Veskimagi said.
Latvia, meanwhile, announced that it would join the ERM2 regimen six months later - on Jan. 1, 2005. A Bank of Latvia spokesman was quoted as saying that joining the ERM2 was not a race and that a six-month difference will not mean a thing.
