Inflation obstacle to Lithuania’s eurozone hopes

VILNIUS - Lithuania has reaffirmed its intention to apply for eurozone membership in 2014 even though its accession could very well be delayed by the currency union’s ongoing problems or by its own failures to meet EU-mandated financial targets, reports Stratfor. Clearly some EU countries still want to join the eurozone despite the risks that membership entails. For Vilnius, the rewards of membership may outweigh the risks if stronger orientation to Western Europe distances Lithuania from its longtime adversary, Russia.

Lithuanian Prime Minister Algirdas Butkevicius said his country remained resolute in its decision to join the eurozone as recently as July 18. If the accession process goes smoothly, Lithuania would gain entry as early as 2015, becoming the final Baltic country to have adopted the euro. Estonia joined the eurozone in 2011, and Latvia is set to become the union’s 18th member in 2014. Eurozone membership would be yet another step in Vilnius’ path to insulate itself from Russian influence - it joined NATO and the European Union in 2004.

In addition to escaping Russian influence, Lithuania hopes that eurozone accession would ensure economic prosperity through greater foreign investment. The 2008 financial crisis hurt the Lithuanian economy, but the country has since recovered, showing some resilience to the ills affecting other European countries. In 2009, the economy contracted by almost 15 percent. By mid-2010, the unemployment rate was more than 18 percent - nearly five times higher than it was in 2008. But Lithuania’s has been one of the fastest growing economies in the European Union, growing at an annual average of 3.7 percent over the past three years. It is expected to grow at around 3 percent this year. Unemployment has also dropped from the high in 2010; in May, it stood at 11.7 percent, according to Eurostat.

On the surface, Lithuania’s eurozone accession appears both inevitable and straightforward. The Lithuanian currency, the litas, has been fixed to the euro since 2002, and it has been part of the European Exchange Rate Mechanism, a requirement before joining the eurozone, since 2004. Moreover, Lithuania appears ideally suited to implement EU austerity measures. Over the past few years, Vilnius has cut social security contributions and wages to keep government debt and deficits in check. It also cut its budget deficit from over nine percent in 2009 to 3.2 percent in 2012. The government’s debt level is at around 41 percent of gross domestic product, well below the 60 percent threshold under EU guidelines.

However, Lithuania’s joining of the currency bloc may be more daunting than it first appears. Lithuania wanted to join the eurozone by 2007, but in 2006 the European Union said Lithuania’s inflation rate was too high for consideration (at the time, its inflation was 3.5 percent, higher than the 2.7 percent limit set by the bloc). Notably, some in Lithuania partly blamed the country’s inflation problem on Russia, on which Lithuania relies heavily for natural gas imports. Rising gas prices at the time were seen as contributory to higher energy prices and inflation. As part of its overall strategy to distance itself from Russia, Lithuania now wants to lessen its natural gas dependency from its eastern neighbor by importing liquefied natural gas in late 2014.

Regardless of who is to blame, inflation is still seen as an obstacle for Lithuanian eurozone membership. Lithuania’s economy is expected to continue growing, so the government will have to try to regulate wage increases to contain inflation. In any case, the budget deficit will have to be reduced to - and kept at - below three percent. In trying to meet those targets, the government risks angering voters and fueling opposition toward eurozone accession. According a survey conducted in January, roughly 57 percent of Lithuanian citizens disapprove of eurozone membership.
But business leaders largely approve of joining the euro. A survey published by the Lithuanian Confederation of Industrialists in May showed that 84 percent of businesspeople asked want Lithuania to join the eurozone. However, only 51 percent said this should happen in 2015, and some 45 percent said Lithuania should only join once the eurozone is more stable.

But public discontent alone will not derail the government’s plans. Vilnius does not have to hold a referendum on eurozone accession. Further economic deterioration at home and in the currency union could change Vilnius’ plans, but for now this seems unlikely.

The Lithuanian government will keep pushing for eurozone accession, even if the accession process is delayed once again. Flawed as it is, the currency union probably is a preferable alternative to isolation as eurozone countries try to forge closer ties with one another at the expense of the remaining EU members.

Lithuania is worried that the European Union’s interest in Eastern Europe, especially in countries that are part of the Eastern Partnership Program but not the bloc itself, will wane as EU powerbrokers concentrate on resolving the issues at the core. Lithuania currently holds the EU presidency, and until the end of the year will use this as a platform to highlight its strong ties with Western Europe and advocate stronger integration of Eastern Europe.