WELCOME?: Will euro adoption result in the price increases Lithuanians already fear?
At the end of last year The Baltic Times launched a journalism competition, and last week the TBT judging panel met to decide who the winners should be. All were agreed that the first prize should be awarded to Nathaniel Curiel for his piece on Lithuania and the euro. His winning article is printed here without correction, and readers will clearly see how well Nathaniel has used his language skills to compose a very readable piece about Lithuania adopting the euro.
A special thanks is extended to all the participants and congratulations to all the winners.
Lithuania is on track to become the last of the Baltic States to enter the Eurozone; if all goes to plan, it will trade in its litas for shiny new euros at the start of 2015. Back in 1990, Lithuania became the first of the three states to declare independence from the Soviet Union. Near to a quarter of a century later, the protection of Lithuanian independence continues to be a guiding principle in the country’s policy decisions. In 2013, Russia initiated a temporary ban on the import of Lithuanian dairy products, due to safety concerns, which was widely seen as unjustified and punitive. Lithuania sought in turn to alleviate both the monopoly by the Russian Gazprom on the importation of natural gas and its status in Europe as an “energy island” by anchoring a large ship capable of processing liquified natural gas off of the port of Klaipeda, reports the New York Times. The name of the ship: Independence.
Latvia joined the eurozone at the start of 2014, and Estonia in 2011. By setting 2015 as a new target date for adoption, Lithuania is seeking to finalize its convergence with the EU and its Baltic neighbors, in addition to alleviating its dependence in certain sectors on Russia and the leverage that dependence makes possible. But there are concerns. Some economists predicted that Lithuania would have difficulty meeting the Maastricht Criteria for euro adoption, though such concerns have lately receded behind the country’s sustained rally to get the economy looking presentable. On the other hand, according to the latest Eurobarometer survey, 52 percent of Lithuanians are opposed to the single currency and a mere 40 percent in favor. Leading up to Latvia’s entry, the media of western Europe were full of headlines expressing confusion and disbelief at the enthusiasm of that country’s political leadership for joining the euro. What these stories failed to really convey, the rationale behind Lithuania and the Baltic states’ determination to join the Eurozone has always been as much driven by real, pressing political and foreign policy considerations as economic ones.
From strength to strength
Lithuania’s recently concluded Presidency of the European Council has been put forward by Dalia Grybauskaite, the President of Lithuania, as irrefutable evidence of the country’s maturity and good citizen of Europe status. “We have proved that Lithuania is a responsible, reliable, and trustworthy country” the president said at the closing event of the EU Presidency. Lithuania had to contend with a workload volume two and a half times the norm, against the backdrop of ongoing recession and with a fairly small presidential budget (62 million euro). The high-water mark of the presidency was the Eastern Partnership Summit which took place in Vilnius in late November of last year. The summit saw several countries drawn further into the European fold and set to embark on the road to EU accession, while the government of Ukraine folded under pressure from Moscow, uncorking widespread and continued civil protest in that country.
This show of Russia’s willingness to exert soft power- to prevent the drifting out of orbit of countries traditionally within its sphere of influence- has been seismically felt throughout the region. On a January visit in Riga with Latvia’s President Andris Berzins, Grybauskaite said: “We need to take a number of concrete urgent steps that are essential for the security and well-being of our people. Standing together we will successfully resist external challenges, speed up implementation of key projects, and strengthen energy and economic security in the Baltics.” Prominent among these urgent steps is euro adoption, which the president said would serve to bolster competitiveness in the region and attract investment.
The toast of Vilnius
Enthusiasm for the common currency is at a high ebb within Lithuania’s government. While the Seimas was in session on January 23, the draft law and secondary legal acts on the introduction of the Euro in Lithuania were approved with near unanimity: 103 MPs voted in favor, with 3 against and 2 abstaining, reported the Lithuania Tribune. The draft law is meant to harmonize national law with EU legislation, thereby bringing the country into full compliance with the Maastricht Criteria. Lithuania’s previous bid to join the eurozone, in 2007, was thwarted by a too-high inflation rate. As of the time of writing, however, the inflation outlook is good, and Lithuania appears to be on track to meet all of the Maastricht Criteria.
The area of concern has shifted to the national budget deficit, which will be affected by increased old age and disability pensions payments meant to make up for sharp cuts in those areas during the height of the country’s austerity regime, from 2010-2011. There is also pressure on the government to dramatically increase the minimum wage to 1,500 litas (434 euro) in anticipation of euro adoption-related price hikes, though Prime Minister Butkevicius has said that this will not happen until the average salary, now among the lowest in Europe, reaches 3,000 litas, as reported in the Baltic Times. All of the wage- and pension-slashing took place at a time when Lithuania, hit catastrophically hard by the eurozone crisis, opted to forgo devaluation of its currency. Reuters reports that the restoration of pensions might cost from 1 to 1.2 billion litas (300 to 350 million euro) in additional spending, or 1 percent of GDP, which will drive the budget deficit up close to the 3 percent limit dictated by the Maastricht criteria. Nevertheless, Minister of Finance Rimantas Sadzius told Delfi he was optimistic about the figures that Lithuania will have to report to the European Commission this March.
In an interview with Delfi early this year, Sadzius called the euro “a prerequisite for continued economic development” and said it was the government’s highest priority. GDP is projected to grow by four percent this year, and 4.5 percent in 2015, one of the highest rates in the EU, according to Swedbank Lithuania’s predictions. The Finance Ministry’s projection is more conservative, putting 2013 growth at 3.2 percent, and 2014 growth at 3.4 percent. Growth will be on the strength of increased domestic consumption as well as increased investment. Sadzius told the Financial Times that, as a small economy, there simply aren’t the financial resources in the country to undertake large projects without significant investment from outside.
The power to attract this foreign investment is among the principle selling points for bringing the euro to Lithuania. As the Baltic country with the largest economy and largest and most homogenous population, Lithuania is poised as well as keen to take on a position of leadership in the Baltic Sea Region. From the outside, the Baltics are often looked at as one market. It is not difficult to imagine exchange rate risk-averse investors passing over Lithuania and its litas in favor of Latvia or Estonia should the changeover fail to occur. From this standpoint, the euro clearly is the “logical next step” as Sadzius and his fellow ministers, like their Latvian counterparts in 2013, are so fond of saying.
Rounding up and down
If the voices of Lithuanian politicians extolling the euro have joined into a kind of monotone hum around the streets of Vilnius in recent months, the voice of one politician has stood out from the rest. Upping the rhetorical ante- and putting his job on the line- Prime Minister Algirdas Butkevicius has said that he would resign from office if Lithuania failed to join the eurozone in 2015, reports Lietuvos Rytas. The political will is undoubtedly there, but what about the public will? According to the latest Eurobarometer survey, the number one problem most people feel they face across Europe is increasing prices.
Lithuania tied with Slovakia for the highest percentage of respondents who gave this answer, at 60 percent. There is also an emotional component to euro resistance; like Latvia and its lats, the name of Lithuania’s currency alludes to the country’s name. Despite the level of public dissent, calls for a referendum have largely come to nothing. In contrast to the dissenting economists and PMs who may feel that the euro is doomed, or that Lithuania is unready and should push the target date back to 2020, the number one concern among the people is abusive price setting. Rounding up on retail prices, and rounding down on salaries and pensions. Furthermore, the cost of the changeover itself could be up to 800 million litas (230 million euro), which will likely force Lithuania into borrowing, raising fears that a freeze on pensions and wages may follow Delfi reports the government has pointed out that these are one-off costs, and that under Lithuania’s National Changeover Plan, business owners will be encouraged to sign a “Good Business Practice Code” pledging not to use the euro as an excuse to raise prices. Olli Rehn, European Commissioner for Economic and Monetary Affairs and the Euro, speaking in mid-January of this year in Riga, said that there is “no evidence of significant price raises” from previous changeovers.
Speaking to Latvia’s analogously low approval rating for the euro, Rehn said that as time goes by, fears subside and support increases, and that the case of Estonia testifies to this fact. The pros of the euro, according to Rehn, actually include better price transparency for consumers, along with improved medium-term economic prospects, foreign investment, elimination of exchange rate risk, among others. Crucially, he said, it “anchors perceptions of the adopting state as a stable partner.”
“First of all, we already have this currency, because the Lithuanian currency has been pegged to the euro for quite a long time, and we feel all the winds that blow in the eurozone.” This is Finance Minister Sadzius speaking to the Financial Times, but it could just as easily be former Latvian PM Valdis Dombrovskis speaking to the Economist this time last year. It’s a popular thing for politicians to say. But is it true? It is true that Lithuania, like Latvia, pledged to adopt the euro as a condition of joining ERM-II, though not along any particular timetable. It’s also true that most Lithuanians already take out their mortgages and loans in euros. The Baltic countries were dragged deep into the maelstrom of the eurozone crisis despite not being in the eurozone, and there is no real reason to suspect it would necessarily have been worse had they been. Can a peg be broken? Again, in theory Lithuania is permanently pegged to the euro. Lithuania’s economy is too small at this point to sustain a floating currency in Europe, and to break the peg would likely be to invite economic disaster.
Because we must
The EU and ECB will present their conclusions on Lithuania’s eligibility in June, and make a formal decision in July. Provided they can keep their budget deficit below 3 percent, Lithuania will adopt the euro on January 1st. As in Latvia, the changeover will take place in spite of a low level of public support. They will do it not because it is a great or exciting time to do so- far from it; they will do it because Lithuania is a “catching up” economy and can’t afford not to, they will do it because it is, after all, the final, if not “logical” step toward achieving full EU convergence, toward safeguarding their economic independence against meddling from the east, toward growing into the role of a regional leader. It won’t be easy with the euro, but it would be harder without it.