European Commission decides Lithuania unprepared to introduce euro in 2007

  • 2006-05-17
  • Staff and wire reports

JUST A MINUTE: Grybauskaite tried her best to defend Lithuania's readiness for the euro, but to no avail.

VILNIUS - Te European Commission and the European Central Bank said on May 16 that Lithuania is not prepared to adopt the euro since it has failed to satisfy the Maastricht criteria on inflation. Convening in Strasbourg, commission and bank officials said that the annual inflation rate in Lithuania ending in March 2006 was 2.7 percent, over the reference value of 2.6 percent as set by the three EU members states with the lowest inflation.

Considering that consumer prices have actually picked up in the Baltic state 's the CPI amounting to 3.4 percent at the end of April 's it would appear that inflation will continue to remain above the reference rate and therefore hex Lithuanian policymakers.
The budget deficit, public debt and long-term interest rates have met the prescribed requirements, while the litas has remained stable in line with the requirements of the Exchange Rate Mechanism II since June 2004, when Lithuania joined the mechanism.
Dalia Grybauskaite, Euro-pean commissioner for financial programming and budget, criticized the conclusions set out in the commission's report. The commission, she said, should base its decisions on comprehensive economic logic and avoid an inflexibile and dogmatic interpretation of EU Treaties, she noted.

While acknowledging the borderline inflation, Lithuanian government officials had been hoping that Brussels would evaluate the price-rise in a favorable light and pave the way for Lithuania to become the first Baltic state and one of the first new EU members to phase in the common currency. President Valdas Adamkus has urged the government and other institutions to take a self-critical view of the efforts to comply with the criteria. "We can only regret that the growing economy, sharp increase in global oil and gas prices and, unfortunately, insufficiently considered administrative decisions led to a faster growth in prices," the president said in a press release. "Only a strict assessment of efforts can become solid grounds for the planning of our future activities," he added.

Jonas Lionginas, chairman of Parliament's finance and budget committee, said the commission's decision showed disrespect toward Lithuania. "Where does it say that the required inflation rate should be calculated by the indicators of all 25 EU members when accepting new members to the eurozone? If the required inflation levels were calculated by the indicators of the current 12 countries of the eurozone, Lithuania would not exceed the inflation threshold," he said. The opposition seized on the news. As leader of the opposition Lithuanian Liberal Movement, Petras Austrevicius, said, "The commission's move is a blow to the international community's trust and, foremost, Lithuania's macroeconomic stability and economic convergence. The government should acknowledge its failure to do its homework and assume full responsibility."
Under Lithuanian law, a resolution expressing no-confidence in the government may be proposed by at least one-fifth of Parliament, or 29 members. The resolution would have to be passed in secret ballot with at least half of the MPs voting in favor.
Businessmen warned of financial repercussions in the private sector.

Marius Busila, director of the Economic and Financial Department of the Lithuanian Industrialists' Confederation, said the rejection could slow the country's integration into the EU economic space. "If we had been the first to introduce the euro, we would have acquired a competitive advantage both as a nation and as individual businesses," he said.
Specialists say the news will have an adverse effect on foreign direct investment, since euro membership would have guaranteed economic stability. As euro interest rates are lower because they are controlled, adoption would have favorably impacted business productivity. Moreover, with EU countries accounting for around 65 percent of Lithuania's trade, euro entry would have enabled companies to save on conversion costs.

FDI in Lithuania is two times lower than in Estonia (and five times on a per capita basis).
Rimantas Busila, president of the Lithuanian Banks' Association, said that banks had undertaken great efforts to prepare for the planned replacement of the litas with the single currency. These investments may turn out to be wasted because the implemented technologies can become outdated in several years' time.

Meanwhile, real estate specialists lament their losses as the greatest. "The impact on the real property market will depend on how long the euro introduction is delayed: a year or three years," said Aleksandras Zimnickis, director of the real estate agency Domus Optima. As he explained, in Vilnius and surrounding areas, a considerable number of land plots have been held out of the market in anticipation of the country's euro entry. Government and public opinion were still not known since the commission made its decision as The Baltic Times went to press. In Grybauskaite's opinion, the commission had a chance to follow economic logic instead of the constricted application of legal arguments. What's more, she pointed out that Lithuania's inflation rate as set out in the report was estimated in a simple arithmetic method without due regard to all major factors.

The final assessment was too inflexible, considering that Lithuania met the other four Maastricht criteria, she noted.
The purpose of Maastricht criteria was to promote economic stability and development and, if applied dogmatically, those goals would not be achieved, the commissioner warned. The government, for its part, reiterated that it was committed to acquiring the euro.

"Adoption of the euro remains the key objective of Lithuania, and the government will seek to implement stringent fiscal policy and maintain public financial discipline," Finance Minister Zigmantas Balcytis said at a news conference on May 16.
He could not make any projections of a future date that might be set for euro adoption. "It would be irresponsible to do that today since the European Union has no firm decision over the enlargement of the eurozone," he said.