Race for euro adoption slows

VILNIUS - Latvia and Lithuania are becoming less enthusiastic in following their Baltic neighbor Estonia into the eurozone, potentially delaying the next expansion of the common currency beyond 2014, reports Bloomberg. Lithuanian central bank governor, Vitas Vasiliauskas, said on June 8 that the government’s goal to adopt the euro in three years is “not something to kill yourself over.” His Latvian counterpart, Ilmars Rimsevics, on June 7 said that the currency shouldn’t be introduced “at any price.”

Lithuania, which in 2006 became the only nation rejected for euro adoption, and Latvia both pledged to follow Estonia, which introduced the currency this year. The rhetoric is changing and timetables may be pushed back as the euro region grapples with its sovereign debt crisis.
“There’s been a change in tone, no more talk about the targets,” said Jekaterina Rojaka, an economist with DnB Nord. “We hope that these changes won’t have an impact on budget planning. When the euro isn’t an immediate target, there’s less incentive to cut the deficit.”

Lithuania’s government should decide when it will adopt the euro only after meeting all the necessary criteria, as the situation in the currency union may change, Finance Minister Ingrida Simonyte said last month. “The costs and benefits of being in the eurozone now look somewhat different to what they seemed a few years ago,” Simonyte told Ziniu Radijas on May 23.“I’m not sure how much of these costs are acceptable to us.”

Potential entrants outside the Baltic region have also changed their stance, with Poland, the Czech Republic and Hungary slowing preparations to adopt the euro as the costs of extending financial support to nations like Greece rise.
Latvia implemented austerity measures equal to about 16 percent of gross domestic product since 2008, and Lithuania’s budget discipline totaled 12 percent of GDP as their economies went through the world’s worst recessions.
Both countries opted for the budget cuts to help maintain currency pegs to the euro before its full adoption. Latvia received a 7.5 billion-euro bailout loan package in 2008 from a group led by the European Commission and the International Monetary Fund.

“Euro adoption would mark a successful exit from Latvia’s ambitious and difficult program,” the IMF said on June 8. “A delay in euro adoption, when Latvia is so close, would be a tremendous lost opportunity to eliminate exchange rate risk and lower borrowing costs.”
To join the euro, countries must meet targets on inflation, budget deficits, debt, long-term interest rates and exchange-rate stability. Lithuania still aims to tame inflation and lower the budget deficit to meet the criteria by 2014, Prime Minister Andrius Kubilius told reporters on June 8. “Our goal remains the same: to have sustainable finances and the euro as an instrument in 2014.”

Lithuania’s accelerating inflation, the stumbling block to euro adoption in 2007, may prevent the country from meeting the requirements on schedule, said central banker Vasiliauskas.