Budget deficit risk to Lithuania’s euro hopes

  • 2013-05-15
  • From wire reports

VILNIUS - With Latvia on track to adopt the euro on Jan. 1, that leaves Lithuania, among the Baltic countries, still waiting to join the club. Lithuania has real possibilities to introduce the euro in 2015, but in order to achieve this, the government should refrain from populist and consumption-encouraging decisions, which would increase inflation and the government’s deficit, say analysts at DNB Bank, reports ELTA.

The analysts predict that next year more favorable macroeconomic conditions necessary to meet the Maastricht criteria will develop in Lithuania, and the country will have a real opportunity to be invited to join the eurozone.
However, the analysts say that the greatest risk to euro adoption will be posed by criteria of the price stability and the government budget deficit. If Lithuania’s chances to join the euro zone were considered now, Lithuania would not meet the criteria.

DNB analysts say that if public sector spending and consumption grows too much, Lithuania’s inflation and budget deficit are at risk of not complying with the criteria next year.
The Confederation of Industrialists carried out a survey which revealed that Lithuanian entrepreneurs approve of the euro, but they disagree on the timing for the euro adoption. Eighty-four percent of 130 surveyed companies support the euro introduction in Lithuania, while 13 percent of domestic producers do not want to change the current currency - the litas. Three percent refrained from answering.

However, opinions differ on the date of the single currency introduction. Fifty-one percent of respondents would like to join the euro area as soon as possible - in 2015, while 45 percent want to wait for the proper time when debt storms in Europe settle down.

Analyst at the Confederation of Industrialists Aleksandras Izgorodinas thinks that the main reason why people are sceptical of the euro are worries that the adoption of the EU currency will hit the country’s economy.
Prime Minister Algirdas Butkevicius says that if Lithuania joined the eurozone, it would become more financially stable.
“This year we will be getting ready to adopt the euro because joining the single currency area would primarily mean greater financial stability. Although de facto we already have the euro, unfortunately we do not feel all the advantages of the euro area,” Butkevicius said May 4 at the 31st Congress of the Lithuanian Social Democratic Party.

According to the PM, currently 70 percent of all loans are in the euro, therefore each year due to conversion of the litas to the euro between 100 million litas - 120 million litas is lost.
“Once the euro is adopted, people and the state will be able to borrow at lower interest rates, investment will increase,” says the PM.

The Social Democrats-led government is planning to introduce the euro in 2015.