As the three Baltic states have set their goals to join the European Union, it is expected that the euro might substantially decrease the role of the U.S. dollar in these countries' economies.
The euro has entered the Baltic markets through trade with the EU, which is a major export partner for Estonia, Latvia and Lithuania. As trade grows, so does invoicing in euros, now that 11 EU member states use their national currencies only for domestic cash payments.
At the Euro Conference in Riga, held Feb. 17 and Feb. 18, representatives of the Baltic banks predicted the share of euro transactions will increase by the end of the year.
Unibanka's Vice President Viesturs Neimanis said, "The euro is a more important currency for our export [than the U.S. dollar]," since 28 percent of Latvia's exports in the first nine months of 1998 went to what is now known as "Euroland" - any of the 11 euro countries.
Neimanis said international payments are dominated by the U.S. dollar, but predicted the picture will be different by the end of the year.
"I see the potential for an invoicing structure in which the euro will play an important role," he said.
Stasys Kropas, director of the International Relations Department at the Bank of Lithuania, agreed that as trade with EU countries grows, the role of the U.S. dollar shrinks.
"In Lithuania, the U.S. dollar still dominates, but its role has decreased over the past few years," said Kropas, who added that exports to the EU in 1998 comprised 39 percent of Lithuania's total export.
Last year, settlements in U.S. dollars decreased by 10 percent and now constitute only 55 percent of all transactions. Seventy-eight percent of borrowing was done in dollars in 1998, but Kropas said the Lithuanian government had announced the restructuring of the loan portfolio and stated that all new borrowing will be in euros.
Estonia, which is a step ahead of its Baltic neighbors on the road to the EU, is more directly influenced by the introduction of the new currency.
"Euro-denominated deposits have more than doubled. It's a clear sign that the euro is becoming more widely used in Estonia," said Andress Sutt, deputy head of the International Relations Department at the Bank of Estonia.
As the Baltics move closer to joining the EU, they will have to make an important decision about whether to peg their national currencies to the euro.
The Estonian kroon, which is pegged to the deutschemark, indirectly became pegged to the euro at the beginning of the year.
Kropas said Lithuania's central bank has already decided to change the litas' peg from the U.S. dollar to a basket of currencies.
"In our exchange rate policy, we will move to the basket of currencies, and peg litas to the U.S. dollar and the euro in 2000. It will lead to stabilization of trade relations with the EU and accelerate orientation to the euro area," he said.
Last week, Ainars Repse, president of the Bank of Latvia, surprised everyone by saying Latvia might abandon its national currency in favor of the euro even before it joins the EU.
In an interview broadcast on the BBC World Service Weekly Business Review, Repse said it would be "very wise" for the Baltics first to re-peg their national currencies to the euro and then introduce the new currency to unify their markets, the Baltic News Service reported.
"And this may happen even before actually joining the European Union," Repse said, noting that such a move would be beneficial for the three countries.
Repse said he does not see why the Baltics would not be able to swap litas, lats and kroons for the euro after they meet the Maastricht criteria.
Although at this point, pegging the lat to the euro is "purely theoretical," as Repse said, this has been the first announcement that Latvia may change its peg from the SDR basket of currencies to the new European currency.
Even if the Baltics do not introduce the euro in the near future, they will have to do it once they are accepted in the European club.
When the euro was introduced Jan. 1, Great Britain, Denmark and Sweden opted to stick to their national currencies. (Greece desperately wanted in but did not qualify.) The three Baltics will not have the same opportunity.
Alexandra Cras Granje, head of the unit for candidate countries and related issues at the European Commission's economics and financial affairs office said if new countries are accepted, "there will be no opt-outs of the European Monetary Union."
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