Lithuania Adopts Euro as Russian Worries Rattle Baltics

Lithuanians celebrated with fireworks and toasted champagne bought with euros as their country finished a quarter-century transition from a communist economy to a member of the single European currency.

Swapping its litas for euros at midnight, the Baltic country of 3 million wedged between Poland and Latvia became the 19th member of the currency bloc. Crowds gathered by the cathedral on the main square in the old town of Vilnius, the capital, as Prime Minister Algirdas Butkevicius withdrew the country’s first euros from a bank machine.

Lithuania’s entry puts the entire Baltic region in the euro area after neighboring Latvia’s accession a year ago and Estonia’s in 2011. It also comes as the countries, which gained independence in 1990 and 1991 during the collapse of the Soviet Union, are seeking greater security guarantees from their allies amid signs of growing Russian expansionism.

“Joining the euro zone is a very logical step in the chain of very important steps for my country,” Finance Minister Rimantas Sadzius said in an interview. “Euro adoption is perhaps the final step at this stage of integrating Lithuania into the single market of western Europe. This of course has security implications, like joining NATO and the European Union.”

Euro adoption “went smoothly and successfully,” central bank Governor Vitas Vasiliauskas said in a news conference today. Euros accounted for some 28 percent of money in circulation on the first day of the currency-switch, he said.

Last In

Eastern European countries that joined the EU in 2004, 2007 and 2013 are obliged to adopt the single currency once they meet the economic criteria.

Yet as political turmoil in Greece triggered snap elections this month, shaking financial markets and rekindling memories of the euro-area debt crisis, Lithuania may be the last addition to the euro club for several years. While Romania has set 2019 as its target date for joining, the biggest eastern EU members, including Poland, the Czech Republic and Hungary, are clinging to their currencies.

For Lithuania, the euro promises both a political and economic boon. After having no independent monetary policy for 20 years because of its currency pegs, the country now gains a say in the ECB’s decision making, access to Europe’s bank resolution fund and cheaper borrowing costs.

“There’s also a geopolitical reason that is more relevant for the Baltic states than for any other EU country,” Butkevicius said.

Security Blanket?

Lithuania, which joined the North Atlantic Treaty Organization and the EU in 2004, also considers the single currency an economic shield as its concerns grow over Russia’s actions in Ukraine.

The alliance has accused Russian President Vladimir Putin’s government of inciting a separatist rebellion there, while the EU and U.S. have sanctioned individuals, companies and industries in what has become the biggest standoff between the Cold War foes since the fall of the Iron Curtain.

Lithuania put military units on high alert for five days last month to respond to increased Russian military activity close to its borders. The number of Russian military planes intercepted by NATO fighters over the Baltic Sea near its members’ borders at least tripled last year, according to the alliance.

“The closer we are to the West, the further we are from the East,” Vasiliauskas said in an interview. “As a central bank governor, I shouldn’t get myself involved in geopolitical discussions. But these are the facts today.”

Euro Snub

Lithuania’s path to adopting the currency was marred by a historic snub in 2006, when it became the only nation to be turned down for euro-area membership. It missed the EU’s inflation target by 0.1 percentage point, and the European Commission, the 28-member bloc’s executive arm, said prices would jump further. Inflation peaked at 12.5 percent in 2008.

The country then suffered a 15 percent economic contraction during 2009 when the government pushed through wage cuts and tax increases equivalent to 12 percent of annual output. The strategy was aimed at curbing a swelling budget deficit and keeping the litas pegged to the euro during the global financial crisis.

That sent a wave of Lithuanians pouring out of the country to seek jobs elsewhere in the EU after unemployment doubled, with 83,000 people, or almost 3 percent of the population, leaving in 2010 alone.

The second attempt at adoption went smoothly. Inflation is set to drop to 0.3 percent this year, the lowest since 2004, according to the central bank. The budget deficit will narrow to 1.9 percent of gross domestic product, from 2.2 percent last year. Public debt is the euro area’s fourth-lowest.

Strong Peg

“Lithuania has taken exceptional measures at difficult times to reach its goal of joining the single currency,” European Central Bank President Mario Draghi said in a video message posted on YouTube. “This is an achievement from which both the euro area and Lithuania will benefit. The euro area is enriched by a small country of great history, culture and economic achievements.”

Lithuania will be among the poorest euro members, with GDP per capita at 73 percent of the EU’s average in 2013, on par with Greece and Estonia and ahead of Latvia. With the central bank forecasting economic growth of 3.1 percent in 2015, the nation is still gaining on richer EU states, even if a slower expansion there may undermine the $46 billion economy’s main source of growth.

“The country is well placed to thrive in the euro,” EU Economic Commissioner Pierre Moscovici said in a statement. “In joining the euro, the Lithuanian people are choosing to be part of an area of stability, security and prosperity.”

Public Support

Backing for the euro surged to 53 percent in Lithuania in November, according to a central bank-sponsored poll of 1,002 people, which didn’t provide a margin of error. That compares with 31 percent support in March 2006. Of those opposing the currency switch, 49 percent said they were concerned over price increases and 26 percent said they objected to losing national identity.

Lithuanian euro coins feature a knight on horseback with a sword and shield, the Vytis, which has graced the country’s currency since the 14th century. They go into circulation today, starting a two-week phasing out of the litas.

“I personally feel sad that the litas, which has served us well for over two decades, becomes history,” Sadzius said, withdrawing his first euro notes from a bank machine at the euro introduction ceremony. “But we have to move forward.”

Vasiliauskas will join the ECB’s Governing Council, which will hold its next policy-setting meeting on Jan. 22 in Frankfurt. Lithuania’s chief central banker praised today the ECB decisions last year to help “revive the real economy by supplying banks with money.”

“I don’t have any preconceptions and the division between hawks and doves is only a game,” Vasiliauskas said of his role at the ECB. “I’m flexible myself but it’s also important that other actors, and I mean the governments of the member states, also do their job. The ECB alone within its mandate can’t solve all the problems. It can’t simply splash money, the economic situation in the euro zone won’t improve just because of that.”

(Source: Bloomberg)