Lithuania should become the 19th country to use the euro, the European Commission said, paving the way for the Baltic state to join the currency bloc Jan. 1.
The former Soviet republic, the only nation to have been turned down for euro-area membership, now meets the economic criteria to join the monetary union, according to the commission, the European Union’s executive arm.
“Euro adoption will be a major, hard-earned and well- deserved achievement for Lithuania and its people,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels today. “European integration has been and must remain the powerful driving force for stabilization, democracy and increased prosperity.”
Lithuania, whose bid to adopt the common currency was rejected eight years ago, completes a clean sweep for the Baltic region, with neighbors Estonia and Latvia switching in 2011 and 2014. The move comes as the region is battling to restore growth, counter low inflation and reduce unemployment.
The euro changed little against the dollar after today’s announcement, and was trading at $1.3613 at 12:33 p.m. in Brussels, down 0.1 percent on the day.
“The euro adoption is an economically and politically measured strategic step by Lithuania aiming at more rapid economic growth, and also a better life for all the residents of the country,” Prime Minister Algirdas Butkevicius said.
Today’s official recommendation by the commission, after consultation with the European Central Bank, needs the EU’s national ministers to make a formal decision next month after leaders discuss the issue at a summit on June 26-27.
“The news received today from Frankfurt and Brussels is not a surprise,” Lithuanian central bank Governor Vitas Vasiliauskas said. “Having done our homework responsibly, and after regular monitoring of our compliance with the convergence criteria, we expected exactly such an assessment.”
Lithuania is fully prepared to abandon the litas in favor of the euro, according to Vasiliauskas. Inflation through May 15 was 0.6 percent, lower than the 1.1 percent to 1.7 percent adoption requirement, while the fiscal shortfall was 2.2 percent of gross domestic product and government debt was 39.4 percent of GDP.
The low level of inflation in Lithuania “reflects mainly temporary factors, including the fall in global commodity prices and the associated lower growth in administered and energy prices,” and maintaining low inflation rates on a sustainable basis “will be challenging in the medium term,” according to the ECB.
The Baltic country has looked past public skepticism about the euro, reining in its budget deficit and taming inflation to meet EU thresholds — policies that have been rewarded with credit-ratings boosts. Lithuania is also seeking to cement its place in Europe amid heightened security concerns stemming from Russia’s annexation of Ukraine’s Crimean peninsula.
Investors have recognized Lithuania’s efforts to overhaul its economy. The yield on the government’s euro-denominated debt due 2024 has plunged to 2.719 percent from 3.425 percent when it was sold at the start of the year. That compares with 2.773 percent for comparable bonds issued by neighboring Latvia.
Lithuania failed in its bid to adopt the euro on Jan. 1, 2007, after inflation missed the EU’s target by 0.1 percentage point and the commission said prices would jump further. That prediction proved right as inflation peaked at 12.5 percent in 2008.
Adopting the euro requires that candidates fix their currencies to it for two years, keep their budget gaps within 3 percent of GDP, debt at less than 60 percent of economic output and inflation “sustainably” within 1.5 percentage points of the average of the EU’s three lowest rates.
Joining the euro also means that Lithuania will become a member of the EU’s fledgling banking union, including a centralized supervisory system that starts in November and a resolution mechanism that begins next year.
Standard & Poor’s raised Lithuania’s credit rating by two levels in April on the prospects for euro adoption. The rating was raised to A-, the fourth-lowest investment grade, on par with Poland, Slovenia and Malaysia.
Growth in the Baltic region’s largest economy slowed to 3.2 percent from a year earlier in the first quarter from 3.6 percent in the previous three months. GDP will expand 3.3 percent this year, the central bank predicts.
While Vasiliauskas says becoming the 19th euro-area state may boost growth by 2 percentage points during the next seven years, the public remains unconvinced of the benefits after witnessing bailouts from Greece to Ireland.
Support for euro adoption fell to 34 percent in March from 40 percent in November, with 56 percent of Lithuanians opposing the switch, the European Commission said on May 13.
The nation’s second stab at euro adoption must succeed to seal its place within Europe and boost regional development, according to Estonian central bank Governor Ardo Hansson.
“We’re not only expanding the borders of the single currency area, but also firmly securing the place of the Baltic states within Europe and the prospects for economic strengthening of the region as a whole,” he said on June 1. [Bloomberg]