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Lithuania Moves Closer to Joining Euro Zone Lithuania Moves Closer to Joining Euro Zone
(about 7 hours later)
FRANKFURT — The euro zone is closer to adding its 19th member. FRANKFURT — The looming deflation. The rising tide of anti-European populism. The near-record unemployment.
The Baltic state of Lithuania received preliminary approval on Wednesday to join the currency union at the beginning of 2015, in what is likely to be the last expansion of the troubled bloc for several years. The euro zone is a club that few potentially eligible countries are eager to join. But Lithuania on Wednesday moved closer to becoming its 19th member.
Lithuania, with about three million people, fulfills the economic and legal criteria necessary to join, the European Central Bank and the European Commission said, after conducting separate assessments of the country’s readiness. The country received a passing grade from the European Central Bank and the European Commission on the requirements for membership. On Jan. 1, if all goes according to plan, shops in the country will start accepting euros and Lithuanians will cede sovereignty over monetary policy to the European Central Bank.
Lithuania’s membership must still be approved by European governments after consultation with the European Parliament. Lithuania may be the last new member of the euro zone until the end of the decade, or even longer. Of the seven other European Union countries still planning to join someday, none meet all the criteria for economic performance, budget discipline or central bank independence, according to a status report issued on Wednesday by the European Central Bank.
The country would begin using the euro as its legal tender on Jan. 1, becoming the latest member since Latvia, its neighbor and fellow former Soviet republic, joined at the beginning of this year as the 18th nation in the bloc. Reading the so-called convergence report, it is hard to escape the impression that countries like Sweden or the Czech Republic are not yet being invited to join because they are not really trying. So Lithuania’s lone admittance among the current outsiders serves more as a reminder of the tarnished dream of a single currency than as a confirmation of the euro’s continuing appeal.
Membership in the euro zone ties Lithuania yet closer to western Europe at a time when Russia is striving to reassert influence in former Soviet republics. In theory, all members of the European Union are required to strive for euro membership, excluding Britain and Denmark, which opposed the idea when the euro was created by treaty in 1992 and received permanent exemptions. To qualify, countries must make changes to their legal systems and economies, such as loosening rules on hiring and firing.
The Lithuanian prime minister, Algirdas Butkevicius, suggested that linking his country to Brussels through the single currency would improve security for his people in the wake of Russian aggression in Ukraine. The European Union countries that remain outside the currency group are not showing much enthusiasm for doing that. In addition to Sweden and the Czech Republic, the other five are Bulgaria, Hungary, Croatia, Poland and Romania.
Becoming a part of the single currency area “is one more step toward the deeper economic, financial and political national security,” Mr. Butkevicius said in a statement issued by Lithuanian diplomats in Brussels. “The countries that are left still have a lot to do structurally,” said Mujtaba Rahman, director of Europe for the Eurasia Group, a consulting firm. “In order to progress, you need to invest some political capital. Some countries are delaying making those difficult choices.”
The move, he said, would mean a “better life for all the residents of the country.” A case in point is Poland. With more than 38 million people and one of the fastest-growing economies in the European Union, Poland would be a welcome addition to the euro club. But the government, facing strong opposition in Parliament, has not put a priority on bringing its central bank laws into harmony with euro zone standards.
Countries that join the euro cede control of monetary policy to the European Central Bank, and they can no longer allow their currencies to depreciate as a way of making their exports more competitive on world markets. “They have mixed feelings about joining the euro,” Mr. Rahman said. “It’s more a political constraint than an economic one.”
But Lithuania has tied its currency, the litas, to the euro for a decade, and membership in the euro relieves the country’s central bank of having to defend its value against speculators. If Lithuania’s membership is approved, as expected, by European governments after consultation with the European Parliament, the country will become the latest member since Latvia, its neighbor and fellow former Soviet republic, which joined at the beginning of this year. Estonia, another Baltic country, joined in 2011.
Vitas Vasiliauskas, the chairman of Lietuvos Bankas, the Lithuanian central bank, will become a member of the European Central Bank’s governing council with a voice in euro zone monetary policy. The euro remains appealing to the smaller countries like Lithuania, a nation of three million people whose entire economic output equals less than half a year’s revenue at Apple. Membership protects them from attacks by currency speculators, and a closer embrace with Europe offers additional help.
But a report issued Wednesday by the European Central Bank suggested that euro membership remains a distant prospect for other potential members like Hungary, Romania and Sweden. The Lithuanian prime minister, Algirdas Butkevicius, suggested on Wednesday that linking his country to Brussels through the single currency would be beneficial in the wake of Russian assertiveness in Ukraine.
Of eight European Union countries that remain outside the euro zone, none except Lithuania fulfill the standards for membership and many do not seem to be making much of an effort to do so. The E.C.B. highlighted shortcomings in areas like budget discipline, central bank independence and economic performance. Adopting the euro “is one more step toward the deeper economic, financial and political national security,” Mr. Butkevicius said in a statement issued by Lithuanian diplomats in Brussels.
After six years of crisis and near-record unemployment, the popularity of the European Union is at a low ebb in the wake of a series of financial and debt crises that nearly destroyed the euro. The move, he said, would mean a “better life for all the residents of the country."
Parties that are hostile to the European Union or want to abandon the euro made big gains in elections to the European Parliament last month, including in countries like Britain, France, Germany and Denmark. The big sacrifice of euro zone membership is that countries can no longer allow their currencies to depreciate as a way of making their exports more competitive. That drawback is on painful display in Greece. Without their own currency to absorb the shock of the debt crisis, many Greeks have had to accept steep wage cuts, which in turn have undercut government tax receipts and corporate profit.
In that atmosphere, countries like Poland and the Czech Republic are moving cautiously toward euro membership, if at all. In fact, the European Central Bank is now preoccupied with preventing other countries from slipping into the same deflationary cycle of falling prices and wages as Greece.
In theory, all European Union members are required to strive for euro membership, with the exception of Britain and Denmark, which have exemptions. Of the remaining eight noneuro countries, only Lithuania has fulfilled the prerequisites. Lithuania has tied its currency, the litas, to the euro for a decade. So it is will not really give up any room to maneuver. On the contrary, use of the euro relieves the country’s central bank of the stress of having to defend the value of the litas on currency markets.
The other countries are not yet participating in the European exchange rate mechanism, under which they pin the value of their currencies to the euro. And the European Union clearly retains appeal to countries outside its borders, as Ukrainians have amply demonstrated in recent months.
Countries must be in the exchange rate mechanism for at least two years before they can join the euro. There is no sign that any of the countries outside the euro will join the mechanism soon, meaning that further expansion of the euro zone is years away. But countries like Hungary and Sweden seem to prefer having it both ways — the easy trade and travel that membership in the bloc brings, without the straitjacket of the euro.
Some of the countries actually seem to be drifting further from European norms. Viktor Orban, the prime minister of Hungary, has been accused of infringing on news media freedom and meddling in central bank policy. After six years of crisis and near-record unemployment in the region, political leaders feel little popular pressure to join the euro zone. Parties that are hostile to the European Union or want to abandon the euro were the big winners in elections to the European Parliament last month. That was true even in France and Germany, the bloc’s two largest members, as well as in Britain and Denmark.
In its report on Wednesday, the European Central Bank urged Budapest to respect the independence of the Hungarian central bank and also expressed concern about government measures to relieve Hungarian borrowers by restructuring loans at the expense of commercial banks. The remaining seven outliers are not yet even participating in the European exchange rate mechanism, a sort of junior membership under which national central banks pin the value of their currencies to the euro. Countries must be in the exchange rate mechanism for at least two years before they can join the euro, but there is no sign that any of the countries outside the euro will start participating even in that preliminary system soon.
Sweden, which is supposed to be moving toward euro adoption, has been dragging its feet on laws necessary to harmonize with euro zone standards, the European Central Bank said. Some of the countries actually seem to be drifting further from European norms. Viktor Orban, the prime minister of Hungary, has been accused of infringing on the freedom of the press and meddling in central bank policy.
“As yet no legislative action has been taken by the Swedish authorities to remedy the incompatibilities described in this and previous reports,” the E.C.B. said. The European Central Bank chided Budapest on Wednesday, urging the country to respect the independence of the Hungarian central bank. It also expressed concern about government measures to relieve Hungarian borrowers by restructuring loans at the expense of commercial banks.
Even in Lithuania, a poll last year showed that opponents of euro membership outnumbered supporters by a wide margin, though sentiment may have shifted recently after the aggressive moves by Russia in Ukraine in recent months. Sweden, which is supposed to be moving toward euro adoption, has been dragging its feet on laws necessary to harmonize its policies with euro zone standards, the European Central Bank said. “As yet no legislative action has been taken by the Swedish authorities to remedy the incompatibilities described in this and previous reports,” the bank said, with a hint of peevishness.
For Olli Rehn, the European commissioner for economic and monetary affairs, the recommendation to admit Lithuania marked the continued appeal of the single currency for Europeans — and the progress made to shore up the euro after six years of turmoil that nearly sank the project. Even in Lithuania, a poll last year showed that opponents of euro membership outnumbered supporters by a wide margin, though sentiment may have shifted recently after the aggressive moves by Russia in Ukraine.
“The euro area today has more effective economic policy coordination, a robust financial firewall to safeguard stability and, from this year, a banking union,” Mr. Rehn said in a statement before his official announcement. “All of these, Lithuania is committed to participating in and to further strengthening.” European leaders on Wednesday cited Lithuania as proof that the euro remained alluring and as confirmation of the progress made to shore up the currency after six years of turmoil that nearly sank the project.
The eight countries assessed on Wednesday had made uneven progress to meeting the terms of membership of the euro area, but Lithuania showed prudent fiscal policies and economic reforms, said Mr. Rehn. “The euro area today has more effective economic policy coordination, a robust financial firewall to safeguard stability and, from this year, a banking union,” Olli Rehn, the European commissioner for economic and monetary affairs, said in a statement on Wednesday.
“That reform momentum, driven in part by Lithuania’s E.U. accession 10 years ago, has led to a striking increase in Lithuanians’ prosperity,” he added. Mr. Rehn issued a plea for those countries preferring to stand on the sidelines to remember the good parts of sharing the euro, noting that it made it easier for consumers to compare prices among countries and relieved people of the risk of fluctuating currencies.
The Lithuanian finance minister, Rimantas Sadzius, said admission to the euro zone should deliver “greater confidence of foreign partners in the country” as well as “more favorable borrowing, lower unemployment, and growing income of the residents.” Membership, Mr. Rehn said, would “bring a range of benefits to every country currently outside the euro area.”
Lithuania tried to join the euro in 2007 but was rejected because inflation was 0.1 percent higher than allowed. The rejection may also have been related to concern about the levels of private debt in the country, which proved to be well founded. The financial crisis in 2008 sent the Lithuanian economy into a tailspin. Those outliers’ eligibility will be assessed again in two years.
After a severe austerity program, Lithuania recovered and is now among the fastest-growing countries in the European Union. Growth in the first quarter of this year was 2.4 percent on an annualized basis.
Along with Latvia and Estonia, which suffered similar crises, Lithuania is often cited by advocates of fiscal austerity as a model for how countries like Greece should behave.
While Lithuania received generally good marks, the European Central Bank expressed concern over whether the country could contain inflation once the euro zone as a whole recovers.
Inflation in the country averaged 0.6 percent from May 2013 through April of this year, the period examined by the central bank, which targets annual price increases for the bloc at just under 2 percent.
“The current low level of inflation in Lithuania reflects mainly temporary factors, including the fall in global commodity prices,” the E.C.B. said. “Maintaining low inflation rates on a sustainable basis in Lithuania will be challenging in the medium term.”
Under European Union procedure, the next step is for government ministers to make the final decision on whether to admit Lithuania, which could happen during the second half of July, after the European Union’s leaders discuss the matter in late June and after the European Parliament has given its opinion.
Because Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden had not met all of the criteria to adopt the euro, European Union officials said that they would be assessed again two years from now.