Lithuania is ready to 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 today in Brussels. “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 was little changed against the dollar after the announcement, trading at $1.36258 at 2:26 p.m. in Brussels.
“Lithuania worked hard, made every effort and passed the exam successfully,” Prime Minister Algirdas Butkevicius told reporters today in Vilnius, the capital. Euro adoption is an economic and political step that will boost growth and ensure “a better life for all the residents of the country,” he said.
Euro adoption is “a big factor” in boosting Lithuania’s investment profile and “our goal is to benefit from this great opportunity, bring prosperity and attract foreign investors,” Finance Minister Rimantas Sadzius told the same news conference.
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.
Lithuanian central bank Governor Vitas Vasiliauskas called it an “historic” day that brings the nation into a “higher league.” The bank will continue preparations for the euro by pressing coins depicting Lithuania’s national symbol, Vytis, a knight on horseback holding a sword and a shield, he said.
Lithuania has strived to meet the euro-adoption criteria. Inflation through May 15 was 0.6 percent, lower than the 1.1 percent to 1.7 percent requirement, while the fiscal shortfall was 2.2 percent of gross domestic product and government debt was 39.4 percent of economic output.
Even so, the ECB said keeping inflation rates sustainably low “will be challenging in the medium term.” Wage restraint, labor market reforms and measures to counter labor force outflows through emigration are needed to lock in the competitiveness gains achieved in recent years, the bank said.
The ECB also called on the government to introduce measures to fight corruption, reduce the size of the shadow economy and to take further steps to increase domestic production of energy.
The Baltic country has looked past public skepticism about the euro, with currency-union membership also offering to cement Lithuania’s place in Europe amid heightened security concerns after from Russia’s annexation of Ukraine’s Crimean peninsula.
“Given the geopolitical situation at our border, euro adoption gathers even greater importance,” Butkevicius said.
Investors have recognized Lithuania’s efforts to overhaul its economy. The yield on the government’s euro-denominated debt due 2024 has plunged to 2.713 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.
Its credit assessment has also been upgraded. Standard & Poor’s raised Lithuania’s 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 and Slovenia.
Lithuania failed in its bid to adopt the euro on Jan. 1, 2007 after inflation missed the EU target by 0.1 percentage point and the commission said prices would jump further. That prediction proved right as inflation hit 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 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.
Lithuania will complete bank-asset reviews and stress tests before handing over the supervision of the country’s three largest lenders to the ECB on Jan. 1.
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.
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