Lithuania Risks a Greek Euro Tragedy
It's probably too late for Lithuania to reconsider its plan to abandon its currency, the litas, and become the 19th member of the euro on Jan 1. But Greece's mess is a cautionary tale about the potential consequences of ceding sovereignty over monetary policy. Not to be too blunt about it, but losing the ability to cheapen your currency to increase exports and boost growth can be crippling.
Greece finds itself locked in an economic cage and engulfed in political crisis, pursuing an austerity program dictated by its bailout partners that's increasingly unpopular with voters. Although its problems are almost entirely of its own making -- telling lies about the scale of the budget deficit to qualify for the euro was a dumb move -- its solutions are constrained by its common-currency membership.
Countries that join the European Union, though, must switch to the single currency once they meet the economic qualifications, unless they can get the same opt-out agreement as the U.K. and Denmark. So come Jan. 1, Lithuania becomes the final Baltic nation to adopt the euro, following Latvia a year ago and Estonia four years ago.
Even though Lithuanians in 2003 overwhelmingly approved joining the EU, they were never given a chance to weigh in on the euro. They aren't exactly overjoyed by the prospect, according to a September survey commissioned by the European Commission. Just 47 percent said they were in favor of the move, compared with 49 percent who were opposed and 4 percent in the don't-know camp. Still, a similar survey taken in April 2013 showed opponents of the common currency at 55 percent versus 41 percent in support:
Economically, Lithuania is arguably in better shape than the euro area. Its economy is growing faster and unemployment is lower. Its borrowing costs are already in line with the likes of Spain and Italy (albeit higher than in Germany, the bloc's benchmark borrower), and inflation is nonexistent:
Some 48 percent of respondents said the move would have negative consequences for the nation, versus 44 percent who viewed joining the euro as positive. An April questionnaire showed 47 percent were negative, compared with 41 percent who were optimistic:
The EC reckons there's a built-in bias among respondents that colors their responses:
Respondents who think that the euro has had, or will have, positive consequences are much more likely to think that Lithuania is ready. 76% of respondents who expect the consequences of introducing the euro to be positive for the country say Lithuania is ready to join, compared with just 30% of respondents who expect negative consequences.
Price gouging is one concern, with 76 percent of Lithuanians concerned about "abusive price setting" during the switch to the euro, and 84 percent convinced it will lead to higher prices, according to the EC survey. Their concerns are, in a way, justified: Prices began to rise in April, before companies accepted a government obligation not to raise charges. This reflects a similar trend in Latvia before it started using the euro, according to a study by Skandinaviska Enskilda Banken:
It isn't a great time to be expanding the euro-club's roster. Events in Greece risk renewing the existential crisis that has threatened to unravel the project in recent years. Ignoring the ambivalence of the Lithuanian people to joining the adventure highlights, to my mind, the EU's deficit of democracy. Let's hope Lithuiania doesn't end up regretting its entry into the euro.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
To contact the author on this story:
Mark Gilbert at email@example.com
To contact the editor on this story:
Paula Dwyer at firstname.lastname@example.org