Lithuania on Track to Adopt Euro as EU Sees Deficit Reach Limit

European Union forecasts indicate Lithuania is meeting all economic criteria to join the euro area in 2015 even as an upwardly revised budget deficit underscores the challenges of qualifying for entry by the target date.

Consumer-price growth, which has blocked Lithuania’s currency switch in the past, will probably slow to 1.4 percent this year, compared with 2.1 percent predicted in May, the Brussels-based European Commission said in a report released today. This year’s budget deficit is forecast at 3 percent of economic output, the highest allowed for euro entry.

The Baltic nation became the only candidate rejected for euro adoption in 2006 because it topped the currency union’s inflation ceiling by 0.1 percentage point. While lower commodity costs are helping Lithuania bring price growth below the euro region’s limit, a swelling fiscal gap shows the government will remain under pressure to keep public finances in check.

A slowdown in inflation is “reflecting weaker growth in food and energy prices,” the commission said. “The moderating trend is expected to reverse this autumn due to the base effect, and inflation is set to pick up further over the forecast horizon on the back of accelerating inflation in the service sector, which is sensitive to wage increases.”

Inflation is set to accelerate to 1.9 percent next year, slower than the 2.7 percent pace predicted earlier, according to the report. Price growth will probably accelerate to 2.4 percent in 2015, the commission said.

Five Tests

To join the euro area, inflation must be within 1.5 percentage points of the average in the three EU countries with the lowest rates. Countries must also meet targets for deficits, debt, long-term interest rates and exchange-rate stability.

Lithuania would be the last Baltic country to adopt the euro, with Estonia having joined the currency area in 2011 and Latvia set to become its 18th member on Jan. 1, 2014.

Lithuanian consumer prices rose 0.4 percent from a year earlier in September, the slowest pace since April 2010. Average inflation for the previous 12 months, a gauge the European Commission watches, was 1.8 percent, 0.4 percentage point lower than the threshold for euro adoption.

Even so, the deficit may narrow at a slower pace than previously estimated, shrinking to 3 percent of gross domestic product this year from 3.2 percent in 2012. The commission had earlier forecast a gap of 2.9 percent of GDP in 2013.

‘Limited Progress’

“Only limited progress in fiscal consolidation” is seen “despite favorable economic environment,” the commission said. “Despite robust economic growth, the fiscal position remains unchanged.”

The budget gap is projected at 2.5 percent of economic output in 2014 and 1.9 percent in 2015.

The commission also raised Lithuania’s economic growth forecast to 3.4 percent this year, from 3.1 percent seen earlier, and kept 2014’s estimate unchanged at 3.6 percent. Growth may accelerate to 3.9 percent in 2015.

“We are absolutely ready” to meet the criteria and adopt the euro, Lithuanian President Dalia Grybauskaite told reporters Oct. 31.

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