Lithuania Eyes Euro Conquest 8 Years After Historic Snub

The only nation to be turned down for euro-area membership is confident history won’t repeat itself.

Lithuania, whose bid to adopt the currency was rejected eight years ago, predicts it will get a green light today from the European Commission and the European Central Bank. Its planned Jan. 1, 2015 transition would complete a clean sweep for the Baltic region: Estonia and Latvia switched in 2011 and 2014.

Lithuania has “finally caught the bird by its tail,” central bank Governor Vitas Vasiliauskas said May 15. The nation of 3 million people meets the criteria necessary for euro adoption, with European central bankers relaying “positive messages” during trips to the continent this year, he said.

The Baltic country has looked past public skepticism over the euro, reining in its budget deficit and taming inflation to meet European Union 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.

Failed Attempt

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 European Commission, the 28-member bloc’s executive arm, said prices would jump further. That prediction proved right as inflation peaked at 12.5 percent in 2008.

EU Economic and Monetary Affairs Commissioner Olli Rehn will announce the verdict on Lithuania’s readiness to switch currencies at a news conference in Brussels at 12 a.m., while Vasiliauskas, Lithuanian Prime Minister Algirdas Butkevicius and Finance Minister Rimantas Sadzius will speak to reporters at the same time in Vilnius, the Baltic nation’s capital.

Adopting the euro requires that candidates fix their currencies to it for two years, keep their budget gaps within 3 percent of gross domestic product, 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.

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 euro requirement, while the fiscal shortfall was 2.2 percent of GDP and government debt was 39.4 percent.

S&P Upgrade

Standard & Poor’s raised Lithuania’s credit rating by two notches 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 member 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 fifty-six percent of Lithuanians opposing the switch, the European Commission said May 13. The survey of 1,025 people conducted March 15-24 by TNS LT has a margin of error of 3.1 percentage points.

Today’s recommendations require further approvals before Lithuania’s bid, part of a pledge made when it joined the EU in 2004, comes to fruition. 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 yesterday.

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