Lithuania joins eurozone on in 2015

The countdown has started: on 1st of January 2015 Lithuania will join eurozone and adopt the euro as its currency. The European Commission proposed in early June and the European Council and the parliament approved that the country was ready to introduce the joint European currency from the New Year.

Olli Rehn, at the time Commission Vice-President responsible for Economic and Monetary Affairs and the Euro, said that “Lithuania’s readiness to adopt the euro reflects its long-standing support for prudent fiscal policies and economic reforms.”

“That reform momentum, driven in part by Lithuania’s EU accession ten years ago, has led to a striking increase in Lithuanians’ prosperity: the country’s per capita GDP has risen from just 35% of the EU28 average in 1995 to a projected 78% in 2015,” Rehn said at the time.

“The Economic and Monetary Union remains an attractive community to be in. The euro area today has more effective economic policy coordination, a robust financial firewall to safeguard stability and, from this year, a banking union. All of these Lithuania is committed to participating in and to further strengthening. Thanks to the efforts of the past five years, this ship is far better placed to navigate rough seas than it was at the outbreak of the crisis,” he added.

Lithuania’s average inflation rate during the 12 months to April 2014 was 0.6%, well below the reference value of 1.7% for the same month, and is likely to remain below the reference value in the period ahead.

The analysis of underlying fundamentals and the fact that the reference value has been met by a wide margin support a positive assessment of the fulfilment of the price stability criterion.

In Lithuania the general government deficit-to-GDP ratio declined from 5.5% in 2011 to 2.1% in 2013 and is projected to remain at 2.1% in 2014 according to the Commission’s Spring 2014 Economic Forecast. The general government debt stood at 39.4% of GDP at end-2013, well below the Maastricht limits.

Lithuania’s average long-term interest rate over the year to April 2014 was 3.6%, well below the reference value of 6.2%. The spreads vis-à-vis euro area long-term benchmark bonds have declined markedly since 2010 to very low levels, which reflect robust market confidence in Lithuania.

Other factors have also been examined, including balance of payments developments and integration of product, labour and financial markets. Lithuania’s external balance adjusted significantly during the past years, supported also by improvements in its external competitiveness.

Lithuania’s economy is well integrated within the EU economy through trade and labour market linkages, and it attracts sizeable levels of foreign direct investment.

The integration of the domestic financial sector into the EU financial system is substantial, mainly due to a high level of foreign ownership of the banking system.

Finally, Lithuania’s legislation in the monetary field is fully compatible with EU legislation.

Throughout the crisis, Lithuania has successfully managed a difficult macro-economic adjustment process and returned to economic growth following deep recession in 2009.

Of the seven other Member States with a so-called ‘derogation'[1] (Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden), none currently fulfil all of the criteria to adopt the euro. Their situation will therefore be reassessed in two years’ time.

All EU Member States, except the UK and Denmark, are committed by the Treaty to adopt the euro once they fulfil the necessary conditions. Eighteen countries already share the single currency. This leaves eight other EU members still outside the euro area (i.e. ‘Member States with a derogation’).

According to the EU Treaty, the Commission and the ECB, every two years or upon request of an EU Member State which would like to join the euro area, examine whether the Member States satisfy the necessary conditions to adopt the single currency.

The assessment of the eight Member-States can be consulted in the document “Convergence Report 2014”, available online here