As Europe ushers in 2015 the Eurozone will take in its 19th member: Lithuania, the third Baltic state to join the club. Estonia and Latvia were well ahead with this step, in 2011 and 2014 respectively. Yet, Lithuania was in fact the first new EU member state in central Europe to lodge an application in 2007, though at the time this was rejected on technical grounds.
Today, the single currency is proof that the economy of €35 bn. and about 3 million people has truly emerged from the wrenching financial crisis of 2007-09. It completes its integration into the family of European institutions at a time of sharply higher economic uncertainty to the east, and as persistent political tensions disrupt a substantial share of its trade and take their toll on domestic confidence.
The immediate macroeconomic benefits may be modest, as the country has already operated under a currency board that rigidly fixed the parity to the euro. All Litas accounts will be converted at that unchanged parity. Still, on 1 January Lithuania eliminates any remaining currency risk and it will also subject itself to the new standards in supervision that apply within the Eurozone banking union. These confidence effects will likely reduce funding costs in the financial system, and secure banks against any rapid liquidity withdrawal.
Lithuania represents a minor addition to the size of the Eurozone economy. Yet, it not only meets the technical criteria on debt and deficits that are applied to determine accession but also brings a very high standard of openness to all neighbouring regions and wage and price flexibility to the currency zone. Needless to say Lithuania’s still buoyant growth is in short supply elsewhere.
For its part, the governing body of the ECB will likely find another advocate of a very open euro area banking system. As the majority of Lithuania’s banking system is controlled by Scandinavian banks (from outside the euro area space of common supervision) procedures for coordination will need to be defined that reflect the already close relationships with the partners across the Baltic Sea.
Lithuania can no doubt prosper within the common currency area, and its structural reforms have progressed to a very advanced stage (and in recognition of this, 2015 may even see OECD membership approved). But that is not to say that the process of reforms has come to an end.
As the EBRD’s recent Transition Report made clear the economy is well behind in international indicators of innovation. Hi-tech products are a relatively small share of exports, and public and private R&D are among the lowest in the EU.
Energy costs have remained high with little competition in supply, and emigration of skilled labour to the wider EU labour market continues to plague domestic and foreign investors alike. With a key stepping stone in macroeconomic policies now taken, the government can now focus on that next stage in growth – which EBRD stands ready to support.