Bank of Latvia: A special day and not only for Lithuania

In this article I am going to review briefly how the Lithuanian economy has developed in recent years and what benefits Lithuania’s adoption of the euro will mean for the Baltic States.

Experience from the crisis

The economy of Lithuania and the other Baltic States went through difficult times of change. Especially hard was the period of economic transition at the beginning of the nineties, 1998 and after the Russian crisis of 2008 to 2009.
Having gone through the last crisis, Lithuania had to make huge efforts to recover its competitiveness. Productivity on the one hand grew in companies and in the country in general. On the other, salaries and pensions that had risen during the economic bubble and which were not sustainable from a budgetary as well as from a business survival and development point of view, had to be cut. This process took place successfully and is especially significant when it comes to exports and rational utilisation of geographical location as a bridge between Eastern and Western markets.

A breakdown of Lithuania’s experience in overcoming the crisis shows, it would seem, that much of the work performed will be useful when working in the euro zone preserving too the country’s recovery of its competitiveness and strength.

The Lithuanian economy is in tip top shape

We as people of the Baltic States are often prone to see everything in our countries as being bad, ignoring what good has been done and is starting to be done. In breaking with this trend, on this momentous day for Lithuania, I’m going to talk about some encouraging achievements.

Over the past three years Lithuania’s gross domestic product has been among the three fastest growing in the entire EU even though the population and the corporate loan portfolio are decreasing. What’s more, Lithuania has enticed world-class financial sector investors such as Barclays and Western Union. And Lithuania’s private sector debt percentage-wise, compared with its GDP, is the lowest of the Baltic States. The service sector is becoming more and more important for the economies of the other Baltic States whereas Lithuania has retained the manufacturing sector. In Lithuania this made for a better weathering of the crises.

It would however not do Lithuania any good for it to rest on its laurels. It must continue to strengthen its economy. First of all, one of the current challenges is achieving credit growth to spurn investment and job creation. Secondly, structural unemployment or, in other words, the discrepancy between supply and demand in the job market, must be reduced. Thirdly, it’s becoming more important to implement major infrastructural projects in the energy and transport sectors.

Introduction of the euro in Lithuania will be easier

I believe that for Lithuanians the transition from a national currency to the euro will, in both practical and psychological terms, be easier than it was for the Estonians and Latvians. Firstly, as I have already mentioned, by introducing the euro, Lithuania will benefit both of its Baltic neighbours with its practical experience. This takes into account areas such as the preparation of cash, restructuring of the bank payments system, education on what the new currency is all about and security. There is then the currency conversion process and the central bank’s successful participation in carrying out the Eurosystem monetary policy.

In Lithuania, as was the case in Estonia and Latvia, there is public concern regarding the introduction of the new currency’s impact on the economy and daily life. Estonia and Latvia as examples have shown that introducing the euro doesn’t cause any significant increase in prices. In all countries where the euro has been introduced, the impact on prices has been around 0, 2 to 0,3 percent. This is comparable to far more conventional impact factors such as changes in the oil price on the world market or in a simple potato harvest. And national identity will not be lost; if Latvia or Lithuania can participate in choir wars, then Lithuania as a country will have something to say and give as a common euro monetary zone and policy take shape. And Lithuania’s euro coins on which the Vytis coat of arms will be depicted will, let’s hope, be liked by Lithuanians and other Europeans alike and no less than Milda (the national symbol of Latvia).

Benefit to Lithuania

Lithuania felt the benefit of introducing the euro before becoming an equal participant in the Eurosystem – and that’s not just in terms structuring of the economy but also strengthening of competitiveness.

As the Latvian example shows, clear commitment to introducing the euro and a positive decision on joining the euro zone even before introducing the common currency improves a country’s value in the world arena. This is because the country’s credit rating improves while state debt service costs drop. In this way funds in the budget accumulate and can be allotted to the country’s social needs.

There’s one more important advantage in that there is no longer any possibility of devaluation. It no longer exists in any of the Baltic States. That’s especially important when looking back at the current geopolitical situation.

Other Baltic States to feel positive effect

It’s not only Lithuania’s businessmen and people who are amongst the biggest winners in the introduction of the euro in Lithuania but also all three Baltic States. All three economies are linked though trade. All three are interested in working together as a region and all three have a common interest in creating a euro zone future.

After the introduction of the euro the economic integration of Estonia, Latvia and Lithuania will strengthen even more. It’s practical to assume that using different currencies was an obstacle to that and so with the introduction of the euro in Lithuania, in the eyes of investors the Baltic States have irreversibly become one economic region.

In terms of overall population of the Baltic States (6,3 million), we’ll be somewhere between Finland (5,4 million) and Austria (8,5 million) and a region like this are more attractive as a place for businessmen to expanding their business to attract investment.

Moreover, by eliminating currency exchange expenses, it will be easier for the Baltic States to trade with each other and so trade amongst these countries will grow thereby ensuring job creation, income and material well-being in all of them.

Incidentally, when Latvia introduced the euro, the number of tourists from Estonia increased dramatically. In the first quarter of 2014 visitors from Estonia who stayed in hotels and other tourist accommodation increased by 23,6 percent compared to the first quarter of 2013.

The Baltic States are brought together not only by a similar history and common currency but also by cooperation in many spheres including NATO, the implementation of the Rail Baltica project, energy projects and many other areas. Transfer of experience and information also strengthens cooperation amongst people and institutions alike. An example of this is the process of introducing the euro (Estonia – Latvia – Lithuania); Lithuania’s experience will come in very handy when Latvia takes over the EU presidency this year.

It’s not only for Lithuania that this day is special. It’s special for all of the Baltic States. As of 1 January 2015 we’ll all be in a common monetary union. It is clear that healthy competition between neighbours will not vanish. What’s important is what the fiscal policy of each one of these countries will be, how attractive their business environment will be and how many countries’ businessmen will be able to export to the Baltic States and other markets. In my opinion then support competition like this! It will benefit all three Baltic countries.