Why Member States still want to join the Euro: The Case of Lithuania 1.1.2105

National motive on Lithuanian Euro coins. © Bank of Lithuania, 2014
National motive on Lithuanian Euro coins.
© Bank of Lithuania, 2014

At a time when the value of the euro reached a historical low of the last nine years, the Eurozone adopted a new member – Lithuania. The Baltic state is set to adopt the common currency in spite of the rresurgenceof the Grexit debate and blunt relations with Russia, its largest neighbor and former ruler. Perhaps Lithuanian citizens were convinced by the forecast of their national central bank, stating that in the long run the adoption of the Euro will contribute to a 1,3% growth of the country’ GDP.

WHY DOES LITHANIA EVEN WANT THE EURO

The first question that an average Slovenian citizen probably asks him/herself after reading about Lithania’s accession to the Eurozone is probably “why?”. It’s only understandable considering that Slovenes seem to in general think that Euro only made their lives more expensive and complicated and neglect the importance of export, salaries growth and monetary stability.

Source: ec.europa.eu
Source: ec.europa.eu

So let’s have a look at why  Lithuania has sought to join the Eurozone and has been striving to do so already since 2007. This country could, according to some forecasts even join the Eurozone earlier than Slovenia (more details about this can be read in Euobserver). Lithuania has a population of around 3 million inhabitants and its annual GDP in 2012 amounted to 32,940 billion Euros (Slovenian GDP was this year only slightly higher: 35,319 billion Euros). Therefore, it could be said that the two small countries are quite similar, both are export-oriented, and from the first of January this year both operate with the Euro. So, what grounds did Lithuania have to decide to join the single currency area despite the fact that the Eurozone currently holds a record unemployment rate and the Euro itself has reached its lowest level in the last nine years?

GREECE AND RUSSIA IS NOT SCARE THEM OFF, MANY ADVANTAGES FORESEEN IN THE ECONOMY

All EU Member States except Denmark and the United Kingdom, have an obligation to sooner or later join the Eurozone. However, the process remains quite flexible and the criteria for accession are sometimes relative. The determination of individual countries to be included in the area is also influenced by political factors. Lithuania could thus be scared by the resurgence of the Grexit debate and any consequent weakness this might imply for the common currency. It could also delay its decision because of the fears of Russia, which is its largest neighbor and whose citizens account for nearly 6% of the total population of the country.

Despite these potential political obstacles Lithuanians still supported the switch from national currency Lit to the Euro. Euobserver presents the results of a survey among the population, which showed that Lithuanians decided in favour of the Euro mainly for economic and stability reasons. Lithuania is one of the fastest growing economies after the end of the worst financial crisis and its GDP per capita this year is projected to 78% of the European average (for comparison, in 1995 the per capita GDP of Lithuania reached only 35% of the European average).

Source: consilium.eu
Source: consilium.eu

Similarly, The Economist also points out that Lithuania correctly perceived economic benefits of adopting the Euro. Investors will be more likely to invest into the country while predictability of legislative and monetary framework will be reinforced. In addition, the Lithuanian central bank now gets access to the reserve funds of the European Central Bank (ECB), as well as its support mechanisms. This will reduce the price of borrowing for the Lithuanian government (such benefit was found with the accession of Estonia in the Eurozone in 2011).

Finally, Lithuanians expect that the use of a common currency will positively influence the foreign trade of the country. This is especially important as Russia, which usually represents up to 30% of all exports of Lithuania, imposed sanctions on this Baltic country. Last but definitely not least, Lithuanian businesses will no longer need to worry about currency fluctuations.

Calculations of the Lithuanian Central Bank showed that that adoption of the Euro will in the long run contribute to a 1,3% growth in the country’s GDP.

HOW TO BECOME A EUROZONE MEMBER

Joining the Eurozoone is not automatic, following accession to the EU. As common currency is an enhanced for of cooperation, it is subject to specific and strict rules.

For a country to adopt the Euro, it must fulfill economic and legal criteria, designed to ensure that the country’s economy is ready for a smooth integration into the monetary regime of the Eurozone. When a country shows its readiness to join the Eurozone, the European Commission starts preparing reports on the economic situation and progress every two years. These reports are then examined the finance ministers of the Euro area countries (the Eurogroup), which then together with the finance ministers of all Member States give an opinion and recommendations. When the Euro area Member States are of the opinion that a candidate can join the Eurozone, the European Central Bank will fix an exchange rate between the two currencies. Only then can national money be replaced by the Euro.

The European Commission recalls that the “replacement of domestic currency against the euro is an important process, which takes a lot of preparations such as the rapid withdrawal of the domestic currency, the appropriate conversion and display of prices of goods and good information to citizens.”

Current Member States of the Eurozone as of 1.1.2015 Source: Banka Slovenije
Current Member States of the Eurozone as of 1.1.2015
Source: Banka Slovenije

More information on the procedure to join the Eurozone is available on the pages of the European Commission.

More information about Lithuania and the Euro is available here.

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Avtor: Špela Majcen Marušič

I am a first-generation student of European affairs from Slovenia, a proud member of the Charles Darwin promotion at the College of Europe with experience in the European Parliament and the UN Refugee Agency. I believe that a kinder world can be created through cooperation and understanding. We are not as different as we tend to believe. You can follow me on Twitter @SpelaMa.

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