Lithuania meets all the criteria for joining the euro, the European Commission said on Wednesday (4 June), clearing the way for the Baltic state to become the 19th member of the single currency from the start of next year.
To adopt the euro, a country has to have government debt no higher than 60% of GDP, a budget deficit below 3% of GDP, low inflation and interest rates, and its own currency has to be stable against the euro.
Of the 28 countries in the EU, only Britain and Denmark have negotiated formal opt-outs from the euro.
All the others are supposed to switch to the single currency at some point, provided they meet the criteria. The Commission assesses such compliance every two years, in what it calls a convergence report.
“The 2014 convergence report concludes that Lithuania meets the criteria for adopting the euro. As a consequence, the Commission is proposing that Lithuania adopt the euro on 1 January 2015,” the Commission said.
The European Central Bank, which must give its opinion on the readiness of a country to join, also said Vilnius was ready but warned about maintaining low inflation rates. “Maintaining low inflation rates on a sustainable basis in Lithuania will be challenging in the medium term, as it may be difficult to control domestic prices pressures and avoid economic overheating in an environment of fixed exchange rates,” the ECB said.
Economic and Monetary Affairs Commissioner Olli Rehn told a news conference that while the ECB and Commission reports differed in nuance the inflation outlook was not worrying.
He said the Commission expected inflation in Lithuania to accelerate to 1.1% this year and 1.8-1.9% in 2015 from a 12-month average of 0.6% measured to April 2014.
“The analysis of fundamentals … clearly support a positive assessment of the price stability criterion,” Rehn said.
The formal decision to accept Lithuania into the euro zone will be taken by EU finance ministers in the second half of July, at which point the ministers will also agree on a conversion rate of the country’s litas currency into the euro.
“We’ll be in the club of the strongest, we’ll be able to take part in the decisions ourselves – currently we are on the other side of the door,” Lithuanian President Dalia Grybauskaite said during a visit to Poland.
“We’ll be trusted more, which means we’ll be able to borrow cheaper, so we’ll have more money left over for pensions and other things,” she said.
The Lithuanian central bank estimates that not being part of the euro zone cost Lithuania about 2 billion litas, or roughly 2% of annual GDP, in increased borrowing costs during the financial crisis.
The remaining seven countries that remain outside the euro zone – Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden – do not meet all of the criteria to adopt the currency.
Romania would like to adopt the euro in 2019. None of the other six has set a firm date for accession.
With the addition of Lithuania’s 3.4 million people, the euro zone will have a total population of 336 million and a GDP of approximately $9.5 trillion (about €7 trillion). The single currency was launched in 1999, and started trading as notes and coins in Europe on 1 January 2002.