Welcome to Eurozone, Lithuania!

Kamil Augustyniak

Since 1st January 2015 Lithuania is considered as the nineteenth member of Eurozone in the European Union and can finally fully enjoy its position in the European Central Bank.

Source: http://emergingequity.org/

Lithuania on the way towards euro adoption

From 1922 to 1940 and then, continuously, from 1993, Lithuania had its own currency – Lithuanian litas (LTL). The change of currency was planned from more than decade when the agreement between Lithuania and the European Central Bank was concluded. Pursuant to the new document, signed in 2002, the litas was pegged to the euro at the rate of 3.4528 to 1.

Although Lithuania still couldn’t be an active participant in meetings related to ECB monetary policy, the benefits of such enlargement were economically and politically based First of all, it has allowed the economy to be more predictable and balanced. Secondly, this was the first step toward adopting euro.

The first attempt at establishing euro in this country came in 2007 but it was less than successful. The European Commission did not give a green light to Lithuania to adopt the euro currency because of a high inflation and economic crisis. All these factors delayed the change which a lot of Lithuanian citizens support[1]. Fortunately, the delay suited Lithuania because it didn’t have to financially support weaker countries when the crisis came to the Eurozone, considering her unbalanced internal economic situation. Now, when Lithuania finally meets all legal and economic requirements (e.g. price stability, sound and sustainable public finances, exchange rate stability), it can officially benefit from EU’s common currency.

Eurozone members (source: pl.wikipedia.org)

Opportunity to thrive

The most important advantage of adopting euro in Lithuania is coming nearer to the European Union. For any European country, being a member of the EU is significant, but being a member of the EU and Eurozone at once opens great possibilities and give stronger position on the international arena. Attractiveness of the region increases – new investors will not come across any obstacles of currency exchange. What is more, market competitiveness grows in comparison to other Baltic countries which have already adopted euro. This factor means a lot for Lithuania which, very often, occurs with Estonia and Latvia that are in Eurozone from 2011 and 2014 respectively. The risk of omission of Lithuania is now quite small. Change of currency is only a new beginning for reforms which will have the desired result in investments and more integrated trade with the EU. For a new member of Eurozone this can be considered as a crucial point in near development due to a new Russian policy which imposed embargo on foodstuff from the EU. In result, the forecast of economic growth of Lithuania for 2015 has dropped from 4.3 to 3.3%.

What about prices?

The Lithuanian government assures its citizens that they will not feel the appreciation of prices thanks to a special agreements between state administration and entrepreneurs all around the country. Those who will try to seize an opportunity of such a big change will be punished.

[1] http://ec.europa.eu/public_opinion/flash/fl_400_sum_en.pdf

A successful euro changeover in Latvia

Ivonna Orlova

From 1st January 2014 the official national currency of Latvia has become euro. According to dates provided by Latvian Finance Ministry the process of joining the euro zone in Latvia has been successful. Latvia started to prepare to this changeover 10 years ago and it seems that a careful preparation has borne its fruits – the first hours after joining had been smooth and with no major problems encountered.

© Latvijas Banka

Well Prepared ‘Homework’

One might say that Latvia had done its “homework” well last year and in this year it just relay on before carefully planned and organized work plan. And indeed, before Latvia joined the euro zone there was done a sufficient work ahead. For example most of the 106 IT systems have been equipped to deal with the euro already on December. The same as the adaptation system of the euro in local governments was done previously and with the start of the new year 30 000 active users in nine biggest towns were able to start their daily work using the euro currency. On 1st January 113 laws, 603 regulations of the Cabinet of Ministers and 1432 local binding rules successfully entered into force thanks to the previous preparations.

Latvia’s Key Steps toward the Euro Change Over

There are a couple of other very important steps taken long before the euro became an official currency in Latvia. The first thing, that has been made was to fix lats against the euro which was 1 EUR = 0.702804 LVL. Afterwards Latvia got the right to join the Exchange Rate Mechanism II or a multilateral agreement aimed at fostering exchange rate stability and coordination in Europe. The next key step was the development and implementation of two crucial projects, such as the Euro Changeover Project and the National Euro Changeover Plan. The last one, according to information by the Finance Ministry of the Latvian Republic “is aimed at identifying the key Euro Implementation Project tasksin Latvia, their implementation stages and spheres of accountability as well as defining the euro introduction principles and scenario.” The establishment of the Steering Committee has been helping to ensure an efficient euro implementation process and monitor the elaboration of the National Euro Changeover Plan.

Moreover, the euro changeover process in Latvia consists of the 3 main stages, such as:

• the dual circulation period of the lats and the euro, when two weeks following the date of the adaption of the euro it has been possible to use both the lats and the euro. This period is already successfully over in Latvia, and since 16 of January the only official currency in Latvia is the euro.

• the next stage or the period of the lats cash exchange to the euro, which will last for six months following the euro has been adopted and during this period day gives a possibility to convert the last lats cash reserves to the euro in all commercial institutions. After this period the lats will be possible convert only in the Bank of Latvia.

• And the last stage will start when all prices will be displayed in the lats for euro, which will last for a quarter before and half a year after the euro adoption and it is called as the period of dual price display.

Till now Latvia has rather productively passed the first stage thanks to it careful planning before and it seems that the last two stages will not be a problem as well.

Formula of Success

A few reasons should be mentioned that became like a formula of success for completion of the first stage and hopeful beginning of the second period of the euro changeover process in Latvia. First of all as it was mentioned by the president of the Association of Latvian Commercial Banks Mārtiņš Bičevskis“the smooth work of Latvian commercial banks in the first stage of the euro changeover, were possible thanks to banks close cooperation with their clients and in its turn the positive response of the clients to the banks.”

On the other hand, according to the director executive of the Latvian Food Traders Association Noris Krūzītis– the successful work of merchants and entrepreneurs depended on “the ‘homework’ done by each merchant before, such as the reprogrammation of cash registers and adoption of IT systems or careful planning of collection and exchange of the money supply, as well as the training of the shop-assistances long before the euro adoption.”

The possibility to change previous currency in post offices, the State Police and other organizations mobilized work to maintain security process during the changeover and the Consumer Rights Protection Centre’s monitoring over the proper price calculation from lats to euro are another causes for the smooth changeover process in Latvia.

Positive Future Vision

The future with the euro in Latvia seems rather positive and there are several advantages that came after adoption of the euro. It is essential that after the euro adoption Latvia is joining the Single Euro Payments Area (SEPA), that will establish more convenient, cheaper and faster banking transactions for citizens and entrepreneurs all over the euro zone.

According to the published articles by Finance Ministry of Latvian Republic “The euro is a working tool that will help our country to attract more investments and enhance economic development. It will help to raise the standards of living and promote the prosperity. And it will also help to travel without extra spending because of changing currencies.” However, there is always some fly in the ointment, or in this case it was an obvious mistrust of people to the euro as a stable currency and the support for adoption of the euro in society of Latvia was rather low. According to Eurobarometer survey on December 2013, only 53% of all citizens of Latvia supported the euro adoption. On the other hand, the Finance Ministry of Latvia, claim that soon after people saw all advantages of this common European currency in practice, they will quickly change their mind to more welcoming position.

Let’s hope that this mistrust in eyes of Latvia’s citizens in the end of previous year, will be the only little unpleasant thing in whole changeover process, but the positive example of how to smoothly adopt the euro and the formula of success will be passed to the next euro zone states, for example – to Latvia’s neighbor Lithuania, who are planning to adopt the euro on the year 2015.

Did you know that…

• The euro is used daily by more than 320 million people

• All banknotes of the euro have different colors : the 5-euro note is grey, the 10 is red, the 20 is blue, the 50 is orange, the 100 is green, the 200 is yellow and the 500 is purple

• Finland decided not to use 1 and 2-cent coins because such low coins weren’t used any more with the former currency, the Finnish Mark. However, they’ve issued such coins in a very small series and their value could reach euro 10 on the numismatic market

• The very first country that produced the euro coins was France

• There are 17 the euro zone states, and Latvia became the 18th state of the euro area

• Despite the fact that the official name of euro zone currency is the euro, it has its local names, for example in Latvia it is called Eiro, in Finland – Ege, in Germany – Teuro or Eurone, but in Greece it has rather tuneful name such as Europoulo

The Smart about Europe 03

The Euro Crisis- endless story

Magda Dąbska

Euro: pride of prejudice?

Since the euro had become the official currency, the enlargement of the Eurozone took place fourfold. From 2007, Poland was looking with a jealousy when Slovenian tolar, Cypriot pound, Maltese lira, Slovak koruna and Estonian kroon were replaced by euro. However, nowadays, euro is more cause for “prejudice” than “pride”.

It seems that European leaders have no idea how to solve the crisis in the Eurozone, or they are afraid to take responsibility for the future of common currency. Herman van Rompuy in his last report concerning European Monetary Union makes following proposals: establishing an integrated financial and budgetary framework, economic policy, democratic legitimacy and accountability of decision- making within EMU. Nevertheless, the Eurozone needs a concrete move instead of political promises. The subsequent bailout of 120 mld euro for stimulating the growth within the Euroland does not resolve a problem. Moreover, the crisis starts touching not only the peripheral countries, but also these which are located in the heart of the European Union (like Italy or France).

The core-sins of EMU

The media repeat a mantra about division into thrifty North and spendthrift South; therefore many people are confused about who is really responsible for euro crisis. To explain current situation in Euroland we have to go back to 1992. The Treaty of Maastricht introduced the convergence criteria regarding inflation rate, government deficit, government debt and long-term interest rates. It meant that member states of EMU lost their influence on establishing a height of interest rate. Due to internal differentiation within the EU, the common interest rates bring about different results. For example, while the interest rates were the same, Greeks were encouraged to live on credit, but Germans were prompted towards saving money.  The Eurozone has never fulfilled criteria for a monetary union. In addition, the countries conduct one monetary policy but 17 completely different fiscal policies, and sooner or later, each monetary union should be linked with a budgetary and political union. The Treaty of Maastricht created criteria of accession to EMU, but it did not provide an institutional mechanism to execute these provisions of treaty and punish countries which breach of rules. To sum up, a correct functioning of EMU depends on an effective coordination of fiscal policies in 17 countries. This goal will be achieved only by advanced political cooperation within the Eurozone.  

In the EU, the project of the political union has a long history. The first attempt appeared 1952, and it was very quickly blocked by France whose leaderships could not imagine cooperation in this area at supranational level. The next effort was made in the end of ’60s, and it led to establishment of the European Political Cooperation in 1970. After Treaty of Maastricht, the EPC became the “second pillar” with its intergovernmental character in a decision-making process.  Despite of many changes introduced by Lisboan Treaty in area of a political cooperation, it is still difficult to achieve a consensus in economic and political matters, so real political union was not established until today.

 

Possible solutions

The head of states and governments have to realize that the economy expects the Summit of European Council to undertake concrete measures which will bring more stability in far-reaching perspective to the Eurozone. They cannot count on that crisis will solve by itself. The Eurozone needs solutions like a banking union to restore confidence in banks, a fiscal union reminiscent a federal budget and political union with central authorities which will be responsible for an effective decision-making process and will protect against law infringements by member states of EMU.

One of the proposals to reanimate the Eurozone is the Eurobonds (meaning sharing public debt and emission new bonds). However, this idea is strongly rejected by Angela Merkel and is against article 125 of Treaty on the functioning of the European Union which stipulates:

“A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project”.

The other option advocated by Francois Hollande is to increase the expenditures to stimulate economy. Will Berlin and Paris finally find a common ground on this issue? The third option could be a return to national currencies. However, those who try to propagate this solution forgot about its cost. On one hand, debts of Greece, Portugal or Ireland would be dominated in euro, so after devaluation obligations would increase. European politicians have to know that governments do not go bankrupt like companies. It cannot seize a country or its asses. On the other hand, mark, shilling or guilder would be rapidly appreciated, so as a result it would make the export from Germany, Austria and Netherlands completely non-viable. As we can see, a constructive and quick solution is in interest of all member states of Eurozone…

 

Footnotes

TOWARDS A GENUINE ECONOMIC AND MONETARY UNION – Report by President of the European Council Herman Van Rompuy,  26/6/2012, available on http://www.european-council.europa.eu

Treaty on the functioning of the European Union

Protocol (no 13) on the convergence criteria