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

Euro: survival or collapse

Magda Dąbska

This is a roasting hot morning in Athens. The temperature is high not only outside but on the markets as well. The Greek opponents of the subsequent austerity’s measures are excepting the public speech of their Prime Minister. He announces the relinquishing of Eurozone definitely. In the meantime, the heads of state and government of the rest of Eurozone made a decision concerning their return to the national currencies. The euro does not exist anymore, this is a fact…

Can we imagine such a situation?

When we look at newspapers, we can find many headlines which preaching a demise of the euro. Nonetheless, we should read these predictions with a great distance and do not believe in this kind of speculations.  We should try to select information and rely more on economists’ words than journalists.

I would like to refer to Robert Mundell’s statement regarding the situation in Eurozone. According to him, in the EU and EMU, the problem is not a common currency but budget deficits of the Member States and indebtedness of a few of them. To illustrate better his point of view, Canadian economist asks the question: If the federal government of Canada, state government of Newfoundland or Ontario increase their public debts, will it be a problem of a budget deficit or Canadian dollar? Moreover, Mundell continues his argumentation by comparison the Eurozone to the military alliance. The abandonment of the Eurozone by Greece which has more liabilities than assets, in fact, could make the EMU stronger.  He states that EMU is kind of phenomenon because the monetary union which encompasses such a big part of global economy and develops in one and half decade, has never existed before.

As Mundell says “the euro is a world currency par excellence.  It is second only to the dollar. Indeed, it is challenging the dollar as a stable global unit of account and could have a great future as an international reserve asset. The euro has passed its youth with flying colours.”

What is interesting in Mundell’s approach to the euro is a belief in strength of the common currency. For this reason he is called a “godfather of the euro”. His point of view is unusual for Northern American and British scholars who are sceptic towards the euro since its appearance. For them, the euro, which pretends to be a global currency, became a real threat for American dollar and British pound.

In my opinion, instead of burying the euro and the EMU too fast, we should draw attention on its role that plays in global economy, and we have to aware that each monetary union matures for ages. The best example is monetary union in the U.S. which was established by Act of Constitution in 1789, and it took almost one hundred and fifty years there to gain an optimal currency area.

It would be better if maturation of the EMU took less time.  However, the subsequent reforms within the Eurozone such as common banking system and enhanced political cooperation are a must. The practice of some Member States that leads them to excessive indebtedness must be eradicated as soon as possible. It jeopardizes stability of Eurozone as a whole and brings about a drop in trust between partners. In this place we should refer to the past and take into account aforementioned American (or German) monetary union which are successful due to strong sense of community. In case of the Latin and Scandinavian Monetary Union situation was completely different. They failed because of a lack of political integration and consequences of the First World War.

Finally, I would like to refer to Bohdan Wyznikiewcz’s words. He says “there will be many dramatic twists involved in a cure of the euro; nevertheless the euro’s survival is more feasible than its collapse”.

Of course, we should not be blind euro-enthusiasts, and it is important to look at the common currency with some constructive criticism. However, if we analyze the graph below, is the euro really as weak as it is suggested by media? …

References

1. Robert Mundell, Euro is here to stay, Financial Post, Jun 8, 2012. http://opinion.financialpost.com/2012/06/08/robert-mundell-euro-is-here-to-stay/.

2. Hugh Rockoff, How long did it take the united states to become an optimal currency area?, NBER working paper series on historical factors in long run growth, NBER Historical Paper No. 124, http://www.nber.org/papers/h0124.

3. Bohdan Wyznikiewicz, Koniec strefy euro? To sie nie stanie, Obserwator Finansowy, 31 March 2012.

http://www.obserwatorfinansowy.pl/forma/debata/koniec-strefy-euro-to-sie-nie-stanie/.

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