The European Union is recovering from a profound economic and financial crisis which at its worst moments raised questions over the future viability of the euro, the most ambitious project in the process of European integration. The Greek government’s announcement in late 2009 that the country’s public finances were in far worse shape than anyone had believed shocked Greece’s EU partners and shattered the financial markets’ faith in the euro area, leading to doubts the euro could survive.
The European Central Banks decision on September 12th 2012 that it would act as sovereign lender of last resort removed much of the fear of self-fulfilling liquidity panics. This announcement, and European key nations clear statements that they were determined to stay with the euro at any cost saved it as the common European Unions currency.
Since then the borrowing costs for the troubled euro countries have dropped substantially. Not because austerity policies brought national debts under control, debt ratios are still rising because of shrinking economies and deflation. Instead, because there has been a dramatic flattening of the relationship between debt and interest rates, with a new trust in the euro as a currency that is here to stay. See below graph form The Economist of the current currencies in Europe.
This week, the European Union and the Government of Lithuania announced that Lithuania will become the nineteenth member of the euro area from January 1st 2015.
Lithuania’s adoption of the euro is a major event not only for the country but also for the euro area and the European Union as a whole. Lithuania’s readiness to adopt the euro reflects its long-standing pursuit of prudent fiscal policies and serious economic reforms. This reform momentum, driven partly by Lithuania’s EU accession ten years ago, has led to an increase in prosperity as GDP per capita has doubled since 1995.
As Doug Bandow recently wrote in Forbes, Estonia, Latvia, and Lithuania have not had an easy time. They were early and avid reformers after escaping the unwanted bonds of the Soviet Union, but they were careless after the good times arrived. They allowed spending to rise too rapidly in the middle of last decade, on average nearly 17 percent per year between 2002 and 2008. Then the global financial crisis and recession hit.
However as the crises arrived, the Baltic countries turned to reform and restraint, strongly cutting government spending. Rather than borrowing money for lavish “stimulus” programs as United States, United Kingdom, France and other leading economies did, the Baltic states emphasized fiscal responsibility.
The introduction of the euro will bring a range of practical benefits to Lithuanian companies and citizens, including the elimination of exchange rate risk and lower transaction costs. The stability-oriented policy framework of the euro area will support the catching-up process of the Lithuanian economy, including attraction of more foreign investment.