As stated by the European Commission, Lithuania is ready to become the 19th Member State to adopt the single currency. The Baltic state will most likely adopt the euro by the beginning of next year.
Membership in the Euro Area is conditional on meting a set of criteria, commonly referred to as the convergence criteria. The set of four criteria were formally established and enshrined in EU law by the Maastricht Treaty, which was signed in 1992. In fact, the Maastricht Treaty has provided two important principles which hugely contributed to the course of economic and monetary unificationin the European Union. These two principles established that the process towards monetary unification should be gradual and that forming part of the monetary union should be made conditional on satisfying the convergence criteria.
These criteria, which are still applicable today, set that (1) government debt should not exceed 60% of GDP and excessive deficit is not permanently over 3% of GDP; (2) inflation rate should not exceed 1.5% of those three countries with the lowest inflation rates; (3) the country's currency has to be stable against the Euro for at least two years and that (4) the long term interest rate should not exceed 2% of those three countries with the best performances.
Denmark and Britain are the only Member States who have negotiated formal opt-outs from the Euro. Most, out of the remaining 26 Member States, have already adopted the Euro while others will switch to the single currency eventually. Those Member States which remain outside the euro zone, particularly because they do not meet all of the criteria, are Hungary, Bulgaria, Czech Republic, Croatia, Poland, Romania and Sweden. With the exception of Romania, none of these countries have set a firm date for accession yet. Romania has indicated that it would like to be part of the single currency in 2019.
The convergence criteria play an important role on different levels. First, they determine the way the monetary policy of the candidate country, should be conducted. Thus in order to adopt the single currency, aspiring countries must be committed to take the best decisions; only in this manner they can be prepared and satisfy the criteria. Secondly, the convergence criteria also act as a shield and protect those countries that are already in the Euro zone. This is especially because satisfying the convergence criteria also means minimising the economic discrepancies between the candidate country and those who are members of the Economic and Monetary Union. Thus, by having these criteria one can strengthen the possibility of having a sustainable and stable environment.
In fact, Lithuania was denied access to the Euro zone before. Since it had a very high inflation rate, roughly 2.7% in 2009, the convergence criteria have served to keepit out of the Euro Area. This gave an impetus for the country to take better policy decisions.
Every two years, the European Commission is responsible to assess the progress made in the Member State aspiring to adopt the Euro. The Commission looks into the compatibility of national legislation and the statute of the national central bank. Most importantly, it examines the achievements made in satisfying the convergence criteria.
As the 2014 Convergence report concludes, Lithuania fulfils the convergence criteria. The European Central Bank commented positively on the readiness of Lithuania but warned about the need to keep low inflation rates on a sustainable basis. The European Central Bank said that in the medium term, it could be quite challenging for Lithuania to keep a low inflation rate. Especially because it has to keep a close eye on domestic prices pressures and avoid a situation of economic overheating.
Many have pointed out that the Commission and the European Central Bank do not have a unified position on Lithuania. However, Economic and Monetary Affairs Commissioner Olli Rehn said that in nuance the inflation outlook is not alarming. He added that the analysis of fundamentals gave a positive picture of the price stability criterion.
However, the conclusions of the 2014 convergence report do not mark the official decision over Lithuania's entrance in the Euro zone. In fact, the formal decision should and will be taken by the EU finance ministers. By the second half of July, ministers will also agree on a conversation rate of the country's current currency to the Euro.
The Lithuanian President, Dalia Grybauskaite, has argued that adopting the Euro will give more credibility to Lithuania and thus have positive effects on the economy. This is especially because the cost of borrowing will be cheaper. According to estimates provided by the Lithuanian Central Bank, during the financial crises alone Lithuania suffered a cost of 2 billion Litas in increased borrowing costs.
I would like to take this opportunity to officilly thank David Herrera for his sedulous contribution to the election campaign and to the Nationalist Party. A big thanks also goes to all PN candidates.
David Casa is a PN MEP