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Lithuania and the Euro 10 August 2012
Text: Ray Vysniauskas

Lithuania has done quite well at handing the economic downturn, albeit largely on the back of cutting wages and pensions and the poorest in our society shouldering the majority of the burden.

Vilnius Cathedral Tower, Bokstas

While still not back to the GDP and production levels pre Global Financial Crisis, the Lithuanian economy has been heading forward in most areas and signs of cautious optimism were becoming ever more common.

The latest hurdle to prosperity has been the weakening euro, which has fallen to its lowest level for many years. Older readers might recall that early in its history the euro was worth only US$0.825 (currently at US$1.20), though since 2003 the euro has remained the stronger currency as the US has maintained large budget deficits.

The strengthening dollar has variously raised concern and calm in the wider Lithuanian business community.

Europe and the Eurozone seem headed for a another few quarters in recession as growing cuts and austerity have created a contraction in markets. The UK has officially re-entered a recession after posting a third quarter of negative growth while Greece slides ever closer to expulsion from the euro and the Spanish banks demand more and more bail-out funding and the Spanish government is also expected to be heading to the IMF very soon.

On the one hand a weaker euro makes Lithuanian exports cheaper to non-Eurozone markets and increases our competitiveness on the world stage creating cheaper products and hopefully, growing demand.

On the flip side, most raw materials are sold in US Dollars, so the price of oil, gas, gold, metals and other commodities are also increasing. Growing materials cost mean increased production costs and is a damper to any sort of rise in wages, which in turn stifles internal growth.

Still, Lithuania has good proximity to the markets of Scandinavia and Russia which have weathered the global downturn better than most. Germany buys a bit of our stuff, and they have been the best performing country in Europe, in fact, Germany has been almost single-handedly holding the whole of the Eurozone afloat.

We also export more to central European countries such as France and the UK than southern Europe and the problems in Italy, Greece, Spain and Portugal have little direct impact on Lithuania.

The future of the euro in Lithuania is up for debate at the moment. The Ministry of Finance is still officially stating that they are hoping for euro adoption in 2014, but have tempered the rhetoric by stating that it is more important to have good fiscal fundamentals in place, and we can worry about the euro later.

One of the reasons Lithuania was so keen not to default and to have its currency stay pegged to the euro is because many housing loans were issued in euros, and if the litas was floated, it would have exacerbated our real estate crisis, with values falling perhaps a further 20% – 40% on top of the 40% - 50% falls already registered.

The Polish zloty was never pegged to the euro and they have managed to handle the economic crisis better than most, with their floating currency acting as a buffer against international pressure. But of course Poland has a much larger population and economy than Lithuania and an independent currency is not currently an option for Lithuania.

In all, with elections around the corner, the course for Lithuania remains the same. The best we can do in this globalised economy is make sure our domestic affairs are in good order and we can ride out this second dip of the depression.

Let’s just hope our new government agrees, and that vote buying in the upcoming elections doesn't bankrupt the nation. And maybe if we have to save a bit more, perhaps the wealthy in our society might be asked to contribute this time.

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