How the Baltic three have done it
When Lithuania becomes the 19th member of the Euro zone next January, the prime minister Algirdas Butkevicius will have a double reason to celebrate. Not only his country will join a club where they have once been denied entry already, but he will keep his post. The reason is that earlier this year Butkevicius promised to resign if the tiny Baltic country fails to join the Euro zone in 2015.
For some, it could seem strange that a prime minister is willing to bet his post on something of such dubious attractiveness. The European crisis may have subsided somewhat, but it is still far from being done with, and at the moment no other country is openly willing to join. Some potential members like Bulgaria have even halted their effort to join the Euro zone, citing caution and a desire to see the turmoil going away first. Other countries that are yet to adopt the euro, like Sweden, Poland, Hungary, the Czech Republic, Romania and Croatia, still do not have a clear timetable at all.
However, the example of the three Baltic states is quite teaching. First of all, their national currencies had already been tied to the euro in practice, if not on paper. They have small economies that are open to the world, therefore very susceptible to negative effects from the turmoil on the international markets. So these countries have figured that they could be better protected internally rather than externally in the fiscal sense, even if the Euro club is no longer as cosy as it used to be.
Lithuania was unfortunate to be the only country to be denied access to the Euro zone in 2006, and only because it exceeded the inflation requirement by a tiny 0.1% (keep in mind Greece's excesses in that respect). But now Lithuania is finally being rewarded for their persistence and patience. Similarly to the other two Baltic countries, its road to this achievement was not easy at all, and it had to cope with all the difficulties that come with the profound reform that was the main requirement of the Euro zone. What's more, these countries had to deal with the skepticism of the European central bank, and of all the older club members.
The Baltic countries showed that they can deal with their problems swiftly and resolutely. Besides, they now have political and judicial systems that are working efficiently, unlike some of the above-mentioned countries. This is why the other member states decided that the risks in the case of the Baltic trio are relatively smaller and fewer. Now the three countries are enjoying a high per capita GDP, so the danger of new boom and bust cycles looks likely to be mitigated more easily. And we should also add the fast economic growth as a factor.
And none of this has happened just like that, by incident. For example Latvia had to go through the nine circles of hell before they eventually saw the euro at the end of the very long, very dark tunnel. There was a heated debate whether Latvia should devalue its currency. IMF insisted that yes, they should, while the EU kept saying no. Latvia eventually chose to take the thorny road, they did all the necessary re-adjustment of their economy, at the cost of a lot of pain. At some point the shock therapy had really frightening dimensions: a 25% shrinking of the economy between 2008-2010, severe austerity, cutting salaries, and all that. But after all the suffering, success followed. Estonia also resisted the temptation to devalue its currency, and it paid dearly with recession, unemployment and cutting expenditure.
In the end, the pain was worth it. The Baltic countries have shown that the effort was rewarded. Their currencies are already practically tied to the euro anyway. In this case, keeping their national currencies is pointless. It just means that you have a little less risk, and you would pay slightly higher interest. What's more, by entering the Euro zone, Estonia and Latvia have also joined the bank union. This provides them with a high-quality bank oversight, and also grants additional protection in case of a big fiscal problem. And all of this was not achieved by austerity alone, because that would have been a disaster - in fact it was coupled with a profound, comprehensive reform at all levels, to reach a point where these economies have become very focused and highly efficient.
Despite the turbulence in the Euro zone during the last few years and the necessity that all members should contribute to the rescue fund to help problematic countries like Greece, Ireland, Spain and Italy, the Baltic countries continue to consider the adoption of the euro as part of their full integration to the EU. And also a way to counter Russia's growing influence, the big menacing eastern neighbour.
Given the circumstances around the Lithuanian borders, adopting the euro obtains an extreme significance for that country. It is just one more step to a greater economic, financial and political national security, Butkevicius himself has argued. Maybe Lithuania will be the last country to enter the Euro zone for quite some time to come. But in fact the key country that everyone is waiting and hoping to see in the club, is Poland. It is vastly important strategically, because if Poland does join, that would mean most of Europe will be already in Schengen, the Euro zone and the bank union simultaneously. This would form a bloc that would be highly coherent in many respects, not just in the monetary one. For countries still outside this union, joining the EU would even become of secondary importance.
The Russian factor also influences Poland's decision. It will largely depend on the geopolitical situation. In Poland there is a serious debate about joining the Euro zone, and the Ukrainian crisis is playing an important role for the political motivations whether Poland should join or not. So, adopting the euro is something more than the mere weighing of the economic pros and cons. The dilemma will increasingly be boiling down to either joining the Euro zone or remaining in the European periphery (in every respect). And when we are talking of such a crucial choice, a mere prime minister's resignation starts looking like a very insignificant price to pay.
For some, it could seem strange that a prime minister is willing to bet his post on something of such dubious attractiveness. The European crisis may have subsided somewhat, but it is still far from being done with, and at the moment no other country is openly willing to join. Some potential members like Bulgaria have even halted their effort to join the Euro zone, citing caution and a desire to see the turmoil going away first. Other countries that are yet to adopt the euro, like Sweden, Poland, Hungary, the Czech Republic, Romania and Croatia, still do not have a clear timetable at all.
However, the example of the three Baltic states is quite teaching. First of all, their national currencies had already been tied to the euro in practice, if not on paper. They have small economies that are open to the world, therefore very susceptible to negative effects from the turmoil on the international markets. So these countries have figured that they could be better protected internally rather than externally in the fiscal sense, even if the Euro club is no longer as cosy as it used to be.
Lithuania was unfortunate to be the only country to be denied access to the Euro zone in 2006, and only because it exceeded the inflation requirement by a tiny 0.1% (keep in mind Greece's excesses in that respect). But now Lithuania is finally being rewarded for their persistence and patience. Similarly to the other two Baltic countries, its road to this achievement was not easy at all, and it had to cope with all the difficulties that come with the profound reform that was the main requirement of the Euro zone. What's more, these countries had to deal with the skepticism of the European central bank, and of all the older club members.
The Baltic countries showed that they can deal with their problems swiftly and resolutely. Besides, they now have political and judicial systems that are working efficiently, unlike some of the above-mentioned countries. This is why the other member states decided that the risks in the case of the Baltic trio are relatively smaller and fewer. Now the three countries are enjoying a high per capita GDP, so the danger of new boom and bust cycles looks likely to be mitigated more easily. And we should also add the fast economic growth as a factor.
And none of this has happened just like that, by incident. For example Latvia had to go through the nine circles of hell before they eventually saw the euro at the end of the very long, very dark tunnel. There was a heated debate whether Latvia should devalue its currency. IMF insisted that yes, they should, while the EU kept saying no. Latvia eventually chose to take the thorny road, they did all the necessary re-adjustment of their economy, at the cost of a lot of pain. At some point the shock therapy had really frightening dimensions: a 25% shrinking of the economy between 2008-2010, severe austerity, cutting salaries, and all that. But after all the suffering, success followed. Estonia also resisted the temptation to devalue its currency, and it paid dearly with recession, unemployment and cutting expenditure.
In the end, the pain was worth it. The Baltic countries have shown that the effort was rewarded. Their currencies are already practically tied to the euro anyway. In this case, keeping their national currencies is pointless. It just means that you have a little less risk, and you would pay slightly higher interest. What's more, by entering the Euro zone, Estonia and Latvia have also joined the bank union. This provides them with a high-quality bank oversight, and also grants additional protection in case of a big fiscal problem. And all of this was not achieved by austerity alone, because that would have been a disaster - in fact it was coupled with a profound, comprehensive reform at all levels, to reach a point where these economies have become very focused and highly efficient.
Despite the turbulence in the Euro zone during the last few years and the necessity that all members should contribute to the rescue fund to help problematic countries like Greece, Ireland, Spain and Italy, the Baltic countries continue to consider the adoption of the euro as part of their full integration to the EU. And also a way to counter Russia's growing influence, the big menacing eastern neighbour.
Given the circumstances around the Lithuanian borders, adopting the euro obtains an extreme significance for that country. It is just one more step to a greater economic, financial and political national security, Butkevicius himself has argued. Maybe Lithuania will be the last country to enter the Euro zone for quite some time to come. But in fact the key country that everyone is waiting and hoping to see in the club, is Poland. It is vastly important strategically, because if Poland does join, that would mean most of Europe will be already in Schengen, the Euro zone and the bank union simultaneously. This would form a bloc that would be highly coherent in many respects, not just in the monetary one. For countries still outside this union, joining the EU would even become of secondary importance.
The Russian factor also influences Poland's decision. It will largely depend on the geopolitical situation. In Poland there is a serious debate about joining the Euro zone, and the Ukrainian crisis is playing an important role for the political motivations whether Poland should join or not. So, adopting the euro is something more than the mere weighing of the economic pros and cons. The dilemma will increasingly be boiling down to either joining the Euro zone or remaining in the European periphery (in every respect). And when we are talking of such a crucial choice, a mere prime minister's resignation starts looking like a very insignificant price to pay.