Expansion and crisis

The move completes the accession of the three Baltic constituents of the former Union of Soviet Socialist Republics (USSR) — Estonia, Latvia and Lithuania — to the three main western institutions.

To see Lithuania’s euro adoption this month as an entry into a losers’ club is to miss the geopolitical picture wherein several of the ex-Warsaw Pact states have staked their future on forging a European identity — to the consternation of Russia. The admission of Vilnius into the single currency bloc represents a landmark of sorts. The move completes the accession of the three Baltic constituents of the former Union of Soviet Socialist Republics (USSR) — Estonia, Latvia and Lithuania — to the three main western institutions. These are the North Atlantic Treaty Organization (NATO), the European Union (EU) and now the eurozone. The European ambitions of another erstwhile Soviet state, Ukraine, as demonstrated by its Parliament’s vote in December to join NATO, underpins in no small measure the ongoing separatist conflict in Kiev. Slovenia and Slovakia are the only other former Eastern bloc regions that have similarly acceded to all the three institutions. Against this backdrop, the flow of western investment, greater export potential and low borrowing cost resulting from integration into the eurozone would seem far more attractive to the Lithuanian population of a few million.

The country has long felt the lock-in effects of a fixed exchange rate as the litas, the national currency until 2014, was pegged to the euro some years ago. Lithuania’s entry was not without its share of controversy when some legislators expressed scepticism about the country’s preparedness to sacrifice the flexibility of a national currency. But the continuing crisis in the eurozone would have deterred Vilnius. With the exception of the United Kingdom and Denmark, accession to the EU implies a commitment to eventual adoption of the common currency by member-states once they have complied with the economic convergence criteria. Lithuania has so far been the lone euro aspirant whose 2006 bid was put on hold as Vilnius narrowly overshot the inflation limit for eligibility. But the expanded euro area comprising 19 countries is not expected to witness further enlargement in the foreseeable future. Except Romania, which has set itself a 2019 target, none of the other states has even given itself a euro-entry deadline. Realising the eurozone targets on fiscal deficits has been among the more ticklish issues within the bloc, with major economies and the architects of the rules themselves found to be in violation. Greater macroeconomic policy coherence is an admirable objective and an imperative for countries that use a common currency. But such an ideal must be balanced with political pragmatism as long as national capitals remain in charge of policy-formulation. That is the lesson from the euro’s 15-year history so far.