site.btaLithuanian Deputy Economy Minister Veleskaite: Euro Changeover Can Double Trade with Rest of Eurozone

The euro changeover can double the commercial exchange of the country with the rest of the eurozone ,Lithuania’s Deputy Minister of Economy and Innovation, Ieva Valeskaite, said in a BTA interview. Another advantage of having the single European currency is the lower interest rates on loans, which encourages economic growth.

A down side is that the country loses monetary policy instruments and also the one-off cost of the changeover, which can reach 0.5% of the country’s GDP, Valeskaite said.

She pointed out that some countries such as Poland view introducing the euro as a loss of economic sovereignty. “In Lithuania it wasn't the case because Lithuania's former currency (litas) was pegged to euro meaning we already had a fixed exchange rate. I read you had it the same with Bulgarian lev so that's not an issue anymore.”

Lithuania adopted the euro in 2015 and as it was a time of record deflation, it did not experience a price increase, she recalled. According to Eurostat data, the introduction of the euro could lead to up to 0.2% inflation in the eurozone countries but inflation per se, Valeskaite points out, is not some sort of terrible disaster: “it is just a sign that the economy is growing but the most important thing is if wages are growing at the same time or not”.

Following is the full text of the interview.

Joining the eurozone is one of the priorities of Bulgaria's government, but it is still a controversial issue for the Bulgarian people, who are deeply divided about it. What are the pros and cons of the single European currency based on Lithuania's experience?

First of all, it is increase in trade volumes because when you introduce euro in your country you reorientate mostly your trade and regarding the various economic studies it might increase your exports and your trade with the Eurozone countries twice, so that's a big plus for a country to introduce euro because that intensifies your trade with the Eurozone countries first of all. It's mostly because of exchange rate safety and that's why trade does intensify between the Eurozone partners. Second one of course is a cheaper borrowing because common currency brings you some safety, therefore people can enjoy cheaper borrowing costs and therefore they can develop higher domestic investments as well because of single currency. So lower interest rates promote economic growth. And third thing is price transparency. I think it's very important topic that usually gets lost in the debate regarding possible price growth but people can really compare prices in a more simple manner and that brings much more clarity to consumers and opens bigger markets for production and brings more various goods and a bigger variety to choose from. Regarding the cons: so first of all it's loss of economic policy instruments. Some countries viewed introducing the euro as a loss of their economic sovereignty (currency policy), for example Poland. In Lithuania it wasn't the case because Lithuania's former currency (litas) was pegged to euro meaning we already had a fixed exchange rate. I read you had it the same with Bulgarian lev so that's not an issue anymore. I would mention the  one-off cost of introducing the euro as a potential downturn because when introducing the euro you have to mint currency, you have to deliver it, systems must be changed like accounting systems and etc. and that is a one-off cost to you introducing the euro and according to various calculations it might cost about 0.5 of GDP on the scale of national economy. And regarding the pricing, I understand that 's one of the biggest concerns in Bulgaria…

Yes, that’s the biggest concern – the speculation when euro is introduced.

So in Lithuania we introduced euro in 2015 and it was time of record deflation at the time in Lithuania. Therefore we did not experience the price increase. Surely we had deflation about 0.7% at the time so the inflation wasn't our biggest concern. According to Eurostat data , the introduction of the euro could lead to up to 0.2 percent inflation in the euro zone countries. but I think that two things are important here. First thing is countries still have some sort of soft instruments when introducing the euro to control this price inflation. In  Lithuania we had an informal agreement between our retail sector and the government and I don't remember exactly for how long but at least half a year before introduction and half a year after introduction, I guess. It was a perquisite to show prices in litas and in euro, therefore people see how and if it's affecting the prices or not. So that's why I think these sorts of measures help control some behavior that we wouldn't like to experience from the retail sector. And second thing: of course, you know, Lithuania has been experiencing some inflation and especially right now after Covid but inflation in Lithuania was a sign of growing economy as a whole. Our economy was growing very fast and wages have increased a lot and therefore the prices were growing as well, So I don't think inflation per say is some sort of terrible disaster, it's just a sign that the economy is growing but most important thing is if wages are growing at the same time or not. So, in Lithuania wage growth has been extremely good, therefore we managed to not have such a huge disappointment in the society.

You mentioned cheap borrowing as and advantage but what happens if populist government comes to power and it borrows more and more money for social benefits and other policies designed to boost its rating? 

You know, the bad governments may happen in eurozone or not in eurozone, it's not the issue, but we have policies that limit that – first and foremost, Growth and Stability Pact.. That's a common European policy therefore governments are not so much susceptible to thatI think that being part of the European Union, being part of the Eurozone especially helps to limit that behavior, the populistic behavior.

How is Lithuania’s economy faring after the Covid pandemic and following Russia’s invasion of Ukraine?

That's a good question. So, Lithuania was one of two countries that managed to keep afloat that actually during 2020, during the Covid pandemic, we did not experience the economic downturn, It's us and Ireland. Both were the European countries that were least affected by the Pandemic. Because we enjoyed a period of economic growth before the Covid Pandemic and of course we made some measures of support for businesses by subsidies and some tax extensions during the times of Covid but what’s the most important, we put a lot of emphasis on keeping our economy open because during Covid a lot of countries closed their business, went in to lockdown. Lithuania was the first country; I cannot tell you if it’s globally or in the EU, that managed to have its own Covid certificate. So we had the European Covid certificate but before that Lithuania developed our own IT solution to that so we managed to keep some of our restaurants open, some events open and managed to fight with Covid despite not closing our whole economy. So that’s why we did not experience such huge downturns. Of course, global supply chains were ruptured in, that’s the same everywhere you know. We were highly affected by that, energy cost inflation when war started in Ukraine. I think that one of the sectors that has been affected is the transport sector because Lithuania had strong transport sector which sure was moving goods between the EU and Russia for example and the war has and will be affecting that sector a lot but otherwise our government put a lot emphasis to diversify our export markets. We are heavily investing in strengthen our economic ties with South-East Asia, with Taiwan, South Korea. We are opening new trade establishments there, therefore our exports managed  be quite good…I think there's some export growth towards Central Asia… towards Asia managed to outperform our export loss to Russia for example and Belarus. Last year our export grew by 28 % Growth of export of goods of Lithuanian origin was 16.6 %Therefore I think we were doing quite good regarding in what economic situation we were leaving after Covid and then you know being a state that has borders with Russia and Belarus as well. So, I think our economy has been doing quite well. This year of course we are going to experience some sort of economic downturn by 1.4% according to IMF calculations and next year we are supposed to grow by 2.5%. So we hope to have some sort of hiccup in the economy but hope to regain our economic strength next year. And Lithuania is investing a lot into economic transformation, for example we are putting a lot of emphasis to innovation, we are spending our recovery resilience facility funds mostly to public sector, digitalization, we want to transform our public sector because a lot of services were unavailable or very burdensome because our information systems were not according to standards that our people expect from them. And Lithuania is putting a lot of emphasis to biotech for example. We expect our biotech sector to be 5% GDP until 2030 so it's fivefold to what we had in 2020. We are putting a lot of emphasis here, a lot of companies, biotech companies are present right now in Lithuania, for example Thermo Fisher Scientific was one of the biggest taxpayers in Lithuania, of course regarding Covid e etc. biotech input in our economy will be bigger and bigger. Semi-conductors are in the area which we are looking to in the future because our company Teltonika in corporation with Taiwan will be opening huge semi-conductor factory here in Vilnius so it's going to be a new direction for the whole Lithuanian economy. 

Another sensitive issue for Bulgaria is arms exports to Ukraine. Does Lithuania export arms and military equipment to Ukraine and is it a problem to the Lithuanian society?

No, actually Lithuanian society is super mobilized regarding supporting Ukraine. Lithuania was one of the first countries to provide military assistance to Ukraine. I don't have the latest numbers but I know that in April our military aid to Ukraine was more than four hundred fifty million euro. The whole support for Ukraine is more than 1 billion euro from Lithuania and is nearly 1.5% from our GDP so we are hugely supporting UkraineUkraine is also a place where Lithuania’s military sector innovations are present. For example drone-catching technologies of Lithuania are being used in Ukraine right now and Lithuanian companies are also heavily supportive. Not to mention Lithuanian society - I don’t know if you know Lithuanians raised 5.9 million euros for the purchase of Bayraktar, which  was later donated to Ukrainians by the company itself, but the funds were spent for other important causes.

Miltech is one of the sectors  we are trying to grow. Therefore, Lithuania for example introduced law that will allow military companies to come to our free economic zones and develop their businesses  and use their infrastructure. So, Lithuania had already some companies that are prominent in the field:  nanosatellites,  globally renowned Lithuanian lasers and our photonics - all of these industries are right now also experiencing great transformation.