2021-12-31
As the euro area prepares for a symbolic 20th anniversary of the euro tomorrow, we can already estimate what this currency has brought to Lithuania’s economy, even though it has only been used for seven years. Although Lithuanians’ favour for the currency has fluctuated over the years, there is no doubt that the euro has helped Lithuania’s economy withstand the pandemic, made government borrowing cheaper and allowed citizens to feel as part of the democratic Western world more quickly.
Commentary by Linas Jurkšas, Chief Economist, Bank of Lithuania
20 years ago, on 1 January 2002, euro cash started circulating in 12 European countries. Over the two decades, the euro area has had to weather several major economic shocks: the global financial crisis in 2007–2008, the European debt crisis in 2011–2012 and the COVID-19 pandemic. Despite these challenges, the euro area has welcomed seven new members over this two-decade period. Lithuania, still the newest member of the euro area, adopted the euro seven years ago.
Changes in living standards
According to surveys conducted by the Bank of Lithuania, even before the COVID-19 pandemic, Lithuanians mostly valued the following advantages of the euro: the fact that there is no longer a need to exchange currency when travelling, a greater credibility of the euro, and the faster convergence of income to the euro area level. For business owners, the most measurable benefit has been the facilitation of trade with other countries.
After the euro adoption, the average wage and pension growth accelerated in Lithuania, far outpacing price inflation. According to the latest data from Statistics Lithuania, in Q3 2021, the average increase in net wages in Lithuania was 87%, compared to the corresponding quarter of 2014. At the end of 2014, the average net salary in Lithuania was around €550, and in Q3 2021 it exceeded €1,000 for the first time in Lithuania’s history. Although we have recently been witnessing an increase in inflation, prices have risen by around 20% on average over the seven-year period. Thus, wages have grown more than four times faster than prices during Lithuania’s membership in the euro area.
Citizens, too, appreciate the euro’s impact on Lithuania’s economy. By adopting the euro, Lithuania has strengthened its national security by an even more close integration of the structures of the Western democratic world. According to a survey carried out in 2021, the share of Lithuanians who feel more European because of the euro currency has increased. People also consider that being in the euro area has improved the country’s economic prospects, ensured financial stability, contributed to improving business conditions and lowered borrowing rates. Only a fifth of Lithuanians still occasionally convert prices in euro to the litas; although we are the newest member of the euro area, this proportion is even smaller than the euro area average.
Fluctuating attitudes towards the euro
Over the past seven years in the euro area, the attitude of Lithuanians towards the currency has fluctuated like a pendulum, as proven by the Eurobarometer survey regularly conducted in all euro area countries.
For instance, in 2015, right after the euro was adopted, approximately 55% of Lithuanians had a favourable opinion of the euro, but this share decreased slightly in subsequent years. The main reason was the fear that the euro would raise prices to the “European” levels, which spread among the public and the media shortly after the currency changeover. The sluggish economic recovery of the euro area after the European debt crisis and concerns about the stability of the European Union after the Brexit referendum in 2016 have also contributed to the lack of confidence. However, since 2017, there has been a clear and continuing increase in support for the euro among Lithuanians, possibly related to the diminishing fears and improving quality of life. Over the past two years (i.e. compared to the period before the COVID-19 pandemic), Lithuanians’ favourable attitude towards the euro has risen by 15 percentage points, the highest increase among all euro area countries. 64% of Lithuanians surveyed said that the euro was a positive thing for Lithuania. An even higher percentage (83%) said the euro was good for the EU as a whole.
Help in the fight against the pandemic
If we metaphorically compared the pandemic to a battle, we could say that Lithuania’s economy has emerged from it practically unscathed. While the real GDP fell by almost 6% across the EU in 2020, the real size of Lithuania’s economy has remained virtually unchanged. Overall, Lithuania has been the second best-performing economy in the EU during this time. Lithuania’s economic recovery was probably stronger than in most European countries.
It is clear that being a part of the large European Economic and Monetary Union has increased the chances of stabilising Lithuania’s economy. Although Lithuania’s state debt has increased significantly due to pandemic-related reasons, the total debt cost of the Lithuanian government has remained almost unchanged. The European Central Bank (ECB) estimates that long-term government borrowing rates in the euro area are around 0.6 percentage point lower than they would have been without the ECB’s monetary stimulus. Since the Lithuanian public borrowing costs have followed a path similar to the euro area average, the Lithuanian government’s bond issuance between March 2020 and now is likely to have saved over €30 million thanks to monetary policy measures alone. Overall, the Bank of Lithuania estimates that the monetary stimulus measures applied during the pandemic contributed about 0.2 percentage point to Lithuania’s GDP growth in 2020, 0.5 percentage point in 2021 and will contribute 0.4 percentage point in 2022.