Bank of Lithuania
2004-03-04

The Board adopted a resolution on joining the Exchange Rate Mechanism II (ERM II) following Lithuania’s accession to the European Union (EU). In addition, the Chairman of the Board of the Bank of Lithuania was authorised to submit an application, together with the Minister of Finance, to the President of the Council of Economics and Finance Ministers of the European Union (ECOFIN Council) for joining the Exchange Rate Mechanism II and to sign related agreements.

These decisions are based on the legal obligation of Lithuania to adopt the euro single currency in the future, arising from the EU Accession Treaty that will come into effect on 1 May 2004, while the adoption of the euro will follow after a period of at least two years of participation in ERM II.

Participation in ERM II immediately after EU accession is based on Lithuania’s successful application of a fixed exchange rate regime with respect to both nominal convergence and acceptable and balanced non-inflationary economic growth. The successful application of a fixed exchange rate strategy of the litas has been favoured by such features of Lithuanian economy as its openness, the importance of a stable exchange rate in maintaining low inflation, relative flexibility of prices and wages.

On the other hand, a delay in the adoption of the euro would be related to the costs to the economy. As the litas is pegged to the euro, Lithuania does not have an independent monetary policy. Moreover, the advantages of the single currency, the euro, cannot be used, as economic entities have to face currency exchange costs, further EU integration of trade and finance is more difficult, etc.

Decisions on the terms and timing of joining ERM II will be adopted by mutual agreement by euro area economics and finance ministers, the European Central Bank (ECB) and ministers and central bank governors of countries participating in ERM II. In view of the existing practices and established procedures, countries applying for joining ERM II do not announce publicly the date of the application. Such procedures have been adopted on the grounds that decisions on endorsing a country’s participation in ERM II are related not only to the joining country but also euro area countries and countries already participating in ERM II.

The ECB and ECONFIN have previously announced that the application of a currency board arrangement is compatible with participation in ERM II. In view of the BoL, the current exchange rate regime is suitable for participation in ERM II.