2013-11-26
Study: the long-term benefit of the adoption of the euro could significantly exceed the one-off costs
Having implemented the goal of introducing the euro in Lithuania in 2015, the benefits of joining the euro area would far exceed the cost of the introduction of the single currency and additional state contributions — this is indicated in the quantitative assessment of the impact of the euro introduction on the country’s economy, as presented by the Bank of Lithuania’s economists.
“The study showed that the positive effect of the euro introduction would be felt by the people, businesses and government finances through a reduction in the interest burden, the disappearance of changeover costs, rapidly rising exports and investment,” says the Chairman of the Bank of Lithuania, Vitas Vasiliauskas.
According to the study results, joining the euro area would provide the economy with additional momentum before the actual introduction of the euro. The estimates of the economists of the Bank of Lithuania suggest that until 2022 the average annual level of GDP, in having joined the euro area, would be 1.8–1.9 per cent higher than if the euro would not be adopted. The greatest impact would be from the euro-determined export growth and the interest burden decreasing due to the introduction of a single currency.
Interest rates would decline when the rates of financial transactions in LTL would be replaced by smaller transactions in euro interest rates and the improvement of the country’s risk assessment. The major rating agencies see the introduction of the euro as a credit risk-reducing factor, so there is a high probability that the introduction of the euro in Lithuania would improve credit ratings. This in turn would allow the country to borrow cheaply.
In the assessment of the economists of the Bank of Lithuania, according to the baseline scenario, the average rate on government securities in the year of the euro introduction would decreased by 0.80 percentage points, the residential and business borrowing cost would be 0.49–0.56 p.p. less than if the euro would not be introduced. Lower interest rates in the medium term (2015–2022) would save LTL 2.0–3.9 billion in interest costs. Residents and businesses would have the majority of these benefits — LTL 1.6–2.3 billion, while the other part — LTL 0.4–1.6 billion — due to lower debt servicing costs, would be saved by the state budget.
With the introduction of the euro, there wouldn’t be any more changeover costs. On average, in the past few years, these expenses amounted to 0.14 per cent of GDP (about LTL140 million annually). In terms of this, the non-banking sector (individuals, businesses, etc.) over the medium term could save LTL 1.9 billion in currency exchange costs.
According to international research on the impact of the euro in the foreign trade performance of the countries that have adopted it, it can be predicted that Lithuania’s exports (excluding mineral products), even by conservatively assessing the effect of the euro, from 2015 to 2021 it should gradually increase by at least 5 per cent. During this period, the amount of additional foreign sales of goods and services is about LTL 34 billion.
The introduction of the euro is related to expenses which, for the most part, are one-off. Such expenses include the adaption of information, accounting and payment systems to the euro, as well as supplying of euro coins and banknotes and other costs. According to the estimates of the Bank of Lithuania’s economists, the total one-off cost of the introduction of the euro could amount to 0.5–0.7 per cent of GDP (LTL 0.7–0.9 billion).
The experience of countries that have adopted the euro shows that due to rounding and other factors, a one-time increase in the price level after the introduction of the euro may fluctuate around 0.2–0.3 per cent.
“The national changeover plan provides many tools to help prevent potential fraudulent actions in converting prices. This is active monitoring of prices, the mandatory listing of the prices of goods and services in litas and euro, inspections by controlling authorities at trade and service centres, public announcing of offenders, and financial sanctions. It is especially important that the package would be used to effectively protect the interests of consumers,” said Vitas Vasiliauskas.
According to the National Changeover Plan, businesses will be encouraged to sign the Code of Good Business Practice. Economic entities that sign this Code will be obligated to abstain from using the euro as a pretext for raising prices. This would be both a chance for honest businesses to improve their reputation in the eyes of the consumers, since a business that signs the Code has a clearly recognisable identification mark.
Membership in the euro area is related to obligations to international institutions and contributions to them. With the adoption of a single currency, Lithuania’s contributions to the capital of the European Stability Mechanism (ESM) could reach up to LTL 1 billion; however, the paying out of this sum would be gradual (over 5 years), aiming to avoid a sudden impact on public finances. The maximum limit of obligations to increase the ESM capital is up to LTL 8.5 billion, however the possibility of a need for such additional ESM capital is small. For its part, the Bank of Lithuania will additionally invest in the European Central Bank’s (ECB) capital about LTL 148 million. For this it won’t be necessary to get additional funds, a small share of the Bank of Lithuania’s assets will be used. All of these contributions should be evaluated as an investment, not expenses; i.e. by investing in the ESM and ECB capital, Lithuania could claim a proportionate part of their profits.