Q&A: Rimantas Sadzius, Lithuanian finance minister
Finance minister Rimantas Sadzius reveals Lithuania’s 2015 euro adoption plan, touts the benefits of convergence and strikes a bullish – and contrarian – tone on eurozone policymaking.
What is your blueprint for eurozone accession? Under our current plan the political horizon for euro adoption is 2015, which means that we still have 18 months left to do our homework and get Lithuania ready for adoption.
We already have a formal structure in place within the Lithuanian government that will carry on this process. We have a committee consisting of the prime minister, the finance minister and the chairman of the central bank, and in addition we have two levels of working groups.
|Rimantas Sadzius, Lithuanian finance minister|
One working group, led by the minister of finance, will be coordinating the process, and below that there are six working groups that will cover all aspects of the process both before and after the EU approves Lithuania’s application for eurozone membership, including public information campaign. This structure is already up and running. What do you see as the biggest benefits for Lithuania from euro membership?
There will be two main benefits. First of all, I expect to see an improvement of the investment climate. The litas has been pegged to the euro since February 2002, and not stepping forward to full euro membership means that we still have to pay up additional risk premium just for the fact that we have differently named currency.
Until recently, of course, we did not comply with the Maastricht criteria, but now we can say that the Lithuanian economy has developed to the point where it is in a high state of convergence with the eurozone countries, so if we make this step there should be some reduction in risk premium and also benefits for potential investors, in that it will be much easier for them to calculate their financial flows.
Secondly, we will join this eurozone club as a full member with full participation in decision-making, which is also important for a country that joined the EU only in 2004 and is keen to establish itself as a political player on the international stage.
Euro adoption will mean that Lithuania has stepped up to another level and joined the club of important countries, not only in Europe but also worldwide.
Has there been any hesitation among policymakers in Lithuania connected with volatility in the eurozone and concerns around Cyprus?
Naturally we take all these developments in the eurozone and the broader EU seriously and we participate in discussions on how to tackle these crises. I would note, however, that financial crises are not exclusive to the eurozone and that banking problems can occur in any country. For example, in Lithuania we also had two banks that needed state resolution – which we managed to do without external assistance.
We also acknowledge the importance of developing necessary legislation at the national and European level, and the files related to the further work on the creation of the banking union will be one of the key priorities for Lithuania during the second semester of this year when we take the rotating presidency of the EU.
I don’t think there are many policymakers in Lithuania who believe that the recent problems in eurozone countries are specific to the eurozone or to the euro itself. It is obvious that adoption of the euro doesn’t in itself aggravate or mitigate financial or economic risks.
Has the response of European policymakers to the various recent crises affected your confidence in the eurozone?
European policymakers have sometimes reacted more quickly to developing situations and sometimes less quickly. I would point out, however, that so far all the crises – many of which developed very rapidly – have been tackled or resolved in one way or another. This proves that the structure for managing banking and finance in Europe does actually work well.
Of course, one might have wished for better and faster results in certain situations, but I don’t see any evidence of a crisis in European politics. There are problems in individual countries that need addressing but overall European politics is quite efficient.
Are you confident that you can persuade the Lithuanian public of the benefits of euro adoption?
Recent polls show that we have an almost equal number of people in favour of and against euro, and the number against is in line with that for other countries that have adopted the euro.
More importantly, half of the population is still undecided and I am confident that we can persuade many of those people that the euro will benefit them and will bring many advantages for Lithuania.
We realize that this is one of the harder tasks ahead of the government but it’s one that we have to address – it’s part of our necessary homework ahead of euro adoption, and while it will be difficult I am convinced it is possible.
Polls from other countries that have adopted the euro show that people can be persuaded and that ideas can change rapidly, so I am confident that we can engender a more positive attitude towards the euro.
Has Lithuania considered the possibility of abandoning the currency peg altogether?
For a small country with no real banking history and traditions, moving to unpeg the currency would be absolutely irrational and could have disastrous consequences. So the only logical way forward is to replace the litas with the euro at the rate that it has been pegged to.
How might Lithuania’s economy be affected by the choice of timing for euro adoption of other EU members in the region?
I see it as beneficial for Lithuania that Estonia has already joined the eurozone and that Latvia has applied to join in 2014. Lithuania will then close this gap and create a Baltic eurozone, so to speak, which will enhance the region’s appeal for investors, many of whom already see the Baltics as a single region for investment.
The economies of the three countries have many similarities and there’s a significant volume of cross-border trade, so removing the currency split in what is a natural economic region would be a logical step.
What is your response to critics who say that the Maastricht criteria impose potentially damaging, short-termist policies on vulnerable economies?
Our position is that the Maastricht criteria should be met, which is why we have 2015 as our political horizon for euro adoption. Certainly, attempting to meet the criteria by artificial means can distort the natural development of an economy.
On the other hand, when countries are assessed from the point of view of the Maastricht Treaty, they are looked at through the prism of sustainability of conforming with Maastricht criteria. We want to have a sound economy with stable development prospects, which is not distorted artificially, and where inflation is brought under control naturally.
Our top priority is stimulating the economy and creating jobs, but of course we also understand that fiscal discipline is a necessary prerequisite of the type of stable economic growth that we are targeting.
What key steps or reforms remain to be undertaken to ensure Lithuania does meet the Maastricht criteria?
The simplest step is putting in place the requisite legal framework, and we are working on that intensively. On the fiscal side, we have had a fiscal discipline act in place since 2007, which ensures we keep our deficit under control, while on the debt side our level of 40% of GDP is comfortably within the Maastricht requirement of 60% of GDP.
Lithuania’s long-term interest rates are on track to meet the criterion. Inflation is a more challenging issue because it is highly dependent on external factors, primarily the global dynamics of food prices and of energy carrier prices. Nevertheless, I am optimistic that we can meet the targets within the current timeframe.
Do you have any doubts about the future viability of the eurozone as a whole?
No, I have no doubts about the future prospects of the currency. It is my personal belief, but one that’s supported by many objective facts, that the euro as a political and financial project is viable, and that it can survive any imaginable crisis.
Of course, there is still work to be done in terms of putting in place the legal framework for banking union, and also on the mechanisms for surveillance of the fiscal policies of eurozone countries, but overall I’m sure that the euro will survive. It is beneficial for all the member countries but also for the entire EU, and I think that it has proved its worth as a major global currency.