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Lithuanian wealth takes priority over euro

Lithuania's finance minister, who oversaw the country's failed attempt to adopt the euro, said giving citizens a „better life” should be a priority over switching to Europe's common currency.

The country's bid to join the euro region on January 1 along with Slovenia was rejected because inflation was too fast. The government will run deficits in the next two years to help boost living standards, rather than try to slow consumer-price growth by balancing the budget and join the euro more quickly, Zigmantas Balcytis said in a December 28 interview in Vilnius. People in the former Soviet state „need a chance to start living a better life,” Balcytis said. „And when the time comes, we'll be able to slip into the criteria automatically just like the Slovenians: without pain.”

Gross domestic product per capita in Lithuania was 52% of the European Union average in 2005, according to Eurostat, the EU's statistics office. To narrow that difference, higher spending on health care, public-sector wages and pensions will also probably boost the inflation rate further beyond the required limit and make adoption unattainable until at least 2010, the Finance Ministry has said. The country needs to raise living standards at a faster pace because „emigration flows are very large” and „the labor force is fleeing,” the finance minister said. „We ought to do something about it, and by giving people more income, we will try to fuel our economy.”

The Baltic country of 3.4 million people, where public opposition to switching currencies outnumbers supporters, will avoid „artificial measures” such as cutting spending or regulating prices to adopt the euro sooner than it is ready, Balcytis said. The euro is open to countries that pass tests for inflation, deficits, debt, long-term interest rates and currency stability. Slovenia is the only new EU member that adopted the euro on January 1. Since the rejection in May, Lithuania's average inflation rate has risen to 3.7% in November from 2.7% in May and well above the 2.8% threshold required for adoption. The finance ministry forecasts the average inflation rate this year will be 4.7%. Lithuania's goal of an early switch to the euro has been undermined by import-led growth, which has in turn driven up inflation. The economy, the fifth-poorest in a 27-member EU, grew 6.4% in the Q3, more than twice the pace of the countries sharing the euro. Balcytis, said growth may have accelerated to 8% or 8.3% in 2006. That exceeds the Finance Ministry's official forecast of 7.8%.

Balcytis said the former communist nation has little ability to control inflation because consumer prices are almost entirely influenced by imports, especially of oil and natural gas. „We've realized that external factors have a big impact on our economy -- no one could have expected in 2005 that energy prices would add as much as 1.5%age points to our inflation on the day Lithuania had to qualify for the euro.” Lithuania receives natural gas supplies from Russia's OAO Gazprom, which has said it may raise energy prices as much as 30% this year as it seeks to increase costs to EU levels by 2008. Gazprom has not said when or how many times it may raise prices this year. Gazprom increased natural gas prices twice last year, by 13% and 22%, respectively. „If we do receive natural gas for the price we agreed, I'm sure that inflation will not exceed our estimates,” Balcytis said.

Because Lithuania's currency is pegged to the euro, the central bank cannot use monetary policy to fight inflation, leaving government spending as the only instrument to steer growth. The International Monetary Fund in September called for the government to take „early action” in balancing the budget if it wants to achieve its goal of switching to the euro in 2010. Instead, the country plans a deficit this year of 0.9% of GDP and a balanced budget in 2009. Balcytis said the budget deficit in 2006 is likely to be less than a gap of 0.5% of GDP in the previous year and less than the originally forecast deficit of 1.2% of GDP. Support for euro membership among Lithuanians was 37.8% in November, while opposition was 39.3%, the government said in a survey conducted on November 9-12. Balcytis, an elected member of parliament from the Social Democratic party, received a degree in finance and accounting from Vilnius University in 1976. (Bloomberg)