When Lithuania adopted the euro on January 1, the third of the Baltic states to do so, it became the 19th member of the currency bloc and strengthened its ties with the West. The move came at a critical time, considering the European Union’s sanctions against Russia over the latter’s move into Crimea and the uneasy atmosphere in the Baltic region.
Lithuania has been rightfully concerned about the effects of its larger neighbor’s actions, to the extent that it has issued a manual on what to do in case of foreign occupation. Such concerns may not be at all extreme, either, given that in December Russia conducted a military drill in Kaliningrad, a Russian enclave located between Lithuania and Poland on the Baltic Sea. The drill encompassed not only land but sea maneuvers that involved 9,000 soldiers and more than 55 naval vessels.
“The examples of Georgia and Ukraine, which both lost a part of their territory, show us that we cannot rule out a similar kind of situation here, and that we should be ready,” said Juozas Olekas, Lithuanian defense minister, in published reports. “When Russia started its aggression in Ukraine, here in Lithuania our citizens understood that our neighbor is not friendly.”
One of the attractions of closer Western ties has been the opportunity to join NATO—something it did in 2004 after it had gained its independence from the Soviet Union. It also joined the EU in the same year, although it took longer to adopt the joint currency; in 2006 Lithuania was actually rejected from the euro zone because its inflation target was over the currency bloc’s requirements by 0.1%.
Still, Lithuania has worked hard since then to be able to finally adopt the euro, and hopes that its closer association with the EU will help its economy to continue to grow while giving it more access to Western business. This is particularly true now that the plunge in the Russian ruble has pretty much eliminated Russia as a good market for Lithuanian dairy products and other goods.
Growth is something Lithuania has been experiencing. Indeed, according to Fitch Ratings, in 2014 it was one of the fastest growing in the EU, with that growth to continue at an expected rate of 3.5% of GDP for 2015–2016. Improvements in the labor market and in wages are only part of what Fitch expects for the months to come; increased investment activity from outside the country, thanks to its adoption of the euro, is also anticipated.
Not that Fitch expects it to be a smooth ride. “[W]e expect some negative impact on Lithuania’s agricultural and transportation sectors from Russia’s latest international trade restrictions, with further risk from negative spillovers on domestic demand,” according to Finch analysts in research. “As a small and open economy, Lithuania is vulnerable to external shocks. A history of large boom-bust cycles means Lithuania’s volatility of GDP and five-year average real GDP growth is significantly worse than both the A and AA median,” the analysts said.