Lithuania’s Euro Adoption Strengthens Western Ties

In addition, the threats posed by Russia’s actions “could negatively affect our real GDP forecasts.” Twenty percent of Lithuania’s merchandise exports go to Russia, but Russian trade restrictions affect approximately a fifth of that, Fitch said. Agriculture and transportation, which make up about 4% and about 11%, respectively, are also expected to feel the sting of Russian activities.

The country’s unemployment levels are also an area of concern, since they’re higher compared with the country’s rating peers. Although the situation has improved significantly, “structural unemployment remains a key challenge for the government.” Still, “[r]elative to its Baltic peers and EU average, Lithuania’s unit labor costs are highly competitive, which should help maintain an attractive business environment.”

Also on the positive side, Lithuania’s banking sector is both “well capitalized and liquid,” with the “dominating presence of Nordic banks in the domestic sector” a positive influence, “given their financial strength and high home supervision standards.”

Despite worries in the region over how Russia’s actions may affect its neighbors, Lithuania hasn’t been letting the grass grow under its feet. It’s been wooing foreign investors, among them Turkish firm Elite World Hotels, which has just visited several sites in the Lithuanian capital of Vilnius with an eye toward building a five-star hotel. The firm has already launched two five-star hotels in St. Petersburg, Russia, and is planning another in Riga, Latvia.

The country already plays host to a number of foreign companies, with its workers voting foreign employers top places to work in a number of categories in an online poll in December and January. And according to Invest Lithuania figures, some 69% of Lithuanians ages 18–35 want to work for a foreign capital company. Eurozone membership may provide more of them with a chance to get their wish, particularly since, according to Fitch, Lithuania rates an A- for ease of doing business in the country and for trade openness.

The country’s entry into the euro zone won’t just affect the country’s own economy and monetary policy. It will have a broader effect on the currency bloc as well, since Lithuania is now able to vote at the European Central Bank. While the change in the vote rotation appears small—the five largest economies get four votes, which they share, while the other 14 countries must parcel out 11 votes amongst themselves—the frequency with which each country gets to vote will likely have the most negative effect on Germany—something that doesn’t necessarily sit well in Berlin.

Those five economies with the largest financial sectors have more say in ECB policy than the smaller ones, and Germany of course is used to wielding its influence on a regular basis. Adding more members to share a fixed number of votes will dilute the influence of smaller countries, but every fifth month, Germany will have to sit on the sidelines. While the change is not likely to have a huge effect on ECB policy, it will definitely influence how things play out—particularly, perhaps, in commentary from member nations on their views and votes.