Last week I had the honor to participate in meeting with Christine Lagarde (IMF), Jorg Asmussen (ECB), Vytas Vasiliauskas (head of Central Bank of Lithuania) and Rimantas Sadzius (Minister of Finance of Lithuania). Among the topics discussed was the question about the benefits of joining the Eurozone. Let us examine the arguments for joining the Euro, expressed during the meeting. Even though the list is far from complete, it encompasses most of the conventional wisdom regarding the benefits of adoption of the Euro in Lithuania.
One of the arguments states that adoption of the Euro is a logical step given the fact that Lithuania operates a currency board with a peg to the Euro. But this is not so. Currency board in Lithuania was established in 1994 for the sake of stability of the currency, fighting inflation, and to prevent government from meddling with the supply of money. One could argue whether currency board achieves those goals perfectly. But if one said that the logical conclusion of currency board is to adopt the peg currency, then one would have to argue that Lithuania was on the road to adopt the US Dollar (given the fact that prior to the Euro-peg, Lithuanian Litas was pegged to the US Dollar). This, of course, is not the case. Adoption of the peg currency is not the only logical conclusion of the currency board. Currency board system does not presuppose an evolution from currency board, to adopting the reserve currency. Even more, the reliability of the currency board comes partly from the fact, that reserve currency can be changed if it stops being reliable.
The second argument states that adoption of the Euro would lead to cheaper borrowing. It might. But the interest rates (especially if we are talking about borrowing by the government) are, among other things, derived from the economic performance of the country, and the estimated ability of the government to pay the loans back. If cheaper borrowing is the objective, a prudent budget policy by the government would do more to lower the cost of borrowing than the adoption of the Euro. Whether adoption of the Euro leads to a more prudent budget policy is a question for economic historians. Were Southern European countries inclined to overspend before joining the Euro? Or was it the Euro, which enabled their spending? As for analysis of the present moment, one could easily find EU member states, which had not joined the Euro, and have cheaper borrowing rates compared to certain Eurozone members.
The third argument cites “stability” derived from joining a widely-used currency. From a very superficial point of view, the days when the Euro was a synonym for stability are long gone; if anything, now the Euro is a source of risk and uncertainty. Whether “stability” of currency exchange rate of the country’s trading partners is such an important factor is questionable. Regardless, there are two facts that make this argument irrelevant. First, the exchange rate of Euro and Litas can be kept stable by the currency board just as it is done right now. Second, even with the Euro, we still have fluctuations of other currencies, (e.g. US dollar) which are important to the economy of Lithuania (because imports like natural gas and crude oil are paid in US dollars). Thus the adoption of the Euro does not eliminate the risk of currency fluctuations. Finally, currency fluctuations on their own seldom are barriers to trade. Elimination of currency rate fluctuations, even if beneficial, is insignificant, compared to other issues. From the economical (the aforementioned risk) to the more emotional (the sentiments attached to the national currency).
All this brings us to the final, and probably the most decisive argument, which goes along the lines that if Lithuania didn’t join the Euro, the currency board would be dismantled, and local politicians would try to conduct their own monetary policy, which would lead to irresponsible printing of money, inflation etc. That is certainly a possibility. But once again, a couple of points arise. First, there is no real reason why local politicians would necessarily want to mess up the national currency. Second, isn’t Europe doing exactly that? Why printing of money by ECB is better than the printing of money by the local Central Bank is a question better left for the proponents of national monetary policy.
It seems that the question really boils down to which politicians we distrust with monetary policy more: Lithuanian or European ones? (Let’s not start the argument about the independence of Central Banks). In other words, the argument turns to a negative case. Instead of the positive (“What benefits would the Euro bring?”), we are dealing with the negative (“Would we be even worse off without the Euro?”). Such argument will put the local politicians in quite an interesting position. In order to convince the public to adopt the Euro, they would have to argue, that they themselves cannot be trusted with the monetary policy.
Frankly speaking, the answers left even more confusion and alarm. Sooner or later the question will have to be discussed publicly. The imagery of poor thrifty Lithuanians paying for the spendrift Southern Europe will be one of the rallying points of the opponents (regardless of whether the image is true or not); it can even go to a referendum. If the population is to be convinced to make an informed choice, mediocre arguments will not suffice. The lack of positive arguments should worry the proponent of the Euro. The lack of more in-depth discussions should worry those in favor of informed decision making by the public.
