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From Litas to Euro: Lithuania and the Eurozone

While people across the world celebrated the New Year, the people of Lithuania changed more than just their calendars. As of January 1, 2015, Lithuania has officially adopted the Euro as its currency. Although the litas, Lithuania’s old currency, had been pegged to the Euro for years, this transition has huge economic ramifications. Further, with tensions between Russia and the West at an all time high since the fall of the Berlin Wall, the shift has profound implications for geopolitics in Europe.

In 2004, Lithuania officially became a member of the European Union, but at the time, the country’s inflation was too high to be allowed to adopt the Euro. When a member state enters the European Union, as part of signing the Maastricht Treaty, they are required to adopt the Euro. However, in order to adopt the Euro, member states must meet strict economic standards (or skirt the standards, in the case of Greece). This means that countries often retain their own currency for several years between entrance to the EU and adoption of the Euro (with exceptions like Poland). In 2004, Lithuania met all the political standards to join the EU, but failed to meet the economic criterion for the Eurozone. Since then, Lithuania has been instituting major economic reforms in order to decrease inflation below the 2.6 percent benchmark.

The biggest economic advantage of joining the Euro lies in banking. For a country like Lithuania, access to the larger banking infrastructure of the Eurozone, including banks in Germany and France, is a major incentive to join. As a Eurozone member, businesses in Lithuania will have easier access to financial capital, allowing them to take more risks and get higher returns. This is a key point that half of Lithuanians, who support the adoption of the Euro, recognize and value. On the other hand, half of Lithuanians look at the current state of the Eurozone and wonder if they aren’t better off on the litas. In light of the falling value of the Euro and increased uncertainty over Greece’s debt, the Eurozone may no longer be the cool kids’ club. However, the case to be made for Euro adoption extends beyond pure finance, and into the realm of politics.

Like most of its neighbors in Eastern Europe, modern politics in Lithuania can be traced back to its days as a Soviet Republic. In 1990, Lithuania became the first Soviet republic to declare independence. By 2004, Lithuania had become a member of NATO and the European Union; its adoption of the Euro in many ways marks the completion of Lithuania’s westernization. Still, much like the rest of the former Soviet republics, Lithuania has yet to fully escape the orbit of Russia. In 2012, roughly one-sixth of Lithuania’s exports went to Russia and roughly one-third of their imports came from Russia. Its exports to Russia nearly doubled those of its next closest partner, Latvia, and its imports from Russia nearly tripled those of its next closest partner, Germany. Clearly, Lithuania still strongly depends on Russia economically, and this dependence could be hazardous. Trade with Russia is always tricky business — Russia is often willing to use its economic weight against former Soviet Republics in order to gain favorable political or economic standing. For example, in 2006 and 2009 when the Ukraine failed to reach a deal on gas prices, Russia responded by cutting off all gas supplies in the middle of the winter. While the failure to reach a deal was the reason on the face of it, Russia’s implicit motivation was to discourage Ukraine’s westernization, the same motivations that have led to the current conflict. By adopting the Euro, Lithuania will expand relations with other Eurozone members, allowing it increased autonomy from Russia. The potential for Lithuania to expand its trade partners also poses a risk for Russia—one that can potentially be leveraged in the current crisis.

In many ways, the current conflict between the EU and Russia can be considered money versus might. Whereas the EU is unwilling to commit military forces to counter Russian aggression in the Ukraine (and in fact, has discouraged the US from sending arms to the Ukraine), Russia continues to flex its military muscle. However, the EU has responded with economic means. What started as targeted economic sanctions on political and financial leaders in Russia has now expanded to sanctioning whole industries, namely the defense and energy industries. Through international sanctions and the luck of dropping oil prices, the Russian economy has been faltering, which is likely to pressure Russia into certain concessions. While Lithuania is by no means the most important trade partner of Russia, $5 billion is not a small net export value and Lithuania may provide additional leverage in the current crisis.

Finally, putting all the economics aside, the adoption of the Euro is a hugely symbolic event, and in geopolitics that is nothing to be scoffed at. As much as it seems trivial, the sentiments of world leaders play a huge role in international relations. And the adoption of the Euro stands as a capstone to Lithuania’s westernization. Lithuania is now the final Baltic state to join the Eurozone, and this bloc may lead the way for further westernization of other former Soviet republic states. However, this action is not to be taken lightly. As the West (hopefully) learned in dealing with Ukraine, Russia has no realistic dreams of getting the gang back together and reuniting the USSR. However, at the same time, Russia wants close allies who support its interests, while seeing thriving Western democracy as an affront to those interests. Between its recent flurry of flights over the Baltics and the conflict in the Ukraine, Russia wishes to scare the former Soviet Republics so that it can continue to lead a community of only marginally democratic countries. Yet in Lithuania’s adoption of the Euro, the country is defying these scare tactics and continuing to march forward.

The adoption of the Euro by Lithuania marks a huge step forward for the country and Europe as a whole. Lithuania now has greater economic opportunity than before and the opportunity to break free of Russia’s orbit. But in this symbolic completion of Lithuania’s westernization, it is critical to celebrate quietly. Russia is a withering nation, led by a man intent on appearing strong by trying to hold onto a quasi-empire. Its orbit is getting weaker, but the West should not force other countries to follow the lead of Lithuania; rather, it must ensure that the westernization of countries like the Baltics does not end on symbolism, but commits to a continued development and integration into the world economy.

About the Author

Matthew Dudak '18 is the Data Editor for Brown Political Review.