Lithuania

1) REFERENCES

Commission Opinion [COM(97) 2007 final - Not published in the Official Journal]

Commission Report [COM(98) 706 final - Not published in the Official Journal]

Commission Report [COM(1999) 507 final - Not published in the Official Journal]

Commission Report [COM(2000) 707 final - Not published in the Official Journal]

Commission Report [COM (2001) 707 final -SEC(2001) 1750 - Not published in the Official Journal]

Commission Report [COM (2002) 700 final -SEC(2002) 1406 - not published in the Official Journal]

Commission Report [COM(2003) 675 final - SEC(2003) 1204 - not published in the Official Journal]

Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]

2) SUMMARY

In its Opinion of July 1997, the Commission took the view that it was too early to decide on Lithuania's participation in the euro area immediately upon its accession but that if it were to participate in the third stage of economic and monetary union (EMU) while not being a member of the euro area, this would pose a number of problems in the medium term. It would in particular be necessary for the legislation on monetary policy to be made compatible with Community requirements and for a sound and efficient financial system to be established. As for the free movement of capital, however, the Commission took the view that it should be possible for the remaining restrictions to be removed without major difficulty.

The November 1998 Report noted that Lithuania had made very little progress in its preparations for participating in economic and monetary union.

In its October 1999 Report, the Commission stated that Lithuania had made progress in its preparations for participating in EMU.

The November 2000 Report noted that since the last regular Report, Lithuania had not made any further progress in adopting EMU acquis. Reservations were entered about the independence of the Lithuanian central bank and the possibility of it directly financing the public sector.

In its November 2001 Report, the Commission stated that Lithuania had made significant progress in adopting the EMU acquis.

The October 2002 Report recorded that Lithuania had continued to make progress in adopting the EMU acquis.

The November 2003 Report noted that Lithuania was meeting the main requirements resulting from the negotiations on EMU.

The Treaty of Accession was signed on 16 April 2003 and accession took place on 1 May 2004.

COMMUNITY ACQUIS

The third stage of EMU begins on 1 January 1999. This date will entail far-reaching changes for all Member States, even those not taking part in the euro area from the outset.

In the economic sphere, the keystone is the coordination of national policies (national convergence programmes, general economic guidelines, multilateral surveillance and excessive-deficit procedure). All countries are required to comply with the Stability and Growth Pact, to refrain from direct financing of the government deficit by the central bank, to prohibit privileged access by public authorities to financial institutions and to have liberalised capital movements.

Member States not taking part in the euro area conduct an independent monetary policy and participate in the European System of Central Banks (ESCB) under certain conditions. Central banks must be independent and must have price stability as their primary objective. Lastly, exchange-rate policy is regarded as a matter of common interest by all Member States, who must be in a position to participate in the new exchange-rate mechanism.

Even though accession entails acceptance of the objective of EMU, compliance with the convergence criteria is not a precondition. However, since those criteria are indicative of a macroeconomic policy geared to achieving stability, all Member States must, in due course, comply with them on a permanent basis.

EVALUATION

In the course of transition to a market economy, Lithuania has made considerable progress in liberalising and stabilising its economy during the period covered by the Reports. Already in 1997, 70% of the gross domestic product (GDP) came from the private sector. Slow but steady progress was being made in the return of land. Lithuania continued to progress towards a functioning market economy and was set to cope with competitive pressure and market forces within the Union in the medium term. The 2000 Report finally noted that the country could be considered as a functioning market economy. In 2000, GDP per capita accounted for 29.3% of the EU average. The economy was beset by an increasingly high unemployment rate. The 2003 Report states that the situation in the labour market has improved markedly, with a higher employment rate (59.9%) and a decrease in the unemployment rate from 17.4% in 2001 to 13.8% in March 2003.

With regard to economic activities, the growth rate was 5.7% in 1997. In 1998, the GDP reached 5.1% as a result of the sharp increase in consumption and investments. However, growth fell virtually to zero at the end of the year following disruption in trade relations with Russia. The GDP in real terms fell to 4.1% in 1999. Following this decline, growth in Lithuania was back on track in 2000. In 2001, the growth rate was significantly higher than the average due mainly to a surge in exports and investments. During the first half of 2002, growth was dynamic and reached 5.8%. As an annual average, GDP growth in real terms was 3.6% during the entire period covered by the reports. The 2003 Report notes that macroeconomic performance in Lithuania was particularly strong in 2002 despite lacklustre growth in the EU. Growth in GDP was around 6.7% in 2002 and rose still higher in the first quarter of 2003, reaching 9.4% with respect to the same period the previous year.

In 1997, the situation as regards public finances developed better than expected with a GDP deficit of 0.5%. However, budgetary policy slackened considerably during the second half of 1998 following the Russian crisis. General government deficit rose to 5%. In 1999, it amounted to 5.6% of the GDP. An anti-crisis plan, based on an austerity budgetary policy, was adopted. The deficit was brought down to 3.3% of the GDP in 2000. Public finances improved since then. They showed a deficit of 1.9% of the GDP in 2001. Following a sharp increase in 1999, public debt remained relatively stable at around 23.5% of the GDP. The 2003 Report states that the Lithuanian authorities have rigorously implemented the public finance improvement programme. The general government deficit fell further to 1.7% of GDP in 2002

Inflation continued to fall: the annual average inflation rate dropped from 24.6% in 1996 to 8.8% in 1997. The annual inflation rate did not exceed 0.8% in 1999 compared with 5.1% in 1998. The 2001 Report noted that inflationary pressures were particularly light in Lithuania. A low and stable inflation rate was one of the main successes of the economic policy. Prices increased by only 1.3% in 2001. During the period 1997 to 2001 inflation averaged 3.3% while decreasing over the entire period under review. Strong productivity growth, moderate wage increases, and the appreciation of the litas all contributed to the fall in prices of almost 1% in 2002. The trend persisted during 2003, with inflation falling by around 1% in August compared with August 2002.

With regard to the exchange rate Lithuanian monetary policy was based on the currency board system. The national bank implemented a strategy to exit from the system, which had survived the Russian crisis, but not without difficulty. The exchange rate continued to rise in 1999, partly because the litas was pegged to the American dollar. In mid October 1999, the Lithuanian central bank announced that the litas would be pegged to the euro from 2 February 2002 onwards without any change to its external value. The transition went smoothly without any strains on the financial markets. The change from the pegged currency was dictated by the determination to obtain a truer picture of the real exchange flows and to encourage integration into the Union's economy. The 2003 Report notes a considerable rise in the litas against the euro in the period covered by the report.

After shrinking a little in 1996, the current account balance deficit increased again in 1997 to 10.3% GDP. The balance in the current account had been improving after a significant drop in 1998 and 1999. The 2001 Report noted that the current account deficit was still considerable even though it had been reduced. The deficit fell to 6% GDP in 2000 as against 11.2% in 1999. The current account balance deficit dropped to 4.8% in 2001. The 2003 Report states that the current-account balance deteriorated somewhat, to 5.3% in 2002.

With regard to structural reforms, privatisation was on track. In order to cope with the Russian crisis, the authorities took various measures in support of firms experiencing financial difficulties. In November 1999, the country adopted a free market policy that it still applies. The 2000 Report stated that significant structural reforms had been embarked on with regard to the public administration and the pension scheme based on three pillars. Progress had been made in the energy sector with the privatisation of the public gas and electricity companies. The privatisation process was therefore near completion. Structural reform continued in 2001 and the restructuring of the economy received a fresh impetus. Privatisation of the financial sector is virtually complete. The pension reform project must be continued and carried out. The 2003 Report notes that the authorities have actively implemented reform, although more needs to be done in a number of areas, including pensions and the budgetary structure. The privatisation of state-owned enterprises advanced significantly and, in some sectors (e.g. banking), is complete.

With regard to the independence of the central bank, the 1998 Report requested that legislation relating to the central bank should be made fully compatible with European Community rules. The 1999 Report requested certain changes to the statute of the central bank (for example, ensuring the personal independence of the members of the Board of Directors) in order to align it with the Treaty. In March 2001, the Lithuanian Parliament amended the law relating to the Bank of Lithuania with a view to aligning it with the acquis. This law also confirmed the prohibition on direct financing of the public sector by the central bank. The law also gave a guarantee that price stability would be the main objective of the central bank. With regard to the independence of the central bank, further alignment was necessary in order to be ready to deal with any conflicts of interest arising from the obligations of the members of the Board of Directors. The 2003 Report notes that adoption of the acquis is complete, except for the adoption of an amendment to the Central Bank legislation to safeguard against possible conflicts of interest relating to the duties of the members of its board of directors.

With regard to progress made in the negotiations, Lithuania fully accepted the EMU acquis such as defined in Title VII of the EC Treaty. The administrative structures needed are in place and operational. NEGOTIATIONS on this chapter were concluded in December 2002. Lithuania has not requested any transitional provisions.

Last updated: 15.03.2004