Lithuanian currency Litas replaced by Euro

2015 01 01. Since today the official currency of Lithuania is Euro, and after two more weeks, Litas will no longer be accepted in stores. Euro is also the legal tender in 18 more European countries. 3,4528 Litas will be converted to a single Euro.

In the upcoming two weeks both Euro and Litas will be accepted but change will be given in Euros alone. This made some small businesses to temporarily close their doors to avoid a hard-to-manage dual-currency circulating capital and accounting.

Litas could be freely converted into Euro at every post office and credit union until 2015 03 01, in every bank until 2015 06 30 (banknotes until 2015 12 31) while the Central Bank will convert Litas indefinitely.

The decision to adopt Euro

The quick adoption of Euro has garnered some controversy as the majority Lithuanians have opposed according to most polls (although recent polls show that a massive governmental pro-Euro PR campaign raised support to 53%). A group of Lithuanians sought to initiate a referendum on the issue back in 2014, but this has been blocked by the Constitutional Court of Lithuania, which generally ruled that such transfer of sovereignty to the European Union (EU) could not be questioned by the people of Lithuania.

The adoption of Euro was supported by most major Lithuanian political parties, although some politicians sought for a later adoption date, more public consultations or negotiations for alternative adoption terms (such suggestions have not been approved).

The commonly cited advantages and disadvantages of the common European Union currency Euro are:

Advantages of Euro

*Lithuanians will no longer need to exchange currency when travelling to other states that use Euro as their currency. Likewise, tourists from those countries will not need to change currency when in Lithuania. Bank transfers would also become simpler.

*The international businesses that imports from or exports to the Euro-using countries will save on currency conversion costs.

*The Lithuanian sovereign debt interest rates are expected to be lower. This is seen as a double-edged sword, however, as lower interest tends to incite government to borrow more for consumption rather than for investments (as happened in Greece after it adopted the Euro), which may have tragic consequences during the financial downturn.

*Lithuanians will supposedly "become more European". As a common theme in the regular government-funded pro-EU propaganda campaigns, further Lithuania's integration into EU (including the adoption of Euro) is promoted as a necessary step for the long-term foreign policy goal of "leaving the East and (re)joining the West".

All the Euro banknotes and the obverse of Euro coins are the same all over Europe (and lack any Lithuanian words or Lithuania-related details). The reverse of coins however could vary among countries; the Lithuanian version features Vytis coat of arms (which was also featured on Litas coins).

Disadvantages of Euro

*Massive costs of adopting a new currency. The cost to change currency will be, according to the government estimate, 1 billion Litas + 8,5 billion Litas pledge to the Euro Financial Stability fund (in comparison, the planned total expenses of Lithuanian state budget in year 2014 were 37,6 billion Litas). Additionally, Lithuanian Central Bank has to transfer its assets to the European Central Bank. Massive costs are also incurred by private businesses (e.g. in updating accounting software and hardware). The optimistic governmental scenario hopes that the advantages of Euro would help recoup the costs several times on a longer term. In reality however while the expenses have been already incurred or will be incurred soon, any long term advantages are speculative as they depend on the overall economic situation of other European Union countries (which has recently been unfavorable).

*By adopting Euro Lithuania has lost the possibility to conduct its own monetary policy. As the recent crisis has shown the economy of different countries using Euro differs greatly. Some countries may need their currency to depreciate to encourage exports, while the success of others (e.g. Germany) make Euro appreciate, damaging the economy in the former (e.g. Greece). However, in the recent years Litas was anyways pegged to Euro even though this may have hampered Lithuania during the crisis (as other unpegged currencies, especially the Polish Zloty, deprecated against Litas and Euro, making Lithuanians visit foreign countries for shopping). That said, by adopting Euro Lithuania will lose the ability to unpeg its currency if the market needs would so dictate. Reissuance of Litas would be expensive and could lead to currency speculations and capital flight (similar concerns were among the reasons why the troubled Southern European countries chose not to abandon Euro).

*Lithuania will be obliged to support Euro-using countries in dire straits. Lithuanian economy is healthy as Lithuania chose to combat recession through curbing expenses, making Lithuania unlikely to need a bailout itself. On the other hand, the nations that have recently needed a bailout (e.g. Greeks) actually are significantly richer in terms of personal income than Lithuanians and their main problem was the unwillingness to accept lower wages and payouts that would be compatible with state productivity (and help reduce their debts). This has created a belief in Lithuania that during such troubles the poorest Euro-using countries (the Baltic States) would be obliged to help fund the richer ones (e.g. Southern Europe) so that those richer countries would not be forced to decrease expenses to the level common in states such as Lithuania.

*Litas, a major ubiquitous symbol of the nation will leave the eyesights of Lithuanians and visitors of Lithuania. Other Lithuanian symbols that have gone due to the European Union membership were Lithuanian-flagged car licence plates, whereas Lithuanian passport now has words "European Union" printed above "Republic of Lithuania" and the Lithuanian tricolor is usually waved alongside EU flag at the institutions. This may be seen as an unnecessary loss of Lithuanian identity, while some Lithuanians even draw comparisons with the Soviet occupation when currency, flags and licence plates were also identical all over the Union.

The Litas banknotes depicted heroes of Lithuanian national revival (obverse) and the famous sights of Lithuania (reverse). First issued in 1993 the modern Litas survived the 23 years as a stable currency without hyperinflations or devaluations (unlike its predecessors Soviet Rouble and Talonas). ©Augustinas Žemaitis.

Euro to inflate prices?

The most common fear of new currency is that it will make prices inflate. Lithuania created tight laws and bylaws controlling price conversion to avoid this tarnishing the reputation of Euro.

However, many prices have been increased before the adoption of Euro or likely be increased afterwards. For example, prices in many Vilnius cafes and restaurants have been already raised so that they would be rounded when converted into Euros (e.g. something that had cost 5 Lt may have had its price changed to 6,91 Lt ~mid-2014 so that it would become 2 Euros since today).

Estonian example (which adopted Euro in 2011 01 01) shows that prices have increased some time after the adoption of Euro as well. For instance, while a Big Mac still cost ~2,15 EUR in Estonia in June 2011, the price have reached ~2,75 EUR by June 2013 (the Big Mac price increase in the other EU countries, both Eurozone and non-Eurozone, was smaller) [source: The Economist].

That said, the prices within Eurozone itself vary greatly depending on economic differences, so it is unlikely that prices in Lithuania would reach the price level of Western Europe anytime soon.

You have more thoughts on the advantages and disadvantages of Euro? You can share them in comments.

A longer analysis of Lithuanian-European Union relations is available here.