Dr. Vitas Vasiliauskas has been a Chairman of the Board of the Lithuanian Central Bank since 2011.
The interview took place on 29th October at the Lietuvos Bankas (Central Bank of Lithuania), in Vilnius.
Lithuania's economy has recovered from a deep recession, experienced during the global financial crisis. This year, the country became the Eurozone's latest member, and the final one of the three Baltic States. Thomas Mulhall met the Governor of the Lithuanian Central Bank, Dr. Vitas Vasiliauskas, to discuss his views on the current state of the Lithuanian economy, the euro, and the Greek crisis.
Thomas: Lithuania suffered a deep recession during the financial crisis. What would your assessment of the economy be now?
Vitas: Well I think the economy is doing well, last year we reached our pre-crisis level. As you know, our drop in GDP was nearly 20%, and we started to grow after six quarters of recession. During that time we did a lot of consolidation, we decreased expenditures and increased the taxes. We entered into the crisis having quite a small state debt and this helped. All of the consolidation efforts helped us a lot. In pre-crisis times we had about 15% to GDP debt, and now we have about 40%. Our forecast for this year is that we will grow by about 1.6%. For next year, our forecast is close to 3%. As a small open economy we depend a lot on our export markets. We see what is happening in China and in other emerging markets. Of course, this can influence our export markets and the so called secondary effects will impact us. However, we still believe 3% is quite a doable figure. Domestic consumption is doing well and we don't think that it will decrease, but you never know what is waiting for you around the corner. We are small, we are open, and that means we have to be very flexible.
Thomas: Regarding euro-zone entry, in an interview around the time, you mentioned the words 'integration and safety'. Integration implies joining Western Europe, the European Union etc, but when you say safety, presumably you allude to threats from Russia. How important has the euro-zone entry been for Lithuania, considering the recent Russian actions in Crimea and Eastern Ukraine?
Vitas: Your question is loaded with a geopolitical situation. First of all, the euro is an economic project and we have, or we had the euro in affect since 2002. After independence we introduced the currency board regime, and a little bit later we pegged our currency to the US dollar. Then in 2002, we switched the peg to the euro. What does it mean? Factually we had the euro anyway, because about 70% of our loan portfolio before its introduction was in euros. We were in the currency but without any voice in the euro party, let’s say. So its eventual introduction was just a formal step. According to the EU treaty, we are also obliged to join when we meet Maastricht Treaty criteria. Before the final decision, we made an assessment as to how a euro introduction would impact Lithuania's economy in the medium and long term. Of course, we saw risks and expenditures, but the benefits were much higher. When you are connected to the euro, but do not have euro, you cannot avoid any speculation on your domestic currency. For example, during the start of the financial crisis, the speculation was terrible, and now we see how the situation has changed. Generally, I would say that economical and monetary policy factors are the most important. Of course, we can't neglect geopolitical factors and the economic situation towards the western world is very important to our country. We can see big changes to our economical model if you compare it to the situation 20 years ago. Now our most important trading partners and FDI sources are the EU and the Eurozone. When you look back over the last 20 years, we can see how we switched from east linkages over to western linkages. It is very important to be part of the currency union considering our closest economic neighbors, Latvia and Estonia, are also members of the same currency family. Therefore, joining was very logical.
Thomas: There is a joke that Lithuania waited for Latvia and Estonia, before joining the euro themselves. How important was it to use the Latvia/Estonia experience?
Vitas: Of course their experience was very important for us. Of course we used that experience. Cooperation between the three Baltic countries is very intensive and of course we used their knowledge for ourselves. As you know, in the euro introduction game, let’s say, we tried to be first in 2006 but our inflation rate exceeded the criteria required at the time.
Thomas: Does the loss of monetary policy make Lithuania more vulnerable in the future? And what is your opinion on further EU fiscal integration?
Vitas: Despite not joining the euro until this year, we were pegged for many years, and so lost the monetary policy in 1994; when we introduced currency board regime. If you think about the future of the euro, everybody understands more centralization and more common policy is necessary. Now we have a banking union, but we should move forward. We should think about a common budget for exampl. We do not have a common market in all areas and without that, the common currency or economical union is not so effective. Whether politically fiscal integration is possible, I am always optimistic, because without that I do not see a future.
Thomas: The Baltic States implemented severe austerity measures with relative success and without large scale public anger. What do you believe the future holds for Greece who have found implementing austerity extremely difficult?
Vitas: I think that for the moment we have the third program. Greece's debt is not sustainable and with such high levels of indebtedness, everybody understands that a normal economy cannot function under such circumstances. We have heard about initiatives regarding restructuring of debt, and I think that will be a topic for discussion. The question of implementation of the third program is the issue for the Greek authorities.
Thomas: Law & Justice have just won an election in Poland with an overall majority. mBank have said 'forget about the euro'. The issue of the euro-zone membership is brought up in Poland and Czech frequently, but most polls show that about 80% are strongly against it. When do you think 'Eurozone19' could become 'Eurozone20'?
Vitas: I don't think we can expect a new member soon. As you know, for euro introduction you have to fulfill Maastricht criteria, and in some countries you have to change your constitution, Poland for example. I don't want to speculate, but I do not expect any imminent new members.
Thomas: If I were a Czech or Polish citizen for example, how would you convince me that joining the euro is in my national interest?
Vitas: I wouldn't convince you, it's your choice. During the euro campaign, we got a lot of questions similar to yours and especially for comparisons of Lithuania to Poland. My answer was simply, look they are different, they have different economical models. Comparing Lithuania and Poland is like comparing potatoes and apples. Yes they are round, but one is a vegetable and the other is a fruit. Every country has its own decision to make.