Forbes on Lithuania and the Euro: One Year Later, the Romance Continues

The latest newcomer to the euro zone makes the common currency look pretty darn good.

Twelve months ago, Lithuania fully shed its ex-Soviet skin and joined the euro. Litas went out of circulation. The euro was the law of the market. Ten years after joining the European Union, the locals witnessed a 55% gain in per-capita GDP. It hovers around $15,500 per capita currently, making it richer than the larger neighboring Baltic market – Poland.

The bulk of 2015, like 2014, was a year in which financial pundits and money managers questioned the future of the euro. It wasn’t until the Syrian refugee crisis began around September that the euro moved backstage. And while many people thought a Greek exit from the euro zone was a sure thing, Lithuania quietly joined its ranks. The real estate market outperformed, with housing construction at an all time high as of the third quarter. Home prices rose more in Lithuania than in any of the four Baltic states, by 2.43%. Domestic consumption is growing quickly. Real wages are up by 5%, and retail trade is up around the same.

“The euro helped build business confidence and consumer confidence. People thought that the euro would make things more expensive,” says Zygimantas Mauricas, the chief economist at Nordea Bank in Vilnius, LT’s capital. “Instead, people ended up making more money. We were growing more in percentage terms pre-euro, but not much more. Now you have stability and the common currency just makes it easier to do business and to invest.”

Lithuania pegged its currency to the euro 3.5 to 1 before switching over. It was already considered a stable place to invest at the time. According to Foreign Policy magazine’s Baseline Profitability Index of 2014, Lithuania was ranked the second best place to invest in Europe. Poland was No. 1. The same ranking held in 2015.

Most of Lithuania’s economic problems last year stemmed from Russia. Sanctions against European agribusiness and a massive decline in Russian demand slowed Lithuania’s growth to around 2.5%, down from 2014 growth of 2.9%. Exports fell as much as 100% in some sectors and 25% on average. Dairy exports, for instance, were banned and are still not going to Russia.

“Lithuania’s economy corrected more because of Russia and not because of an adjustment to the new currency,” says Eglé Frederiksson, a fund manager with East Capital, a Swedish investment firm with offices in Vilnius. “I think Lithuania’s been very flexible, actually.” She forecast GDP growth to be around 3% in 2016, a little better than 2015.

Since joining the euro last January, Lithuania has only seen one quarterly decline in GDP. That happened in the first quarter 2015 due primarily to the Russia effect, and not the euro.

Inflation never ballooned as feared, but that is mostly due to QE in Europe. Lithuania is mostly deflationary, but less so than it was in January 2015 at -0.4% currently.

The euro continues to defy the skeptics. It’s largely won over a new fan base in Lithuania. One year later, the romance continues.

Would they have a change of heart if the U.K. left the European Union? Or if Greece did end up leaving the euro? None of these are base case scenarios for American firms in Lithuania, says Tadas Vizgirda, chairman of the American Chamber of Commerce. He raises his eyebrows over the thought of a euro crack up in 2016. That’s all the market needs…

“It would wreck havoc completely,” he says, half-facetiously, half-fearful. “We’re in the euro for the economy, not for any cultural connection to Western Europe. The euro is still fairly fresh for us all. Overall, I’d say it’s been a success. It’s good to be here.”

Source: Forbes