Membership of the EU gives a boost to the economy
On 1 May 2005, Lithuania, together with nine other new member states, celebrated its first year as a member of the EU. Accession had been a policy target of these states for more than a decade, providing stability and consistency to the reforms undertaken after the collapse of communism.
Hopes have been high, and the public has been among the most enthusiastic, voting overwhelmingly in the 2003 referendum to join. What does the situation look like after the first year of membership? Are the benefits being felt in the economy and in society? What are the main concerns?
Optimistic about membership
Opinion polls reveal that the Lithuanians are still quite satisfied with their country’s performance in the EU. For example, in the autumn of 2004 a survey conducted by Eurobarometer in all 25 member states showed that they are among the most supportive of the EU, leading the new member states and coming sixth among the EU 25.
It indicated that 69% of those surveyed believe that membership is a good thing, and 78% think it is beneficial to the country. The level of optimism about the country’s membership of the EU is rather stable.
The question now is how the economy is doing after the first year of membership.
Of course, one year is still too short a period to talk about significant changes. Moreover, accession itself did not bring many changes. Trade between Lithuania and the EU had been liberalized substantially from 1995, and most of the EU’s regulatory norms had been adopted by 2002 when membership negotiations were completed.
But it is exactly these steps in removing barriers to trade and participation in the internal market that can be linked to the current impressive performance of the economy.
It is impressive. For several years, Lithuania has consistently led Europe in terms of GDP growth. The economy’s dynamism shows that the fears about the inability of new member states to compete in the Single Market are not justified.
Exports to the EU of Lithuanian products keep expanding (despite the sluggish performance of Germany, which is the main export market). For example, in the first quarter of 2005 exports grew by 23% compared to the same period in 2004. The EU accounts for 70% of the country’s exports.
Lithuania is also supporting the efforts of the European Commission to go forward in removing the remaining barriers to the Single Market, such as the liberalization of service provision and the adoption of the controversial service directive. Lithuanian retailers and producers’ trademarks are well recognized in neighboring EU countries, and their activities keep expanding to other parts of the Single Market.
The current performance of the economy is fueled by earlier steps in economic integration, which created good conditions for competition and restructuring, as well as by sound macroeconomic policies. This trend is reinforced by positive expectations, which are reflected in the recent acceleration of FDI growth and the very low level of interest rates.
The combination of very low interest rates, which have encouraged borrowing, and the increase in wages have driven up domestic production and the provision of services.
Another important factor in driving up domestic demand is
the inflow of EU funds, which started in 2004. Although expectations from it were probably exaggerated, it is quite clear that the inflows of money, totaling up to 20% of the national budget, will strengthen the demand side of the economy.
Returning to Europe
It should be noted that the annual growth in wages, averaging 10%, has been given an impetus by the migration of labor to countries like Great Britain and Ireland, which have not applied quotas to Lithuanians since accession. For many, the possibility to look for work in these countries has become a very tangible sign of real economic integration. For example, Lithuanians are the second largest national group of migrants in Britain, out of all the new member states. In Ireland, Lithuanian communities are multiplying fast.
To many, the job opportunities in richer EU countries have become a way not only to earn a living, but also a way to support their families back home. The absolute majority, however, intend to return.
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Returning to Lithuania
The rise in wages and the increase in visitors and tourists from other EU members are contributing to the growth of services. Property, with prices growing on average by 30% in recent years, is the clearest example of this trend.
Hotel and tourism-related services are also increasing. Even to an uninformed observer, the growing presence of tourists on the streets of Vilnius’ Old Town gives clear evidence that it is a booming city open to foreign visitors. This trend is not new, and Lithuania, like other countries of Central and Eastern Europe, has been explored by foreign tourists since the beginning of the 1990s.
But accession to the EU has given an important additional impetus to the movement of peoples across the disappearing borders of the Single Market. Membership in the Schengen area, the zone without internal controls, which is planned for 2007, should complete this process of the “return to Europe”.
Almost in the euro-zone
Tourists should also be among those who will benefit from another step, that of joining the euro-zone, which is planned for the beginning of 2007. Lithuania, Estonia and Slovenia were the first of the new EU members to start the process of preparing to join in the summer of 2004.
However, in the practical terms of exchange rate policy, joining the euro-zone does not imply any major changes, as the litas is already pegged to the euro at a fixed rate.
Thus, with uncertainty absent, the most important benefits of introducing the single currency will be the disappearance of transaction costs in changing money and more transparent pricing.
Changes in prices are possible and are already being debated. The real and supposed impact of the single currency on price levels in Germany, the Netherlands, Italy and other euro-zone members has reinforced fears about price increases in Lithuania.
These fears have also been strengthened by a rise in inflation since joining the EU, even though most of this has been caused by the rise in world oil prices. Measures aimed at informing the public are being debated by governmental institutions.
However, despite the process of price convergence, which is natural in the Single Market, the country meets the Maastricht criteria for joining the euro-zone. Public debt and budget deficit levels are well below the limits.
Interest rates are among the lowest in the region. Moreover, the government has indicated its strong commitment to joining the euro-zone in 2007.
Real integration, real benefits
The growing flow of goods and people since accession last year has been an indication of the continuous integration of the Lithuanian economy and society into the European Single Market. In addition to its historic sites and unspoiled nature, Lithuania also offers the EU its economic dynamism and its thirst for growth. Together with other new members, this could be an important factor in realizing the EU’s ambitions to become the most competitive economy in the world.