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Friday, July 27, 2007

Lithuania to Balance Budget By 2009 to Adopt Euro

From Bloomberg Today:

Lithuania to Balance Budget By 2009 to Adopt Euro, PM Says

By Boris Cerni

Aug. 27 (Bloomberg) -- Lithuania, the only European Union nation to have its euro-adoption bid rejected, will balance the state budget as early as 2009 it to make the currency changeover, Prime Minister Gediminas Kirkilas said.

Lithuania, the largest of the EU's three former Soviet Baltic nations, reported on Aug. 10 that it collected more revenue than projected in the first seven months of the year on improved tax collection, while the shortfall amounted to 0.5 percent of gross domestic product in the first half, already within EU limits.

Lithuania and its Baltic neighbors Estonia and Latvia are struggling to slow inflation after their plans to be the first former communist countries to join the euro region were thwarted last year. Wiping out the budget gap in Lithuania would help quell government spending and inflation, giving it a second chance to take on Europe's common currency.

``The main point of our policies is that we will have a balanced budget in 2009 or the latest in 2010 and when that happens we will be ready to adopt the common currency,'' said Kirkilas in an interview at the Bled Strategic Forum in Slovenia yesterday.

Slovenia is the only eastern European nation that joined the EU in 2004 to have adopted the euro. Slovakia is due to be the second, in 2009.

Lithuania's annual inflation rate was 5.1 percent in July, the highest since 1998, as energy costs for households increased. All new EU members have to adopt the euro once they meet criteria on inflation, budgets, debts and stable exchange rates.

Adoption Rules

To do so, they must first bring inflation down to within a 1.5 percentage points of the 12-month average inflation rate of the three EU nations with the slowest annual consumer-price growth. That limit was 2.6 percent in July, while Lithuania's 12- month rate that month was 4.5 percent.

They also must keep debt to within 60 percent of gross GDP and deficits to within 3 percent of GDP.

``We had a pickup in inflation because of taxation and higher prices for alcohol and tobacco,'' Kirkilas said. ``Energy prices have been the main driver of inflation and have increased on average between 25 and 30 percent from the start of the year.''

The three Baltic states are under threat of an economic collapse because they their growth is among the fastest in the 27- nation EU.

Lithuania's economic growth slowed to a preliminary 8 percent in the second quarter from 8.3 percent in the first quarter. Estonia's growth rate was 7.3 percent in the period, while Latvia's expansion, at 11.3 percent, was the fastest in the EU. By comparison, the euro zone's growth rate was 2.5 percent.

Worsening Outlook

Standard & Poor's Ratings Services lowered Lithuania's rating outlook to negative from stable, citing a higher risk of a ``hard landing'' due to a wide current-account deficit and accelerating inflation. The current-account deficit shrank in June to 201.6 million euros ($276 million) from 383 million euros in May after imports slowed.

Kirkilas dismissed concerns about accelerating growth, predicting a steady slowdown.

``I do not see that danger as economic growth will slow to 6.5 percent next year, then 6 percent in 2009 and around 5 percent in 2010,'' Kirkilas said.

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