While the interview wasn’t solely about this impending turning point, the monetary ‘bazooka’ was related to some issues addressed. Speaking about the recent euro depreciation, it was possible to discern a future dovish position of the Lithuanian national bank at the ECB council. Yet it is a preliminary assessment, and although the exchange rate is not a policy target, Mr. Vasiliauskas recognises its importance for growth and price stability.
“The Bank of Lithuania has been considering monetary policy measures to be accommodative enough to return to the long-term inflation expectations,” he explained, linking the exchange rate to “the euro area monetary policy path, which has been more accommodative than that of the US”.
Overall, the single currency at 1.15 versus dollar on markets would be profitable in an “indirect” way, with regards to demand for Lithuanian goods, because the euro area’s economy will benefit from the downward movement. In the medium term, the national bank hopes foreign trade in the country will go up by 10%, an increase “equivalent to around €10 billion in the medium term”, until 2021.
A more integrated and attractive Baltic region would see a long-lasting positive economic benefit of joining the single currency market, which would exceed short-term costs. Greece, which achieved significant reforms, is now surrounded by a stronger euro area because of “significant institutional changes were implemented”.
“Structural reforms increase the quality of the government sector’s finances,” highlighted Mr. Vasiliauskas, who directed attention to financial sector too. “After the ECB’s comprehensive bank asset quality review, we can confidently claim that the vast majority of euro area banks are well capitalized,” he added.
Therefore, in Vilnius they are quite confident that the euro adoption as a monetary reform will cement their EU integration and prosperity.
“Lithuania had not enjoyed some of the key benefits of the single currency, such as lower interest rates or the absence of currency exchange costs”, the Lithuanian central governor thinks.
That is why Mr. Vasiliauskas noted that quantitative assessment was carried out, which projected even bigger benefits in periods of financial instability. An increase in real GDP for the average person of almost 2% and a reduction of unemployment by 0.4-0. 5% between 2014 and 2022.