On 1 January 2015, eleven years after it joined the European Union, Lithuania became the 19th member country of the euro area, four years after its Baltic neighbour Estonia and one year after its other Baltic neighbour Latvia.

Impact on country risk

While Lithuania is globally characterised by sound fundamentals and sustained economic growth (IMF forecasts a real GDP growth of 3.0% and 3.3% in 2014 and 2015 respectively), its entry into the euro area addresses one of its remaining financial weaknesses, i.e. a low level of foreign exchange reserves, even more given its rather significant level of external indebtedness. Unlimited and unconditional access to the ECB liquidity would indeed preserve financial stability in case of an outturn in foreign investors’ sentiment. This new membership is also expected to further boost international trade, integration in value chains and foreign direct investment with other euro-area partners of this highly export-intensive economy. This should finally decrease the cost of borrowing of the sovereign, thanks to better credit ratings, and therefore contribute to the ongoing consolidation of public finances. The euro entry occurs at a handy moment when Russian sanctions are taking a toll on the Lithuanian food exports and when geopolitical tensions are somewhat disquieting the currency markets in some non-euro EU countries.

Analyst: Florence Thiéry, f.thiery@credendogroup.com