– Is the euro still a world currency?
– Yes, even though it has been under much threat lately. But it still competes with the US dollar, because the dollar is no better. Both currencies race towards devaluation – since both the Federal Reserve and the European Central Bank pursue the same inflationary policies.
If you're asking if the euro is now worse-off than the dollar, my answer is no. It's simply that debt problems surfaced in the euro zone faster than in the United States. The US borrows on the federal level, whereas euro zone states do it nationally, so troubles became apparent sooner. But debt will inevitably become an issue in the US, too.
In fact, both China and the Arab countries are already considering dollar replacements – the options are either returning to the gold dinar or pegging their currencies to gold. There are many suggestions, since everyone knows that nothing stands behind the dollar and the euro – just a promise. And keeping the promise means printing more money, thus further pushing down their value, purchasing power, and confidence in them.
– Will the euro regain its former reputation?
– I do not believe it will – there are no signs of them relinquishing the current inflationary policies. Let's recall what the ECB did last January – it lowered reserve requirement for commercial banks from 2 to one percent, thus releasing a trillion euros into the market, that is one with 12 zeroes.
If the total circulation is 7 trillion, just imagine the onslaught of paper money. True, the ECB is still kicking, it still wants to somehow maintain monetary discipline, but it can hardly manage. I see no signs [of the situation changing]. I think that Germany will be the first one to scrap the euro, because it has always championed a strong Deutschmark and it wants a strong euro, while all other countries do not.
– But Germany is interested in keeping the common currency?
– Indeed it is. Germany is a very influential country. Much will depend on the Bundestag elections. If the left wins, the German position might change, too.
Many economist predicted a sad end for the euro from the very start, as soon as there were talks of a common currency. So it was just a matter of time.
– Who made such predictions?
– Economists, particularly of the Austrian School, said there was no reason why such an artificial currency could work. There's a pressure to inflate it – and all inflated currencies eventually turn into something else. One cannot add twelve zeroes and have another Zimbabwean dollar. Inflation is the death of currency. The Zimbabwean dollar with its twelve zeroes is no longer a currency.
A currency is there to assist in exchange – and if it keeps adding zeroes, that's the death of it. It does not necessarily disappear physically, but it ceases “being” money. People turn to other goods: gold, diamonds, aluminium, copper.
– But the euro connected so many countries.
– And so did the Soviet rouble, but that union broke up. If we look back in history, all similar monetary unions eventually disintegrated. They can be held together by force – like it was in the case of the euro, US dollar, or the pound. Without a common border, these unions simply break up. The rouble was supported by force.
Its architect did put in place safety checks, but the states did not stick to them. The Maastricht criteria are there for this particular reason – to make the euro a viable currency. But Germany itself ignored them for seven years out of eleven. The trouble is that no one sticks to fiscal discipline, the Central Bank is pursuing inflationary policies.
– And what if they did keep discipline?
– If they did, then, theoretically, yes. If the states stuck to fiscal discipline, if the ECB were not pulling euros out of its sleeve, if it operated on the currency board principle, be linked to some real value, a tangible good – then yes, it could work. But there are too many ifs.
– What's the likelihood of the euro collapsing?
– One hundred percent – the question is when. It is a matter of time – but I'm not able to say when. Bad things can go on for extended periods, even 50 years.
If Germany left the euro zone, that would be the end of it. The Deutschmark would become the second global currency.
I hope that, by the time we are ready to join the euro zone, it will have dissolved. There is a high probability for that to happen this year, when the EU is negotiating the new financial perspective. I believe that they won't be able to come to an agreement and approve the financial perspective, adding to the forces of divergence rather than convergence. I believe that the split will happen during these negotiations over the financial perspective – but these are just my speculations.
– What would change if Greece left the monetary union?
– It would ease the situation a great deal – give a great boost to the euro. It would be in Lithuania's interest to kick out fiscally undisciplined countries. We pegged our litas to the euro because we were hoping that it would be a stable currency.
In order for it to be stable, the union should exclude the undisciplined. Now, the Greeks want to throw their burden onto everyone else. They have not experienced real austerity for a long time. Here, in Lithuania, wages fell between 30 and 70 percent during the crisis. Meanwhile Greece did nothing – they lived comfortably, at others' expense.
– If the euro zone broke up, how would that affect Lithuania?
– We will have to give a serious thought to our options. I think that the Bank of Lithuania should already be considering alternatives, and should inflation in the euro zone accelerate, peg the litas to something else. We cannot just sit idly and wait, because we'll experience all the negative consequences. We must stay alert and cut the umbilical chord in time, before the euro zone is completely doomed.
– Gitanas Nausėda, adviser to the president of SEB Bank, has said that Lithuania lacks the political will to successfully adopt the euro. Do you agree?
– Yes, we failed to get the euro in 2007 for want of political will. Why did we fail? We had inflation 0.06 percentage points above the mark – but they say that was not the reason we were rejected. Lithuania was rejected because we weren't quick enough with out reforms.
Even though if you compare Lithuania to Greece, it has achieved much more. Back then, we missed the mark because there was a hike in state-regulated prices of electricity and transportation. If the government had prevented the prices from rising – at least for the control period – we would have had the euro and there wouldn't have been any panic when [in the wake of the economic downturn] Kęstutis Glaveckas blurted that we still had to devalue the litas at some point.
But come to think of it, perhaps it was a blessing in disguise, as all these debt problems were not yet apparent in the euro zone. I think that the Estonians – whom we're always slightly envious of – have made a mistake when they, being the most disciplined one of the lot, joined this club of drunkards. An abstinent joins the drunkards' club and now has to pay for the party. And it does cost – they have to pay real money to the European Stability Mechanism in order to pay off the debts of the South.
– Do you mean to say that disadvantages of Estonia's euro membership outweigh its advantages?
– No, they still insist there are more advantages. Investors still trust the euro more than they trust the krona. And that's the main argument in the Estonians' case.
– So joining the euro zone was a victory for the Estonians, after all?
– Of course, they are prone to point out this victory, but as fas as I know, Estonians deliberately postponed signing of investment treaties to after the euro adoption in order to show off the hike in investments – but their public finances did suffer. Look, they are disciplined, they stick to the Maastricht criteria, and still have to pay from their budget to the European Stability Mechanism. Why, what for? To keep the euro?
– And in Lithuania's case – would adopting the euro bring more advantages or disadvantages?
– I think we are in a very convenient situation right now. We are linked to the euro, so, in a sense, we've already got it. But there still remains a safe distance – so if something bad happens to the euro, we can easily peg the litas to something else. We've already done it once, unpegged it from the US dollar and pegged it to the euro, so we have experience, the process went very smoothly.
– But what are we going to peg the litas to, if the dollar is just as bad?
– I would say, gold. To the thing that people originally chose to use as money. Money is, after all, a phenomenon – and not a result of human, divine, or governmental creation, simply a discovery made through people's spontaneous activity in the market.
People discovered that certain goods can ease the exchange. And many good were used for that purpose, like salt, grain; it evolved by way of people's natural choices and not by some law: Thou shalt choose gold. They discovered the use of gold while trading things – and this is the origin of the market.
I do not know what they would have discovered, had they allowed the evolution to go on. Perhaps they would have discovered something else, but it's hard to tell now, since it is a result of human interaction, and not a fiat of one man or a government. But in order to return to that natural evolution, we have to get back to the point we left off from.
– So perhaps we should have pegged the litas to gold from the very start?
– We should have. We introduced the so-called currency board-like scheme. Even with nostalgia to the interwar gold litas, this kind of currency board was very difficult to introduce, it required overcoming massive resistance, especially from the central bank; linking our currency to gold was politically unrealistic.
– And what if we now unpegged it from the euro?
– Inflation would set in. The central bank would not be able to resist the temptation to print money – in order, say, to pay off the deficit in the Social Insurance Fund, pensions, debts. By printing national money you make people finance the country's domestic deficit. But it is no way for repaying foreign debts. No one will take litas. But there would still be a huge pressure to print money in order to finance internal debts.
Look, our Social Insurance Fund is always in the red, this year's deficit is 2.4 billion litas. What if we simply printed that much money? The argument in favour of such a solution would be that this removes the need to borrow and we'd be saving on the cost of servicing the debt.
– It seems that Lithuania's perpetual striving for the euro has become a utopian goal. Almost each year the date of Lithuania's entry into the euro zone gets pushed back again and again.
– The striving is a good thing. The process itself forces us to maintain fiscal discipline. If we didn't do it – just imagine the deficit they'd grow in the Seimas! The striving itself is a positive thing. I think it's good that we keep striving and never attain it. We can observe how this mess in the euro zone will play out, how they'll clean it up. But joining them now is, as I've said, tantamount to being an abstinent who goes to a drunkards' party and gets to pay the bill.
– Is joining the euro a political or an economic goal?
– It is political for politicians, but for ordinary people, it's all about the economy. Politicians look at it, if you will, politically: We have pledged in our accession treaty to join the union. So it is a political commitment for them, while people benefit from it serving as a curb on the government. For the people of Lithuania, for businesses and market players, it is economy pure and simple, not politics.
– Do people in Lithuania need more information about the euro introduction?
– Perhaps they know enough about the introduction, but they could definitely use more knowledge about what's happening in the euro zone, the EU, the entire world. They know that the litas is pegged to the euro, people have a good grasp of the currency board, since we have the scheme in Lithuania since 1994.
They understand and appreciate this bond – a strictly fixed exchange rate is a good thing. People realize that, but I do not believe they want the euro itself so much. They fear price hikes that happened in all other countries. Ordinary people, I think, are quite comfortable with the current situation where our currency is linked to the euro and we are striving for it, but without the euro itself.
– Would the euro encourage Lithuania's integration into the EU economy, speed up economic growth?
– No, what would that change? It only means we'd have to pay for services inside the country with the same currency. We already use euros in dealing with foreign partners. One thing would be easier – investors wouldn't have to convert euros to litas to pay salaries. Exports happen abroad, imports as well, the only expense here, in Lithuania, is paying salaries. So what do most investors do? They collect their revenues in euros and keep them in bank accounts. And on the pay day, they convert them to litas and pay their employees. Investors would save a few cents, but that is a minor issue.
And even if we hadn't pegged our currency to the euro – international trade is carried out in the common currency anyway.
