Lithuania ’on the course to join euro’

Bloomberg

The goal is to "keep our deficit as low as possible," within 6 percent and 7 percent of gross domestic product, Kubilius said in a Bloomberg interview in Brussels Wednesday. "We have a very clear long term strategy: in 2011 to have our fiscal deficit below the Maastricht criteria and to be able to join the euro in 2012."

Lithuania’s economy may contract 18.2 percent this year, the finance ministry said Wednesday, which would be the European Union’s severest projected recession. As output slumps, the government has been forced to abandon an earlier budget deficit goal of 5 percent.

Neighboring Latvia, whose government sees an 18 percent slump in output in 2009, this week passed budget cuts to keep global bailout funds flowing in, averting bankruptcy and a currency devaluation.

Latvia averts bankruptcy
The Baltic state, like Latvia and Estonia, is a member of the pre-euro exchange rate mechanism obliging it to peg its currency, the litas, to the euro. Lithuania has operated a currency board since 1994. Euro members running budget deficits must contain the gap to within 3 percent of GDP.Lithuania’s government on Wednesday approved raising VAT by 2 percentage points to 21 percent, cutting public wages by 9.5 percent and placing a cap on maternity leave benefits. Parliament has yet to vote on the proposals, which would add to spending cuts already passed equivalent to 7 percent of GDP.

Without the budget revisions, the deficit risks widening to 8 percent of GDP this year, the prime minister said.

The government isn’t considering seeking an international bailout, Kubilius said, while adding his administration is "not afraid" of the prospect.

Latvia obtained a 7.5 billion euros ($10.5 billion) loan from a group led by the International Monetary Fund and the European Commission in December. The IMF and the Commission have yet to confirm that Latvia’s budget cuts, passed on June 16, will unlock the next tranche.