NBP Biannual EU Presidency Lecture Occasional Paper No. II Vitas Vasiliauskas Beyond the Horizon of Lithuanian Presidency: A Central Banker’s Perspective Warsaw, July 2013 The views expressed are those of the author and do not necessarily reflect those of the Narodowy Bank Polski. Enquiries should be addressed to: Narodowy Bank Polski International Department International Conference Division 00-919 Warsaw, 11/21 Świętokrzyska Street E-mail: [email protected] About the NBP Biannual EU Presidency Lecture The initiative of the NBP Biannual EU Presidency Lecture cycle has been established to provide an opportunity to present the views of the central bank governor of the EU Member State currently holding the Presidency of the Council of the European Union on the Presidency priorities and key economic issues. The lectures are addressed to the participants from Polish financial and economic sector, among others representatives of the diplomatic representations, public administration, private sector, academia, independent research institutions. The second lecture entitled Beyond the Horizon of Lithuanian Presidency: A Central Banker’s Perspective, was presented in Warsaw by Mr Vitas Vasiliauskas, the Chairman of the Bank of Lithuania, on July 3, 2013, during the Lithuanian Presidency. Cover design: Mariusz Jasiński Layout and print: NBP Printshop Published by: Narodowy Bank Polski Education and Publishing Department 00-919 Warszawa, 11/21 Świętokrzyska Street phone: +48 22 653 23 35, fax +48 22 653 13 21 http://www.nbp.pl Vitas Vasiliauskas Beyond the Horizon of Lithuanian Presidency: A Central Banker’s Perspective Vitas Vasiliauskas Chairman of the Board, Bank of Lithuania Dear Ladies and Gentlemen, Thank you very much for the opportunity to address you all here today in the second National Bank of Poland Biannual EU Presidency Lecture. I would particularly like to express my gratitude to Governor Belka for the warm invitation that I was delighted to accept. Dziękuję Marek. Lithuania and Poland share a common history and have close cultural and economic ties. For over two centuries Rzeczpospolita Obojga Narodów, or the Polish-Lithuanian The fourteenth Governor of the Bank of Lithuania, Vitas Vasiliauskas, was appointed Commonwealth, was the largest country in Latin-Christian Europe. With a territory on 16 April 2011. reaching almost 1 million square kilometres, it would have comprised a quarter Before his appointment as Governor, he was a lawyer, specialized in the financial of the current territory of the EU, or would have been equal in size to France and law, and an associated partner in the law firm “LAWIN Lideika, Petrauskas, Valiūnas Germany combined. It has been a unique political constellation, with roots of a ir partneriai” (2004-2011). Prior to this, he worked as a Vice Minister of the Ministry modern federal state, single currency, and the second oldest written constitution in of Finance of the Republic of Lithuania for 3 years (2001–2004) after being promoted the world that in many respects was ahead of its time. The Commonwealth shared a from the position of the Director of the Tax Department in the same institution number of features that define the European integration of current times, even if the (1998–2001). Mr Vitas Vasiliauskas started his career in public sector as a Lawyer and two processes are qualitatively rather different. It made an important contribution to Head of the Tax Recovery Division of the State Tax Inspectorate (1995–1998). the European cultural, political, and — from a lawyer’s perspective — legal heritage. Mr Vitas Vasiliauskas qualified as a lawyer after completion of law studies at Vilnius The Constitution of May 3rd, 1791 renounced the liberum veto right that allowed University in 1996 and received his Ph.D. in social sciences (law) in 2004. He has any member of the Sejm to block legislation. Some interpret that the veto right remained active in the academic world throughout his entire career and currently provided a tool for external forces to constrain decision-making. Or that it has been is a Lecturer of the Chair of Public Law of Vilnius University Faculty of Law (since abused due to internal political short-sightedness, contributing to the weakening of 2010). Previously he was a Lecturer of the Chair of Constitutional and Administrative the Commonwealth. Without claiming a precise historical analysis and recognising Law of Vilnius University Faculty of Law (2004-2010) and an assistant of the Chair of differences in interpretations, this reminds us that inclusive governance requires State and Law Theory and History of Vilnius University Faculty of Law (1997–2004). a shared vision, commitment to joint objectives, including preparedness to make sacrifices for a greater common good. Drawing a parallel to the current state of affairs, The appointment of the Governor of the Bank of Lithuania is made by the President we need to make sure that democratic and inclusive governance — the strength for a five year term. of the EU — remains efficient and we are able to move ahead in dealing with the challenges facing us today. We need to implement our vision of a growing, credible, and open Europe. Before turning to the Presidency priorities and the prospects for the euro area enlargement, I would like to take stock of our decade old experience of the -4- -5- EU membership – how we have evolved from an accession country to assume public finance amounted to around 12% of GDP. In the depth of the crisis when it responsibility for driving the EU agenda. I would also like to spend some time to was still not clear whether the bottom had been reached, the most comforting news reflect on the challenges faced by the EU, since that determines the need for policy coming from the external observers was that it will take us seven years to return to response. When discussing the Presidency priorities I will mostly focus on the reforms the pre-crisis level of output, labelling it as seven years of lost growth. that are closest to the mandate of the central bank, though will also briefly touch The recession in Lithuania has been deep, but short-lived, lasting 4 quarters only. upon the initiatives that reach beyond our mandate. Since 2010 we have experienced uninterrupted steady growth. The pace of recovery in the Baltics has been strongest in the EU and the projected path to the pre-crisis output has been halved. The economy quickly adjusted due to its high internal I. Towards the Lithuanian Presidency flexibility, allowing for rapid improvement in unit labour costs and competitiveness. Next year a group of 10 countries, Lithuania and Poland among them, will mark the In its response to the crisis, Poland had additional scope for manoeuvre, given the size 10th anniversary of their EU membership. The dichotomy of old-new Europe did of the economy, healthier macroeconomic fundamentals, lower trade and financial not stick for too long. This group of countries has successfully integrated, proved openness, and a flexible exchange rate. to be deserving members of the EU, and refuted the pre-accession concerns. Other The moral of our story rests on the importance of political determination, reform dichotomies have become more prominent lately – the North-South divide, centre- ownership, and the role of public perseverance in implementing large scale periphery, euro ins and outs. adjustment measures. The first best advice is to avoid the uncontrolled tailspin in the The pre-accession doubts on the capacity of the EU to absorb the biggest wave of future and to accumulate policy space in good times. We will use these very same expansion that included countries with income levels significantly below those of the ingredients – focus on core challenges, determination, and ownership – in driving the rest of the EU have dissipated. Since 2004, 5 of the newcomers have introduced the Presidency agenda for the next six months. euro; Latvia plans to introduce the euro in 2014 and Lithuania aims for 2015. By the Allow me now turn to the challenges faced by the broader region. 10th anniversary of our membership, 6 of the member states that had joined the EU in 2004 will have held the Presidency of the Council. The EU membership has been an important achievement and realisation of our key II. Principle Challenges of the EU strategic objectives. The accession process has helped to anchor policy reforms and The EU has undergone a major crisis that has not yet been overcome. A recessionary important progress has been made in strengthening the institutional foundations of economic outlook, financial stability concerns, and weak public finances are still our economies. Several years of heady success and post-accession euphoria created a undermining confidence. Despite important progress to date, we still have not strong belief that convergence forces will takes us to El Dorado without major efforts. managed to break the vicious circle: where there is no growth until the credit During the years of rapid growth we have lost our vigilance and ignored the dark channel is repaired — among other means by cleaning up the balance sheets of clouds that have started to collect above us, signalling a severe storm and turbulence. banks; the financial sector repair relates to macroeconomic prospects, and there is The macroeconomic imbalances were particularly pronounced in the Baltics. The a reverse causality between the fiscal stance, economic growth, and health of banks. external shock of the global crisis, followed by a liquidity squeeze ruled out the Confidence is the fourth wheel that cannot spin in a different direction. The response possibility of a soft landing — an uncontrolled tailspin was the eventual outcome. requires deep structural shifts in the architecture of the EMU, while not losing sight Poland was the only one to avoid recession in 2009, though it did not leave unscratched, of the most immediate challenges in the financial sector and the real economy.