1. Lithuania in the EU: challenges ahead Daniel Gros CEPS Director

2. Nature of challenges Short term: achieve budget balances, control inflation  euro area membership. Long term: increase savings, improve educational standards, improve quality of administration => Higher growth potential, control of old age expenditure in efficient way, regain trust.

3. Background material for longer term challenges Quality of governance Capital formation, quantity and quality Human capital formation Labour markets important?

4. Governance On quality of regulation and efficiency of administration Lithuania = Poland, Latvia. But worse on corruption and lagging behind euro area average Little improvement over last years.

5. “Corruption and hypocrisy ought not to be inevitable products of democracy, as they undoubtedly are today” (Mahatma Gandhi) Source: WGI 2010, World Bank

6. “ Administration covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate” (Alexis de Toqueville) Source: WGI 2010, World Bank

7. “The only thing that saves us from the bureaucracy is its inefficiency.” (E. J. McCarthy) Source: WGI 2010, World Bank

8. Lithuania: little improvement in Governance indicators since 2002/3 Source: WGI 2010, World Bank

9. Evolution of GIs over the last decade: Lithuania, Estonia and Eurozone Source: WGI 2010, World Bank

10. Building the future Without adequate domestic savings investment has to be financed by international capital, which is fickle (boom bust cycles). Moreover, debt service reduces national income. Savings in Lithuania not sufficient to finance investment needed for rapid convergence (and below peers).

11. Source: AMECO DATABASE National savings insufficient to finance growth (but post crisis rebound)

12. ... below the Euro Zone level until recently Source: AMECO DATABASE

13. Where can the government save? Higher public savings would help, but where to cut? Pensions are an obvious target with plans to increase legal pension age. But will this be possible given state of health of population? (Healthy life expectancy only about 51 years.)

14. Low healthy life expectancy limits room for effective pension reform Male at birth Female at birth Male at 65Female at 65 Lithuania 51.254.35.14.3 Estonia 48.052.23.4 Sweden 64.263.110.510.9 France 62.064.38.29.4

15. Low healthy life expectancy limits room for effective pension reform Male at birth = likely limit for effective retirement age Male at 65 = indicator of healthcare cost for elderly Lithuania 51.2 5.1 Estonia 48.03.4 Sweden 64.210.5 France 62.08.2

16. Investment: quantity and quality Overall investment rate appears satisfactory, but too much in construction, too little in intangibles (modern economy). Quality of education mediocre.

17. Source: INNODRIVE A sustained level of investment (gross fixed capital formation + intangibles)

18. Source: INNODRIVE...but little in what is needed for innovation

19. Quality of human capital formation mediocre Source: OECD

20. Labour market reforms? Importance difficult to judge since cyclical swings were so large. Upgrading of population has helped to maintain employment despite bust.

21. Education and employment: what has improved since Lisbon in Lithuania? Share of population*Employment rates 20012010Change20012010Change Below upper secondary 16.28.6-7.639.830.2-9.6 Upper secondary 62.061.2-0.964.858.9-5.9 Tertiary 21.730.28.48485.41.4 Overall 64.964.4-0.5 Source: Eurostat * aged 20-64

22. Fundamental problem of political system Popular trust in national political institutions abysmally low (negative record among EU-27). Negative trend for long time. Only EU institutions still trusted.

23. Trust in Lithuania: National VS European Parliament

24. Trust in Lithuania: National Government VS European Commission

25. Trust in parliament: EU versus LIT

26. Lithuanian and European trust in their national governments