Commission Opinion on Lithuania's application for Membership of the European Union
Date: 1997-07-15
Institutions: European Commission
Subjects: EU relations, Lithuania, accession to the European Union, economic situation, political situation

COMMISSION OF THE EUROPEAN COMMUNITIES 

it 
it 
it 

it 
it 
it 

Brussels,  15.07.1997 
COM(97) 2007 final 

Commission Opinion 

on Lithuania's Application 

for Membership of the European Union 

Contents 

A.  I N T R O D U C T I ON 

Page 

a)  Preface 

The Application for  Membership 
The Context of the Opinion 
The Contents of the Opinion 

b)  Relations Between the European Union and Lithuania 

Historical and Geopolitical  Context 
Lithuania's Position Concerning the European Union 
Contractual  Relations 
The Pre-Accession  Strategy 
Trade  Relations 
General  Evaluation 

B.  CRITERIA  FOR  M E M B E R S H IP 

1.  Political  Criteria 

1.1  Democracy  and the Rule of Law 

Parliamentary  and Legislative Powers: Structure 
Functioning of Parliament 
The Executive:  Structure 
Functioning of the Executive 
The Judiciary:  Structure 
Functioning of the Judiciary 

1.2  Human Rights and the Protection of Minorities 

Civil and Political  Rights 
Economic, Social and Cultural  Rights 
Minority Rights and the Protection of Minorities 

1.3  General  Evaluation 

2.  Economic  Criteria 

2.1  The Economic  Situation 

Background 
Liberalisation 
Stabilisation of the Economy 
Structural  Change 
Financial  Sector 

Economie and  Social  Development 

2.2  The Economy  in the Perspective of Membership 

Introduction 
The Existence of a Functioning Market Economy 
The Capacity to Cope with Competitive Pressure and Market Forces 
Prospects and Priorities 

2.3  General  Evaluation 

3.  Ability to Assume the Obligations of Membership 

3.1  Internal Market Without Frontiers 

The Four  Freedoms 

- General  Framework 
- Free Movement of Goods 
- Free Movement of Capital 
- Free Movement of Services 
- Free Movement of Persons 
- General  Evaluation 

Competition 
3.2  Innovation 

Information  Society 
Education, Training and Youth 
•Research and Technological  Development 
Telecommunications 
Audio-visual 

3.3  Economic and Fiscal  Affairs 

Economic and Monetary Union 
Taxation 
Statistics 

3.4  Sectoral Policies 

Industry 
Agriculture 
Fisheries 
Energy 
Transport 
Small and Medium  Enterprises 

3.5  Economic  and Social Cohesion 
Employment  and Social  Affairs 
Regional  Policy and Cohesion 
3.6  Quality of Life  and  Environment 

Environment 
Consumer  Protection 
3.7  Justice and Home  Affairs 
3.8  External  Policies 

Trade and International  Economic Relations 
Development 
Customs 
Common Foreign and Security Policy 

3.9  Financial  Questions 
Financial  Control 
Budgetary  Implications 

4.  Administrative Capacity to Apply the Acquis 

4.1  Administrative  Structures 
4.2  Administrative  and Judicial  Capacity 
4.3  General  Evaluation 

C.  SUMMARY AND  CONCLUSION 

Annexes 

Composition of Parliament 
Single Market:  White Paper Measures 
Statistical  Data 

A.  INTRODUCTION 

a)  Preface 

The Application for  Membership 

Lithuania  presented  its  application  for  membership  of  the  European  Union  on  8  December 
1995, and accordingly the Council of Ministers decided on 29 January  1996 to implement  the 
procedure  laid  down  in  Article  0  of  the  Treaty,  which  provides  for  consultation  of  the 
Commission. 

That  is the  framework  in which  the  Commission  submits  the present  Opinion,  responding  to 
the  request  of  the  European  Council  in Madrid  in  December  1995 to  present  the  Opinion  as 
soon as possible after  the conclusion of the Intergovernmental  Conference,  which  commenced 
in March  1996 and concluded in June  1997. 

The Context of the Opinion 

The Lithuanian application for membership is being examined at the same time as applications 
from  nine other associated  countries.  Lithuania's  accession is to be seen as part of an historic 
process,  in  which  the  countries  of  Central  and  Eastern  Europe  overcome  the  division  of  the 
continent  which  has  lasted  for  more  than  40  years,  and join  the  area  of  peace,  stability  and 
prosperity created by the Union. 

The European Council in Copenhagen in June  1993 concluded that: 

"The associated countries  in Central  and Eastern Europe that so desire  shall become  members 
of the Union.  Accession will take place as soon as a country is able to assume the  obligations 
of membership by satisfying  the economic and political conditions.  Membership requires: 

that  the  candidate  country  has  achieved  stability  of  institutions  guaranteeing 

democracy, the rule of law, human rights and respect for and protection of minorities; 

-  the  existence  of  a functioning  market  economy,  as well  as  the  capacity  to  cope  with 
competitive pressure and market forces within the Union; 

-  the ability  to take on the obligations  of membership,  including  adherence  to the  aims 
of political, economic and monetary union. 

The Union's  capacity  to absorb new members, while maintaining the momentum  of European 
integration, is also an important consideration in the general interest of both the Union and the 
candidate countries". 

This  declaration  spelled  out  the  political  and  economic  criteria  for  examining  the  accession 
requests of the associated countries of Central and Eastern Europe. 

The European  Council in Madrid in December  1995 referred  to the need, in the context of the 
pre-accession  strategy, "to create the conditions for the gradual, harmonious  integration  of the 
applicant countries, particularly through: 

- 

the development of the market economy, 

- 

the adjustment  of their administrative structure, 

- 

the creation of a stable economic and monetary  environment". 

In  its  Opinion,  the  Commission  analyses  the  Lithuanian  application  on.  its  merits,  but 
according  to the  same criteria  as the  other  applications,  on which  it is delivering  Opinions  at 
the same time.  This way of proceeding respects the wish, expressed by the European  Council 
in Madrid, to ensure that the applicant countries are treated on an equal basis. 

In addition to the individual  Opinions the Commission  is presenting  separately to the Council, 
in the framework  of its communication  "Agenda 2000", a general assessment of the  accession 
requests,  and  its  recommendations  concerning  the  strategy  for  successful  enlargement  of  the 
Union.  At  the  same  time,  it  is presenting  an evaluation  of  the  impact  of  enlargement  on  the 
Union's policies. 

The  Contents  of the  Opinion 

The  structure  of  the  Opinion  takes  account  of  the  conclusions  of  the  European  Council  in 
Copenhagen. It: 

-  describes the relations up to now between Lithuania and the Union, particularly  in the 
framework  of the association  agreement; 

-  analyses the situation in respect of the political conditions mentioned by the  European 
Council (democracy, rule of law, human rights, protection of minorities); 

-  assesses  Lithuania's  situation  and  prospects  in  respect  of  the  economic  conditions 
mentioned  by  the  European  Council  (market  economy,  capacity 
to  cope  with 
competitive pressure); 

-  addresses the question of Lithuania's capacity to adopt the obligations of membership, 
that  is the acquis of the Union as expressed  in the Treaty, the secondary  legislation,  and 
the policies of the Union; 

-  makes  finally  a general  evaluation  of Lithuania's  situation  and prospects  in respect  of 
the  conditions  for  membership  of  the  Union,  and  a  recommendation  concerning 
accession negotiations. 

In  assessing  Lithuania  in  respect  of  the  economic  criteria  and  its  capacity  to  assume  the 
acquis,  the  Commission  has  included  a prospective  assessment;  it  has  attempted  to  evaluate 
the progress  which  can reasonably  be expected  on the part  of Lithuania  in the  coming  years, 
before  accession, taking account of the fact that the acquis itself will continue to develop.  For 
this  purpose,  and  without  prejudging  the  actual  date  of  accession,  the  Opinion  is  based  on  a 
medium-term time horizon of approximately five years. 

During the preparation  of the  Opinion, the Commission has obtained  a wealth of  information 
on Lithuania's  situation  from  the  Lithuanian  authorities,  and  has utilised  many  other  sources 
of information,  including the member states and numerous international  organisations. 

b)  Relations Between the European Union and Lithuania 

Historical  and  Geopolitical  Context 

Lithuania,  a  small  nation  on  the  Baltic  Sea,  is  about  the  size  of  Ireland  in  terms  of  both 
population  and  area  (3.7  million;  65,200km2).  It  shares  borders  with  Russia  (Kaliningrad), 
Poland, Belarus and Latvia. 

Lithuania's existence as a state dates back to  1009.  The kingdom of Lithuania was founded  in 
1251.  In the Middle  Ages trading  links between North  German, Prussian  and Livonian  cities 
around  the  Baltic  coasts  promoted  the  development  of  the  Lithuanian  economy  and 
strengthened  Lithuania's  ties with the rest of Europe.  The  Lithuanian-Polish  Commonwealth 
was  established  in  1569  but  dissolved  in  1795  when  Russia  occupied  all  of  Lithuanian 
territory.  Russia dominated Lithuania for over a century.  Lithuania declared  its  independence 
on  16 February  1918, and  fought  both German and  Soviet  forces  to establish  it.  Between  the 
Wars Lithuania was an independent state and highly integrated into the world economy. 

Lithuania was forcibly  annexed by the Soviet Union in  1940, then occupied by Germany  from 
1941  to  1944.  The  Soviet  Union  re-established  its  rule  in  1944,  although  it  was  not 
recognised  by  most  Western  states. 
In  the  Soviet  period,  because  of  Lithuania's 
comparatively  good  infrastructure  and  skilled  labour  force,  large  industries  were  established 
there.  Despite  a lack of natural resources, the energy  sector was developed, particularly  in the 
nuclear field  .  Other important sectors were agriculture and food  processing. 

In  1989, public  pressure  forced  the  Communist  party  to  agree  to multiparty  elections,  which 
were won by the Sajudis  nationalist movement.  The Supreme Council declared the restoration 
of  independence  on  11  March.  After  violent  clashes  with  Soviet  troops  throughout  1990, 
more  than  90%  of  the population  voted  for  independence  in  a referendum  in  February  1991. 
The  Soviet  Union  recognised  Lithuania's  independence  in  September  1991,  and  the  last 
Russian troops left  Lithuania in 1992. 

Lithuania's Position Concerning the European Union 

Since  restoring  its  independence  in  1990  Lithuania  has  actively  pursued  a  policy  of 
strengthening  political,  economic  and  social  ties  with  the  European  Union  and  anchoring  its 
security  and  stability  in  the  transatlantic  security  structures.  Lithuania  applied  for  EU 
membership  on  8  December  1995. 
In  June  1996  the  Lithuanian  Parliament  ratified  an 
amendment  to  Article  47  of  the  Constitution,  thus  enabling  foreigners  to  own  land  for 
commercial purposes. 

The  determination  of  Lithuania  to  move  towards  European  integration  was  underlined  by 
President  Algirdas  Brazauskas  in his  address  to the EU Diplomatic  Corps  on  19 April  1997: 
"Those  who  inspired  the  Treaty  of  Rome  had  surmounted  the  consequences  of  the  Second 
World  War just  in  the  western  part  of  Europe.  Today  we  have  a  chance  to  overcome  the 
consequences  of  the  Cold  War  on  a  much  vaster  territory.  Lithuania  strives  for  democracy, 
peace and prosperity  - the values we were unlawfully  deprived of for long decades in the past. 
Lithuania sees its future  in the family  of united, secure and thriving states of Europe.  Full and 
indivisible  membership  of the European  Union constitutes  one of our most  important  foreign 
policy  goals.  We believe that the admittance of new members would be the first step towards 
the  elimination  of  a  major  consequence  of  the  Second  World  War  and  the  Cold  War  which 
divided  Europe.  It  may  be  said  that  it would  be a litmus test  of the actual progress  made  by 
Europe  towards  unification  and  of  the  prevalence  of  thinking  based  on  the  values  of  truly 
Western civilisation rather than pure pragmatism. 

"We are fully  aware that the creation of the Europe of the 21st century  is neither a question  of 
charity  nor  of  altruism.  It  is  very  good  that  the  Copenhagen  European  Council  established 
clear-cut  criteria  on which each  state will be evaluated,  Even  if we would  separate  ourselves 
from  the  problems  related  to  EU  accession,  those  requirements  are  important  in  that  they 
enable us to judge ourselves in terms of future  prospects." 

Contractual  Relations 

Diplomatic  relations  between  the  European  Communities  and  Lithuania  were  established  on 
27  August  1991.  A  Trade  and  Cooperation  Agreement  was  signed  on  11  May  1992  and 
entered  into  force  in  1993.  The present  contractual  relationship  is regulated  by  a Free  Trade 
Agreement which was signed  on  18 July  1994 and entered into force  on  1 January  1995.  This 
agreement  aims  at  establishing  free  trade between  the  EU and  Lithuania  within  a  transitional 
period  of up to six years, on a basis of asymmetry.  Some sectors (mainly textiles,  agricultural 
products and fisheries)  are regulated by specific rules.  The agreement also contains  provisions 
covering payments, competition and approximation of legislation. 

A Europe Agreement  was negotiated  with Lithuania in the first  half of  1995 and signed  on  12 
June  1995.  Lithuania  ratified  the  Agreement  on  5 August  1996.  It  will  enter  into  force  on 
completion  of ratification  by  all  Member  States.  The Europe  Agreement  will  then  supersede 
the Trade and Cooperation Agreement and the Free Trade Agreement. 

Once  it  enters  into  force,  the  Europe  Agreement  will  be  the  basis  of  the  relations  between 
Lithuania and the Union.  Its aim is to provide a framework  for political dialogue, promote the 

expansion of trade and economic relations between the parties, provide a basis for  Community 
technical  and  financial  assistance,  and  an  appropriate  framework  to  support  Lithuania's 
gradual  integration  into  the  Union.  The  institutional  framework  of  the  Agreement  provides 
the  necessary  mechanism  for  implementation,  management  and  monitoring  of  all  areas  of 
Subcommittees  examine  questions  at  a  technical  level.  The  Association 
relations. 
Committee,  at  senior  official  level,  provides  for  in-depth  discussion  of  and  often  finds 
solutions  to  issues  arising  under  the  Agreement.  The  Association  Council,  at  Ministerial 
level,  examines  the  overall  status  of  relations  and  provides  the  opportunity  to  review 
Lithuania's progress in preparing for  accession. 

To manage and  implement  its policy  on European  integration,  the Government  established  in 
1996  a  Governmental  Commission  on  European  Integration,  chaired  by  the  Prime  Minister. 
Coordination  of  all  activities  linked  with  integration  falls  to  the  Department  of  European 
Integration within the Foreign Ministry.  In  1997 a new Ministry  for European  Affairs  was set 
In  early  1997  an 
up  to  monitor  and  control  compatibility  of  draft  bills  with  EC  laws. 
Interministerial  Delegation  for  Negotiations  and  Integration  into  the  European  Union  was 
established,  which  is  currently  finalising  a  National  Strategy  for  European  Integration, 
including objectives and timetables. 

The Pre-Accession  Strategy 

Implementation  of the Free Trade Agreement and the White Paper 

The  Free  Trade  Agreement  is  fully  functioning  according  to  the  agreed  timetable.  Pending 
adoption  of  an  additional  protocol  (under  preparation),  autonomous  measures  have  been 
adopted  for  agricultural  products,  processed  agricultural  products,  textiles  and  fisheries  in 
order  the  adapt  the  Agreement  to  the  enlargement  of  the  Union  and  the  conclusion  of  the 
Uruguay  Round.  Rules on undertakings  and state aid are under preparation.  A new  Protocol 
on rules of origin entered  into force  on  1  April  1997 allowing for pan-European  cumulation  of 
rules  of  origin.  Discussions  are  under  way  about  extending  Protocol  1 on  trade  in  textiles 
beyond the expiry date of 31 December  1997.  Agreement on determination  of the  agricultural 
component  applicable  to  basic  agricultural  products  originating  in  the  Community,  in 
accordance with Protocol 2, was reached in March 1997. 

Other main  issues  being discussed  in the framework  of the Agreement  are:  approximation  of 
legislation and pre-accession  strategy, macro-economic progress, Lithuania's relations with its 
neighbours,  opening  up  of  Community  programmes,  customs  cooperation,  certification  and 
standardisation  issues,  third  pillar  cooperation  and  trade  issues.  The  Joint  Committees, 
Interparliamentary  Committee and technical working groups have all met regularly. 

The  Commission's  White  Paper  of  1995 on the  Internal  Market  set  out  the  legislation  which 
the  candidate  countries  would  need  to transpose  and  implement  in order  to  apply  the  acquis, 
and identified  elements essential to the implementation  of the single market (known as Stage I 
measures)  which  would  need  priority  attention.  Lithuania  has  attached  considerable  progress 
to  this  work.  Ten  working  groups  have  been  set  up  in  the  Ministries  concerned  to  work  on 
implementing  the  recommendations  of  the  White  Paper.  In  September  1996  the  Parliament 
ratified  a  National  Law  Harmonisation  Programme,  which  lays  down  timetables  for 

harmonisation  with  EU  law.  This  fits  into  an  overall  strategy  for  legislative  approximation 
whose  target  is  the  entry  into  effect  by  the  year  2000  of  EC  internal  market  legislation. 
Progress  has  already  been  achieved  in  a  number  of  areas  including  banking,  insurance, 
customs, taxation, transport, environment and consumer protection. 

The EC/Lithuania Free  Trade Agreement  is functioning  well.  It has been possible  to  resolve 
any problems smoothly and constructively.  Cooperation has already advanced further  in some 
sectors  than  the  Agreement  requires.  This  provides  a  good  basis  for  the  enhanced  level  of 
cooperation and implementation which will be required under the Europe Agreement. 

Structured  Dialogue 

Lithuania  has  participated  in  the  Structured  Dialogue  since  the  Cannes  European  Council  in 
1995.  Lithuania has been an active participant  in the political dialogue as well  as in the  other 
areas covered by it. 

Phare 

EU technical  and  financial  assistance  to Lithuania  started  under the  1991 TACIS  programme 
and  has been  extended  under  PHARE  since  1992.  During  the period  1992-1996 the  PHARE 
programme  provided  1794  MECU  to  Lithuania;  The  allocation  for  1997  was  46  MECU. 
Principal  sectors  of  activity  have  been: 
reform  of  the  legal  and  institutional  framework; 
restructuring  and  privatisation  and  third  pillar  issues.  PHARE  has  had  a 
infrastructure; 
particular impact on SME development and reform  of taxation and customs. 

Under  the  Cross-Border  Cooperation  programme  over  15  MECU  have  been  allocated  since 
1994  for  infrastructure  investment  and EU-Belarus Eastern  Border  Management.  In terms  of 
contracting and disbursement, Lithuania has shown a high absorptive  capacity. 

Participation  in Community  Programmes 

Lithuania  will  become  eligible  to  participate  in  Community  programmes  from  the  entry  into 
force  of  the  Europe  Agreement.  It  has  already  applied  to  participate  in:  Socrates,  Leonardo, 
Media,  Youth  for  Europe,  SAVE  II,  Raphael,  Kaleidoscope,  LIFE  and  Ariane.  It  has 
earmarked  funds  in  its  1998  budget  to  meet  the  financial  obligations  which  participation 
would  imply. 

Trade  Relations 

EU-Lithuania trade has developed rapidly.  Between  1992 and  1994 the Union's  exports more 
than tripled, to 724 MECU.  Over the same period Lithuania's exports to the EU rose by 30%, 
to  750  MECU.  The  main  EU  exports  are  machinery  and  electrical  equipment,  agricultural 
products and textiles.  Lithuania's main exports are minerals and base products and chemicals. 
Roughly  equal  shares of Lithuania's  external trade now go to the former  Soviet Union and the 
EU. 

Since the Free Trade Agreement between Lithuania, Latvia and Estonia entered into force  for 
industrial products in January  1996 and for  agricultural products in  1997, trade between the 
three  countries  is expected  to grow substantially.  Trade with Poland  has  increased  sharply 
since  the  signature  of the  Lithuanian-Polish  Friendship  and  Cooperation  Treaty  and  a Free 
Trade Agreement in 1996.  Lithuania also expects to join CEFTA in 1997. 

General Evaluation 

Relations  with the EU have developed well  since Lithuania regained  its  independence.  No 
delays are foreseen  to establishing free trade by the year 2000, as foreseen  in the Free Trade 
Agreement.  The various issues dealt with under the Free Trade Agreement have been solved 
effectively.  Cooperation will be further enhanced when the Europe Agreement with Lithuania 
enters into force. 

B.  CRITERIA FOR MEMBERSHIP 

1.  Political Criteria 

The  European  Council  in  Copenhagen  decided  on  a  number  of  "political"  criteria  for 
accession to be met by the candidate countries in Central and Eastern Europe. These  countries 
must  have  achieved  "stability  of institutions  guaranteeing  democracy,  the rule  of  law,  human 
rights and respect for and protection of minorities". 

In  carrying  out  the  assessment  required  in  this  connection,  the  European  Commission  has 
drawn  on a number  of sources of information:  answers  given by the Lithuanian  authorities  to 
the  questionnaire  sent  to  them  by  Commission  staff  in  April  1996,  bilateral  follow-up 
meetings,  reports  from  Member  States'  embassies  and  the  Commission's  delegation, 
assessments  by  international  organisations  (including  the  Council  of  Europe  and  the  OSCE), 
reports produced by non-governmental  organisations, etc. 

The  following  assessment  involves  a systematic  examination  of  the  main  ways  in  which  the 
public  authorities  are  organised  and  operate,  and  the  steps  they  have  taken  to  protect 
fundamental  rights.  It  does  not  confine  itself  to  a formal  description  but  seeks  to  assess  the 
extent to which democracy and the rule of law actually operate. 

This  assessment  relates  to  the  situation  in  June  1997.  It  does  not  examine  in  detail  any 
changes which  have taken  place  since the  fall  of the  Communist  regime  or  which  may  come 
about  in  the  future,  though  it  generally  takes  account  of  any  stated  intention  to  reform  a 
particular  sector.  The situation of the government  is mentioned here only in passing: it will be 
examined  in greater depth in chapter 4. 

1.1  Democracy  And  The  Rule  Of  Law 

In  October  1992,  Lithuania  adopted  by  referendum  a  new  Constitution,  establishing  a 
parliamentary  democracy.  The Lithuanian  institutions  work smoothly,  the various  authorities 
being mindful  of the limits of their powers and of the need for  cooperation. 

Parliamentary  and  Legislative Powers:  Structure 

Parliament  consists of a single house - the Seimas.  Its  141 members are elected for  four  years 
by  a  mixed  voting  system:  71  are  elected  by  the  uninominal  method  of  voting  in  a  double 
ballot;  the  other  70  are  elected  by  proportional  representation  on  a  national  basis,  and  a  list 
must receive at least 5% of the votes cast (4% before  1996) if it is to be represented.  There are 
no longer any rules  specifically  ensuring the representation  of minorities.  (Before  1996, a list 
representing  a minority required only 2% of the votes cast). 

The  Seimas,  on  a  2/3  majority  vote  of  its members,  can  decide  to  hold  early  elections.  The 
President  of  the  Republic  can  also  dissolve  Parliament  if  it  refuses  to  appoint  a  new 
government  or, at the latter's  request,  if the Seimas brings it down.  He  cannot, however,  use 
this  power  during  the  last  six  months  of his  term  of  office,  or  if  an  early  election  has  taken 
place during the previous six months. 

Members  of  Parliament  enjoy  a  traditional  array  of  immunities.  The  involvement  of  the 
Opposition in the workings of the institutions is Tecognised.  It has a voice, for example, in the 
setting up of cross-party parliamentary select committees. 

The  existence  of numerous political  groupings  (24 parties put  forward  candidates  for  the  last 
General  Election  in  November  1996)  shows  that  there  is  a  genuine  multi-party  system  in 
Lithuania.  Political  parties  receive  no  State  aid,  but  a bill  on this  subject  is currently  before 
Parliament. 

Legislative power  lies with  the  Seimas, which  shares  its right  of initiative with  the  President 
of the Republic, the Government and 50 000 members of the electorate, who can put forward  a 
proposal  for  a law which the  Seimas  is obliged  to  consider.  The  Government  has  regulatory 
power  only  for  the  purposes  of  ensuring  that  the  laws  are  applied.  The  President  of  the 
Republic  has  the  power  to  take  the  necessary  steps  to  deal  with  external  aggression  or  an 
emergency, but is obliged to put them before the Seimas at its next meeting. 

A referendum  can be held at the request of Parliament or of 300 000 members of the electorate 
"on  the  subjects  of  greatest  importance  for  the  life  of the  State  and  the  People" (Article  9 of 
the Constitution).  To date, this procedure has been used seven times. 

Functioning  of  Parliament 

The elections of  1992 and  1996 were free and fair, and in both cases they resulted in a political 
change  of  government  (bringing  to  power  first  the  Democratic  Labour  Party,  then  a 
conservative coalition). 

Parliament  operates  satisfactorily. 
part in its activities. 

The Executive:  Structure 

Its  powers  are  respected  and  the  Opposition  plays  a  full 

The  President  of  the  Republic  is  elected  by  direct  universal  suffrage  for  a  five-year  term, 
If  the  Seimas  is  dissolved  by  the  President,  the  newly-elected 
renewable  once  only. 
Parliament may, by a 2/3 majority  vote of its members, call an early presidential election.  The 
President exercises the traditional prerogatives of a Head of State. 

The  Government,  which  is  accountable  to  the  Seimas,  consists  of  a  Prime  Minister  and 
ministers  appointed  by  the  President  of  the  Republic  after  receiving  the  confidence  of 
Parliament.  The  President  of the  Republic  may  also  dismiss  a minister,  at the  request  of  the 
Prime Minister. 

The  ministers  are  individually  answerable  to  Parliament.  Criminal  proceedings  cannot  be 
brought  against  them  without  the  consent  of  the  Seimas  or,  if  the  Seimas  is  not  sitting,  the 
President of the Republic. 

The  administrative  organisation  of the country  depends  on the decentralised  regional  arms  of 
the  central  government  at  the  level  of  the  ten  counties,  whose  officials  are  responsible  for 
implementing  the  decisions  taken  and  policies  adopted  by  the  central  government.  Each 

county has a regional  Governor appointed  by the government.  The Governor is assisted  by an 
assembly of the mayors and deputy mayors from the town councils under his jurisdiction. 
Lithuania  has  only  one  type  of  local  authority,  the  municipality,  of  which  there  are  56.  Of 
these, 44  are  districts  and  12 are  towns  or  cities.  They  are managed  by  municipal  councils, 
elected by universal  suffrage  for  a three-year term, and by a Mayor appointed by the Council. 
Their deliberations and decisions are monitored by a representative of the Governor,  appointed 
by him at county level but not placed under the Governor's authority. 

The  Lithuanian  local  authorities  enjoy  a  large  measure  of  autonomy  and  financial 
independence. 

There  is a Civil  Service Act, adopted  in  1995, which distinguishes'officials  appointed  by  the 
government  in office  (who have no employment guarantees) from permanently-recruited  civil 
servants.  Lithuania has laws on administrative  transparency. 

The army, the secret services and the police are under the control of the civil authorities.  The 
police has been reorganised  to enable  it to tackle  more effectively  the tasks  it has to  perform 
(in particular the fight  against organised crime). 

Functioning of the Executive 

The executive functions  in a satisfactory  manner. 

The  local  authorities  enjoy  a  certain  degree  of  autonomy,  though  the  decentralised  State 
authorities at county level seem to have considerable powers in respect of local  administration. 
Although  civil  servants'  rights  and  obligations  are  defined  in  law,  there  is  at  present  an 
imbalance  between  their  rights,  which  have  been  extended,  and  their  obligations,  which  are 
still largely formal.  In particular, there is no suitable mechanism  whereby public servants  can 
be  held  accountable  -  and  this  makes  it  hard  to  combat  corruption  effectively.  However,  a 
Civil  Service  Code  of  Good  Practice  is currently  before  the  Seimas, and  the  government  has 
announced  its  intention  of  setting  up  an  inspectorate  to  deal  with  complaints  against  the 
administration. 

Since early  1997, the police has been involved  in a process of reform  intended  to improve  its 
readiness  to perform  its traditional  duties and to tackle new tasks  (the fight against  organised 
crime,  ensuring  that  taxes  are  collected).  Mechanisms  are  now  in  place  for  assessing  its 
performance  and calling police officers  to account. 

The Judiciary:  Structure 

The  situation  of  the  Lithuanian  judiciary  is  such  that  its  institutions  can  claim  to  be 
independent.  It is true that the executive and legislative authorities have a considerable  say in 
the  appointment  of  judges:  Appeal  Court  judges  are  appointed  by  the  President  of  the 
Republic  with the  approval  of Parliament;  District  and Local  Court magistrates  are  appointed 
by  the  President  alone;  Supreme  Court  judges  are  appointed  by  Parliament  on  a 
recommendation  from  the  President.  However,  a  special  Committee  of  judges  makes 
recommendations  to the President  on all matters  concerning  the management  of the judiciary 

10 

(appointments, promotions, transfers  or dismissals).  Judges are not allowed to take part in the 
activities of political parties or other political organisations. 

The Procurator's Office  is under the authority of the Procurator General, who is appointed  and 
dismissed  by Parliament  and is answerable to Parliament.  The procurators  are answerable  to 
the courts for their actions during judicial proceedings. 

In respect of administrative measures, the Constitutional Court has the power, at the request of 
one-fifth  of the Members of Parliament,  to verify  the constitutionality  of acts of the President 
of the Republic and of the Government.  The Lithuanian authorities  are also currently  drafting 
a  "Code  on  violations  of  the  law  by  the  Administration  and  on  administrative  procedure", 
which  will  enable  acts  of  the  Administration  to  be  challenged  in  court.  Under  the 
Constitution, special tribunals can also be set up for hearing such disputes (Article  111). 

In  March  1994,  Lithuania  set  up  parliamentary  Ombudsmen  (five  "controllers"  were 
appointed  for  a  four-year  term  by  the  Seimas  in  December  1994).  They  have  the  power  to 
consider  complaints  against the  Civil  service, the army  and  the local  authorities  and  may,  on 
the basis of their investigations, initiate legal proceedings to have the offending  public  servant 
removed from  his post.  They cannot, however, investigate complaints against the President of 
the Republic, the Government or the judiciary. 

The  Constitutional  Court,  set  up  in  1993, consists  of  nine judges" appointed  for  a  nine-year 
term, not  renewable.  Parliament  appoints the judges  on a proposal  from  the  President  of the 
Republic, the President of the Seimas and the President of the Supreme Court.  (Each of these 
authorities proposes one third of the members of the Constitutional Court). The  Constitutional 
Court  ensures  the  constitutionality  of  laws  and  treaties.  It  may  be  asked  to  do  so  by  the 
President  of the  Republic, the Government,  one-fifth  of the MPs or the courts.  It also judges 
presidential  and  parliamentary  elections,  decides  whether  the  President  of  the  Republic  has 
become  incapable  of  carrying  out  his  duties  and  judges  impeachment  proceedings  against 
members  of the  Seimas  or other public  figures.  The  decisions  of the  Constitutional  Court  are 
final,  except  in  respect  of  the  constitutionality  of  international  treaties,  in  which  respect  the 
Seimas can overrule the "conclusions" of the Court (Article  107(3) of the Constitution). 

Functioning  of the  Judiciary 

The main problem  affecting  the process of justice in Lithuania is the fact that the courts take a 
long time to deliver their judgments.  This is largely  due to a shortage of qualified judges  and 
to  the  1995  reform  of  the judiciary,  which  created  a  four-tier  judicial  system.  Commercial 
cases are particularly  seriously  affected,  as the bottleneck  obstructs  the  application  of the  law 
on bankruptcy. 

The Procurator's  Office  also seems overloaded with work at present, since its powers have not 
been  clearly  defined.  This,  in  turn,  delays  legal  proceedings  and  in  particular  lengthens  the 
procedure for preventive detention (see below). 

11 

1.2  Human Rights and the Protection Of Minorities 

Lithuania  has  introduced  various  internal  rules  designed  to  ensure  respect  for  human  rights 
and  minorities'  rights.  Such  respect  may  also  be  guaranteed  by  the  application  of  certain 
international  conventions,  most  notably  the  European  Convention  for  the  Protection  of 
Human Rights and its main additional protocols.  Under Article F of the EU Treaty, this set of 
provisions  forms  part  of the  acquis: any  State wishing to join  the European  Union  must  first 
have ratified  the said texts. 

Lithuania,  which  has  been  a  member  of the  Council  of  Europe  since  May  1993, ratified  the 
European Convention  for the Protection of Human Rights and most of its additional  protocols 
in June  1995 (with the exception of Protocol No.6 on the death penalty).  It also grants private 
individuals  the  right  to  appeal  to  the  European  Court  if they  consider  that  their  rights  under 
that Convention have been violated. 

Among  the  other  main  conventions  on  human  rights  and  minorities'  rights,  Lithuania  has 
signed,  but  not  ratified,  the  European  convention  for  the  prevention  of  torture  and  the 
Framework  Convention  for  the  Protection  of  National  Minorities.  Nor  has  it  signed  the 
It  has,  however,  ratified  the  main  human  rights  conventions 
European  Social  Charter. 
concluded under the aegis of the United Nations. 

Under Article  138 of the Constitution, any international treaty ratified  by the  Seimas forms  an 
integral part of Lithuanian  law. 

Civil and Political  Rights 

The Lithuanian  Constitution recognises the right of any individual to have recourse to the law. 
However,  the  actual  exercise  of  this  right  is  severely  impeded  by  the  slowness  of  legal 
proceedings  and  the  lack,  until  now,  of  any  procedure  for  calling  public  servants  or  police 
officers  to account.  Moreover,  the shortage  of lawyers  impedes the right  of any  individual  to 
obtain the services of a lawyer (Article 31 of the Constitution). 

The death  penalty  has not  been  abolished  in Lithuania,  and  was  last  imposed  in  1995.  Since 
then, the President  of the Republic has decreed a moratorium,  and a new draft  Penal  Code not 
including  the death  penalty  was  recently  put before  the  Seimas.  Nevertheless,  there  is  strong 
public opposition to the proposed abolition of this penalty. 

The  right  not  to  be  arrested  arbitrarily  is  protected  by  the  law  which  limits  the  period  of 
detention  to  72 hours.  After  that time the detainee must be charged  or released.  This  period 
may  be  extended  to  two  months  if the  detainee  is  suspected  of  having  committed  a  "serious 
offence",  in which  case the individual  in question must appear in court within 48 hours of his 
arrest,  so  that  the  judge  can  decide  on  the  period  of  detention.  The  Lithuanian  authorities 
recognise  that  this  legislation  is  exceptional  in  nature:  it  is  a temporary  measure  and  should 
cease to be applicable after  30 June  1997. 

All citizens over  18 years of age enjoy  electoral rights. 

12 

Freedom  of  association  and  peaceful  assembly  is  also  guaranteed  by  the  Constitution  and  is 
exercised  without  difficulty.  More  than  300 associations  are  active  in  Lithuania.  Since  they 
are non-profit-making  organisations, they are exempt from corporation tax. 

There  is  genuine  freedom  of  expression  in Lithuania,  as evidenced  by  great  pluralism  in  the 
press  and  other  media:  there  is  one  national  public  television  network  and  four  privately-
owned networks, as well as several regional networks.  The Law of July  1996 guarantees  the 
independence  of the  media  and  of journalists  vis-à-vis the public  authorities.  Thus  the  three 
regulatory  bodies  set  up  under  that  Law  are  made  up  primarily  of  representatives  of  the 
profession.  An  Ombudsman  has  also  been  set  up  to  investigate  libel  accusations  and  other 
complaints  against  the  media.  The  Law  also  authorises  the  dissemination  of  information 
about the private life of public figures if it is liable to affect  the general public. 

The  right  of  ownership  is  now  assured,  and  expropriation  may  take  place  only  in the  public 
interest  and  with  fair  compensation  paid  in  advance.  Similarly,  in  June  1996,  Parliament 
amended  Article  47  of  the  Constitution  so  as  to  allow  nationals  of  Member  States  of  the 
European  Union  and of the G24 to own land  in Lithuania.  Parliament  has recently  adopted  a 
law providing for arrangements for compensating persons who were deprived of their property 
by the Nazis during the last war or by the Communist  regime.  The President  of the  Republic 
has asked  the  Seimas  to  reconsider  this  law, in particular  so as to  guarantee  the rights  of  the 
present occupants  of certain property  which is to be restored.  Finally, the land register  is still 
incomplete and this creates uncertainty regarding the ownership of land in some areas. 

Respect  for  private  life  is,  in  principle,  guaranteed  since  searches  and  the  monitoring  of 
correspondence  and  communications  cannot  be  undertaken  without  prior  authorisation  from 
the  Procurator's  Office  or  a judge.  However,  measures  of  this  sort  are  increasingly  being 
taken  without  a  warrant  as  part  of  the  fight  against  organised  crime.  An  appropriate  legal 
basis  for  such  actions  should  be  laid  down,  so  that  they  can  be  carried  out  legally  and 
efficiently. 

With  regard  to  asylum-seekers,  in  January  1997  Lithuania  ratified  the  1951  Geneva 
Convention on refugees,  thus bringing into force the  1995 Law laying down the  arrangements 
and  procedure  applicable  to  such  persons.  The  first  applications  for  asylum  under  this  new 
system were considered  in May  1997.  Accommodation  and assistance  for  asylum-seekers  are 
now of a satisfactory  standard. 

The  situation  in prisons  gives greater cause for  concern.  The present  state of affairs  prevents 
Lithuania  from  ratifying  the  European  convention  for  the  prevention  of  torture  and  inhuman 
and  degrading  treatment.  However,  the  prison  system  is  to  be  reformed  in  1997, chiefly  by 
adopting  a  Code  on  the  imposition  of  sentences  and  a  law  on  prisons  and  by  opening  new 
penitentiary  establishments (two are to be built this year). 

Lithuania  has no  appropriate  legislation  against  pornography  and child  prostitution  or  against 
the  sexual  abuse  of  children.  However,  NGOs  working  in  this  field  have,  with  government 
assistance, taken positive steps to protect abused children. 

Finally,  attention  should  be drawn to the criticisms  levelled  against the Lithuanian  authorities 
for  their  attitude  toward  Lithuanian  Nazi  war  criminals  living  in  Lithuania  (cf.  the  case  of 

13 

Alexandras  Lileikis).  Nor  have  the  authorities  in  Vilnius  kept  their  promise  to  annul  the 
measures,  illegally  taken  by  the  Soviet  regime,  to  rehabilitate  persons  suspected  of  crimes 
against humanity. However, the Procurator General has referred  to the Supreme Court the case 
of twenty persons alleged to have benefited  from these measures. 

Economic. Social and Cultural Rights 

The  right  to the minimum  income required  for  survival  and  to  social  security  is  enshrined  in 
the Constitution. 

Trade union freedoms  are recognised.  Trade union pluralism  is also guaranteed,  and there  are 
some  80 such organisations  in existence.  However, relatively  few  workers  are members  of a 
trade union. 

The right to strike is guaranteed, except for public officials  providing essential public services. 
However,  the  statutory  procedure  for  exercising  this  right  is  so  complex  that  only  a  small 
number of strikes have taken place legally. 

Freedom of education and religion are guaranteed  in Lithuania.  However, police protection  is 
needed  for  Jewish  places  of  worship,  in  view  of  the  sporadic  acts  of vandalism  committed 
against the Jewish cemeteries at Kaunas, Vilnius and Klaipeda. 

Minority  Rights  and  the Protection  of Minorities 

Minorities  represent  nearly  20% of  the  population  of  Lithuania,  the  two  largest  being  Poles 
(9%) and Russians (8%). 

International  standards provide a first line of defence  for minorities.  Lithuania has not  ratified 
the  Council  of  Europe's  framework  convention  on  minorities,  and  Council  of  Europe 
Recommendation  1201 is not legally binding. 

The  Lithuanian  Constitution  recognises  the  individual  rights  of  persons  belonging  to 
minorities  (in  terms  of  language,  culture  and  traditions),  but  has  taken  no  steps  to  enshrine 
collective  rights  which  would  enable  minorities  to  be  recognised  as  politically  organised 
communities.  There  are,  for  example,  no  particular  rules  governing  the  representation  of 
minorities  in  Parliament:  a  party  representing  the  Polish  minority  obtained  one  seat  in  the 
November  1996 general election, having succeeded in getting over the  5% threshold of  Votes 
cast,  and  five  MPs  of  minority  origins  were  elected  on the  lists  of  the  national  parties  (three 
for the Conservatives, one for Labour and one for the Social Democrats).  However,  minorities 
have  the  right  to  manage  their  cultural  and  educational  affairs,  and  at  Government  level  the 
Department  for  national  minorities  and  regional  issues  is  responsible  for  dealing  with  these 
matters. 

The  situation  of  minorities  in  Lithuania  is,  in  general,  satisfactory.  The  1991  Law  on 
nationality  has made  a major  contribution  here by  granting  citizenship  to  all persons  resident 
in  Lithuania,  regardless  of  their  national  origins,  previous  periods  of  residence  or  ability  to 
speak  the  language.  Consequently,  some  90% of  persons  belonging  to  minorities  now  have 
Lithuanian  nationality. 

14 

Minorities  are allowed  to use their  own  language  for  official  communications  in areas  where 
the minority in question accounts for a large proportion of the population.  In such areas, road 
signs  are  in  both  languages.  It  is,  however,  not  permitted  to  express  oneself  in  a  minority 
language in court, except via an interpreter. 

Minority  languages  and  cultures  are  supported  by  the  public  authorities.  The.  government 
gives grants to minority  schools and has introduced  a programme  of  long-term  assistance  for 
such  schools.  Thus,  14.6% of all  schoolchildren  are being  educated  in  establishments  where 
teaching is given in a minority language. There is also a quota system for pupils from  minority 
communities  who  wish  to  go  on to  higher  education.  A  large  number  of  minority  language 
media  serve  these  communities,  and  the  national  radio  and  TV  networks  also  broadcast 
programmes for the various nationalities. 

Almost  all  the  complaints  made  by  minorities  have  come  from  the  Poles,  who  complain  of 
insufficient  access to public  service  employment,  especially  at high  level,  of  obstacles  to  the 
use of  the Polish  language  and  of boundary  changes  to the administrative  districts  within  the 
Vilnius  region  which  they  say, have reduced the  influence  of the Polish  minority.  These  are 
nevertheless isolated problems and do not alter the fact that the overall situation is  favourable. 

1.3  General  Evaluation 

Lithuania's  political  institutions  function  properly  and  in  conditions  of stability.  They  respect 
the  limits  on  their  competences  and  cooperate  with  each  other.  Elections  in  1992  and  1996 
were  free  and  fair,  and  in  each  case  permitted  an  alternation  of  power  in  proper  conditions. 
The Opposition plays a normal part in the operation of the institutions. Efforts  to improve the 
operation  of  the  judicial  system  and  to  intensify  the  fight  against  corruption  need  to  be 
sustained. 

There are no major  problems over respect for fundamental  rights. 

Lithuania  demonstrates 
guaranteeing the rule of law, human rights and respect for and protection of minorities. 

the  characteristics  of  a  democracy,  with  stable 

institutions 

2.  Economic  Criteria 

In examining  the  economic  situation  and prospects  of Lithuania, the  Commission's  approach 
is  guided  in  particular  by  the  conclusions  of  the  European  Council  in  Copenhagen  in  June 
1993,  which  stated  that  membership  of  the  Union  requires  "the  existence  of  a  functioning 
market economy, as well  as the capacity  to cope with competitive pressure  and market  forces 
within the Union". 

This  part  of  the  Opinion  therefore  gives  a  concise  survey  of  the  economic  situation  and 
background,  followed  by  a  review  of  Lithuania's  progress  in  key  areas  of  economic 
transformation  (liberalisation  of  the  price  and  trade  system,  stabilisation  of  the  economy, 

15 

structural  change,  reform  of  the  financial  sector)  as  well  as  its  economic  and  social 
development.  It  concludes  with  a  general  evaluation  of  Lithuania  in  relation  to  the  criteria 
mentioned  by  the  European  Council  and  a  review  of  prospects  and  priorities  for  further 
reform. 

2.1  The Economic Situation 

Background 

Lithuania, with a population of 3.7 million, has a gross domestic product (GDP) of  14 billion 
ECU (expressed  in  purchasing  power  parity);  its  population  is  about  1  percent  of  that  of  the 
Union, while its economy is only about 0.2 percent of that of the Union, GDP per head is about 
24 percent of the Union average.  The average monthly wage is about  140 ECU. 
Lithuania has applied for WTO membership. 

Progress  in Economic  Transformation 

In the inter-war period, Lithuania was an independent state, and highly integrated  in the world 
economy.  In  1940,  the  country  was  forcibly  annexed  to  the  Soviet  Union  and  subsequently 
central planning  was introduced.  Because of its comparatively good  infrastructure  and  skilled 
labour  force,  relatively  large  and  sophisticated  industries  were  established  in  Lithuania. 
Despite  a  lack  of  natural  resources,  development  of  the  energy  sector  was  particularly 
emphasised;  it achieved  sufficient  capacity  to satisfy  the energy demand of most of the Baltic 
region  of  the  Soviet  Union.  Other1  traditionally  important  sectors  were  agriculture  and, 
especially, food  processing. Lithuania's large enterprises were heavily dependent on the rest of 
the  Soviet  Union,  both  for  acquiring  raw  materials  and  energy,  and  for  selling  finished 
products. The industry  was the beneficiary  of substantial  implicit subsidies during this period, 
because  the  system  of  centrally  determined  prices  allowed  it  to  import  its  inputs  far  below 
world prices - an advantage that was lost after  independence. 

Although  Lithuania  started  economic change during the perestroika  era under  Soviet rule, the 
fact  that it regained  independence  only in  1991 has delayed the start of fully-fledged  reforms. 
The need to establish  from  scratch the institutions  and the legal  framework  of an  independent 
state  has  added  considerably  to  the  complications  of  transition  to  a  market  economy. 
Nevertheless,  immediately  after  independence,  extensive  liberalisation  and  privatisation 
programmes  were  initiated  although  the  latter  took  much  more  time than  originally  planned. 
The reorientation  of the economy initially  induced the most severe decline in output  registered 
in  central  and  eastern  Europe,  while  at  the  same  time  inflation  surged.  Only  after  the 
introduction  of  the  new  national  currency  and  the  currency  board  in  1993-94  was  the 
economic downturn  halted. 

Before  independence, the private sector practically  did not exist. The industry  sector  consisted 
of  large  state enterprises,  and  agriculture  was entirely  collectivised.  A programme  of  voucher 
privatisation began in  1991, and succeeded in privatising both the important agricultural  sector 
and all small and medium-sized  enterprises relatively rapidly. However, in the larger  industrial 
enterprises, the  state kept  important  stakes, while  in key enterprises  (e.g. electricity,  railways, 
telecommunications,  oil  refinery)  no  private  influence  was  allowed  at  all.  The  authorities 
report the share of the non-state  sector  in GDP to be around 65 percent, but this figure  contains 

16 

many  companies  with  large  state  participations.  A  second  stage  of  privatisation  started  in 
1996, and is based on several schemes, including cash payments.  Although, it is still too early 
to assess the results, privatisation  is one of the policy priorities of the new government  which 
has initiated divestment procedures for several of the aforementioned  key enterprises. 

Foreign Direct  Investment 

Foreign  direct  investment  (FDI)  inflows  have  been  low,  with  an  average  annual  inflow  of 
approximately  1% of GDP  (SOURCE: EBRD).  This has been due to  several  factors,  including 
macroeconomic  instability  and  the  slow  pace  of  cash  privatisation  and  other  structural 
reforms. Recent policy changes (cf. below) could clearly improve the situation in the  future. 

Economic  Structure 

In  Lithuania,  agriculture  has. always  been  a key  sector.  However,  in  recent  years  output  fell 
steeply: from  27.7 percent of gross value added in  1990 to roughly  9 percent  in  1995. A rapid 
privatisation  coupled  with  the  restitution  of  property  rights  on  land  has  led  to  a  strongly 
aggregated  ownership  structure,  resulting  in  low  productivity.  The  authorities  are  protecting 
the profitability  of the sector with important subsidies. Consequently, the fall  in output has not 
been reflected  in a similar employment  decline, and the agricultural  sector  still  employs  more 
than 20 percent of the workforce. To be able to expose the sector to international  competition, 
a substantial restructuring effort  still has to be made, with mostprobably  significant  effects  on 
employment.  The new government has introduced reform  measures: production  subsidies  are 
being reduced and replaced by income support. 

Industry is still an important economic sector, although its share in gross value added  fell  from 
32.8 percent  in  1990 to 29 percent  in  1995. Employment represents  over one fifth of the total 
workforce.  The  most  important  sub-sectors  are  food  processing  (30  percent)  and  petroleum 
refining  (19.4 percent), although the  latter  lost importance  because  Russia  is no  longer  using 
the  Lithuanian  refinery.  The  large  energy-intensive  manufacturing  enterprises  have  been 
confronted  with a sharp price increase of their inputs, as Russia started to charge world  prices 
for  raw  materials  and  energy,  while  they  simultaneously  lost  most  of  their  traditional  export 
markets.  The  transformation  of  the  sector  from  energy-intensive  production  for  Soviet 
markets,  to  higher-quality  production,  more  in  line  with  natural  endowments,  for  western 
markets, is still  unfinished. 

Under  the  Soviet  regime,  the  services  sector  was  typically  underdeveloped.  Consequently, 
output  in  the  services  sector  declined  less  than  in  agriculture  and  industry,  and  its  share  of 
gross value added nearly doubled in five years to 55 percent in  1995. 

The  reform  of  the  tax  system  and  the  rapid  expansion  of  the  number  of  small  private 
enterprises  have  created  considerable  difficulties  for  the  statistical  office  to  record  all 
economic  activity,  and  for  the tax  administration  to impose taxes. Consequently,  the  informal 
sector has become very  important. 

17 

Main indicators of economic structure 
(all data for  1996 unless otherwise indicated) 

Population 

GDP per head 

Share of agriculture in: 

Gross foreign debt/GDP 

Exports of goods & services/GDP 

Stock of foreign direct  investment 

million 

p PS-ECU (1995) 
per  cent (1995) 

per  cent (1995) 
per  cent (1995) 

per cent 

per  cent 

billion ECU 
ECU per  head 

3.7 

4100 
24 

9 

23.7 

15.6 

52.4 
0.23 
65 

FDI  stock  converted  at  end-1996  exchange  rate  of  1  ECU  =  $  1.2 
Source: Commission services, national sources, EBRD,  IMF 

Liberalisation 

PriceRegime 

Prices were almost  fully  liberalised  during  1991-92. Restrictions  remain on prices  for  energy, 
housing  and  some  prices  for  public  transport  and  utilities.  Goods  and  services  with 
administered  prices  represent  approximately  10 percent  in  the  basket  of  the  consumer  price 
index. 

Tirade Regime 

Lithuania's trade regime is relatively  liberal, as all non-tariff  restrictions were removed  during 
1991-92. The trade-weighted  average tariff  is very moderate at only 4.3 percent  (1995) with a 
large majority  of products zero-rated.  However, there has been  some reversal  in trade  policies 
under  pressure  from  influential  interest  groups.  In  the  last  two  years,  import  tariffs  on  some 
agricultural  products  have  been  reduced  more  slowly  than  previously  announced.  On  the 
other hand, the Community has accepted a Lithuanian request for further  trade liberalisation in 
textiles. 

Lithuania also has free  trade  agreements  in place with the EFTA, with Latvia and Estonia,  and 
with  most  of  the  individual  member  states  of  CEFTA. Once  it  will  have joined  the  WTO -for 
which  it  has  applied-,  Lithuania  will  fulfil  all  formal  conditions  to  become  a  member  of 
CEFTA. 

18 

Foreign Exchange  Regime 

The  introduction  of  the new national  currency,  the  litas,  was  done  in  several  steps. First,  the 
Russian  rouble  was  replaced  by  the  talonas  in  October  1992,  which  was  allowed  to  float 
freely.  The  talonas  initially  continued  to  depreciate,  but  stabilised  after  a  tightening  of 
monetary policy.  Consequently,  the litas was introduced in June  1993, and was pegged  to the 
us dollar, at an exchange rate of 4 litas per dollar, on  1  April  1994. Simultaneously, a currency 
board  mechanism  was  set up  to  increase  the  credibility  of  the  exchange  rate  peg  (cf.  below, 
section  6.3). The  Bank  of Lithuania  (BoL)  has the power  to  change the peg  when  necessary. 
The  Litas  is  fully  convertible  for  current-account  transactions,  and  there  are  virtually  no 
restrictions  on capital transactions. Residents and non-residents  may open accounts  in  foreign 
currencies. 

The  BoL  has  recently  announced  that  the  monetary  policy  framework  and  the  exchange  rate 
regime will be changed over the coming years. The currency board system would be gradually 
abolished,  while  the  exchange  rate  peg  would  initially  remain  unchanged.  Only  in  the  final 
phase of the change of policy, which would not start before  1999, the exchange rate link to the 
dollar would be progressively  shifted  towards a link to the euro. 

Stabilisation of the Economy 

Domestic 

The transition  from  a command  to a market economy, and, even more importantly, the break 
up  of  the  close  input  and  output  relations  with  the  Soviet  Union,  provoked  a  steep  output 
decline  in  industry  and  agriculture  during  the  first  years  of  independence,  leading  to  a 
contraction  of  real  GDP by  almost  60  percent  between  1990  and the  end  of  1993. Starting  in 
1994, the  economic  downturn  was  brought  to  an  end,  and  economic  growth  accelerated  to  3 
percent  in  1995.  Preliminary  and  partial  figures  indicate  that  the  pace  of  economic  growth 
continued  to  increase  in  1996,  despite  the  consequences  of  the  serious  banking  crisis  of 
December  1995. If  structural  reforms  of the  economy  are  continued,  it  should  be possible  to 
maintain similar or even higher growth rates in the coming years. 

Inflation  surged in  1992, not only as a result of rapid price liberalisation and the  terms-of-trade 
shock,  but  also  because  of  the  fact  that  the  currency  remained  pegged  for  too  long  to  the 
sharply  depreciating  Russian  rouble.  In  mid-1993,  a  first  substantial  attempt  was  made  to 
reduce  inflation  by  leaving  the  rouble  zone  and  introducing  a new  currency,  the  litas.  These 
effects  were  reinforced  by  the  adoption  of  a  currency  board  in  April  1994,  which  severely 
limits  the  BoL's  room  for  manoeuvre.  As  a result,  hyperinflation  was  halted.  End-of-period 
inflation  fell  drastically  to  less  than  50  percent  at  the  end  of  1994,  and  declined  gradually 
afterwards  to reach  13 percent at the end of  1996. The fall  of the  inflation  rate continued  into 
the  first  months  of  1997.  This  downward  trend  can  be  expected  to  continue.  The  moderate 
wage  developments  and  the  real  appreciation  of  the  currency,  which  restrain  import  prices, 
have  probably  played  a major  part  in the  sharp  reduction  of  the  inflation  rate.  However,  the 
expected  adjustments  in  the  relative  price  of  energy  products  will  continue  to  exert  some 
inflationary  pressure. 

19 

Through the currency  board  system, the litas is pegged to the dollar and  base money  needs to 
be  backed  for  at  least  100  percent  by  gold  and  foreign  reserves.  Monetary  financing  of  the 
budget deficit  is not possible, and credit to the banking  sector by the central  bank  - in its role 
as lender of last resort  - is limited to the amount of foreign  reserves in excess of those needed 
to  provide  full  backing  for  base  money.  The  Bank  of  Lithuania  used  this  last  possibility  to 
inject  additional liquidity into the economy after the December  1995 banking crisis, which can 
explain why the negative effect  of the crisis on economic growth remained limited, despite the 
fact that one quarter of the economy's deposits was frozen  in the suspended banks. 

Main economic trends 

1994 

1995 

1996 

Real GDP growth rate 

per cent 

1.0 

3.0 

3.6 

Consumer price  inflation 

December-on-December 

Unemployment rate, end-year 

per cent 
per cent 

per cent 
ILO definition 

72.2 
45.1 

39.6 
35.7 

4.5 

7.3 

24.6 
13.1 

6.2 

General 
balance 

government 

b 

per  cent of GDP 

-1.7 

-1.8 

-2.5 

Current account  balance 

per  cent of GDP 

-2.1 

-10.3 

-8.2 

Debt/export ratio 

per cent 

20.7 

25.9 

29.8 

Foreign direct investment  inflo 

per  cent of GDP 

1.4 

0.9 

1.0 

Source: Co?nmission services, national sources,  EBRD 

Recently, the BoL  has announced  changes to the monetary  policy  framework.  In a first stage, 
the central bank would start to influence  liquidity by intervening more actively  on the treasury 
bill  market,  while  maintaining  the  general  principles  of  the  currency  board  and  the  fixed 
exchange  rate.  The  currency  board  mechanism  would  only  be  removed  in  a  second  phase, 
while  the  exchange  rate peg would  remain unchanged  until  the third  phase, which  would  not 
begin before  1999. 

Despite  sharply  reduced  tax  revenues,  Lithuania  has  managed  to  keep  public  deficits 
moderate. Given that the currency  board mechanism does not allow for  monetary  financing  of 
government  deficits,  the  weak  revenue performance  had  to be  offset  on  several  occasions  by 
additional  expenditure  cuts.  Due  to  the  recapitalisation  of  the  state  banks  and  lower-than-
expected  tax  receipts,  the  deficit  came  out  higher  than  planned  in  1996  at  2.5  percent. 
Therefore,  the  authorities  are  presently  trying  to  extend  the  tax  base,  and  to  make  the 
appropriate  improvements  in  tax  collection  and  administration,  in  order  to  reduce  the 
government  deficit  ratio significantly  in 1997. 

20 

External 

As a consequence  of its secession from the  Soviet Union, which  accounted  for  95 percent  of 
its  exports,  Lithuania  lost  almost  70  percent  of  its  exports  in  the  first  two  years  of 
independence, resulting in a rapid increase of the trade deficit to 6 percent of GDP in  1993. The 
external  balances  started  to improve  gradually  afterwards,  thanks to the undervaluation  of the 
real exchange rate at the time of the introduction of the currency board as well as to  economic 
restructuring. The recent evolution  of the trade balance is hard to assess because  of  important 
changes  in statistical  methods, which make comparisons  with observations  from  before  1995 
impossible. Available figures  show sharp increases in both imports and exports, resulting  in a 
slight improvement of the  1996 trade balance as a proportion of GDP. 

Lithuania  has  rapidly  built  up  foreign  exchange  reserves,  mainly  as  the  result  of  official 
external borrowing and, to a much lesser extent, foreign  direct investment.  The fall  in reserves 
after the banking crisis, which amounted to 20 percent in March  1996, was already  completely 
offset  in August. The litas is now backed by reserves of about 2.5 months of imports. 

Lithuania's  external  debt  has  increased  substantially  since  1993  but  remains  modest,  at 
roughly  15 percent  of  GDP at the  end  of  1996. A  large  part  (about  40  percent)  of  the  credits 
received so far went to finance the purchase of oil and gas, while only about one quarter of the 
loans was used to finance  investment projects. 

Structural  Change 

Foreign Trade 

Lithuania  is a small  open economy  with exports of goods  accounting  for  above  40 percent  of 
GDP  in  1996.  Lithuania  has  been  relatively  successful  in  shifting  its  trade  towards  Western 
Europe.  Roughly  equal  shares  of  the  country's  external  trade  now  go  to  the  former  Soviet 
Union and to the European Union. However, Lithuania remains heavily dependent on  Russian 
oil imports because of technical and logistical constraints. 

The  geographical  redirection  of  trade  has  been  accompanied  by  a  significant  change  in  the 
composition  of  exports  and  imports.  While  the  share  of  agricultural  goods,  machinery  and 
textiles  decreased  significantly,  exports  of  chemicals,  wood  and  metals  have  gained  in 
importance.  Redirecting  exports  has  been  successful  in  the  latter  areas  and  in  textiles.  These 
shifts  clearly  illustrate  the  difficulties  formerly  important  industrial  sectors  have  to  penetrate 
western markets. 

The  Lithuanian  authorities  are  currently  establishing  a  set  of  measures  and  institutions  to 
promote  exports,  comprising  an  export  development  agency,  an  export  "insurance  and 
guarantee system, and the creation of trade missions in the main trading partner countries. 

Labour Market 

Initially, the  sharp  contraction  of the  economy  did  not  generate  a rapid  increase  of  registered 
unemployment.  To  compensate  for  the  lower  output,  employers  relied  on  unpaid  leave  and 
shorter working hours, instead of layoffs,  which were legally limited until October  1992. Only 

21 

in the second half of  1994, registered unemployment  started to increase, to reach a peak of  8.3 
percent  of  the  active  population  in  early  1996.  Recently,  registered  unemployment  declined 
again to  6.2  percent  at the end of  1996. However,  some rural  areas are disproportionately  hit, 
with jobless rates of over 20 percent. Total unemployment  remained  relatively  low  compared 
to  many  central  European  countries  in  transition,  as  a  consequence  of  the  important  fall  of 
labour market participation from about 90 percent in 1991 to 83 percent in 1995. 
The minimum wage is now about 86 ECU per month, approximately half  the average wage. 

Public  Finances 

The reform  of the  Lithuanian  tax  system  from  the  Soviet  government  revenue  system,  which 
mainly consisted of levies on enterprise turnover, to a tax system suited for a market economy, 
has  led  to  a  major  erosion  of  government  receipts:  while  general  government  revenue 
represented  almost  44  percent  of  GDP in  1990,  it  fell  to  only  25  percent  of  GDP in  1995. 
Nevertheless, the fiscal reform  in Lithuania has put in place most of the necessary  instruments. 
VAT was  introduced  at  an  early  stage,  and  the  rate  was  increased  to  18  percent  in  1994. 
However,  VAT,  personal  income  tax,  and  corporate  profits  tax,  are  all  eroded  by  many 
exemptions. The tax administration also lacks experience to trace tax obligations of the rapidly 
developing  private  sector.  Therefore,  the  authorities  are  presently  removing  a  number  of 
exemptions  on  VAT,  and  increasing  rates  on  some  food  products  and  fuel.  Furthermore,  the 
government  intends  to  fight  tax  evasion  and  smuggling  more  vigorously,  in  order  to  reverse 
the downward trend in public receipts. 

Notwithstanding  this  substantial  decline  of  government  revenues,  deficits  remained  limited 
because  of  strict  cash  management,  reducing  expenditures  whenever  revenues  were 
insufficient.  The  fact  that  the  currency  board  system  precludes  monetary  financing  of 
government  deficits,  also  forces  the  government  to  conduct  a  credible  fiscal  policy,  by 
keeping  the  budget  close to balance.  Consequently,  government  expenditures  decreased  from 
around 40 percent  of GDP in  1990, to almost 28 percent  in  1995. The structure  of  government 
expenditure  has  changed  considerably.  Subsidies  to  enterprises  were  reduced  significantly 
from  14 percent of GDP in  1990 to only  1.3 percent in  1995 (mainly directed to agriculture and 
the  energy  industry).  However,  the  latter  number  underestimates  the  actual  government 
support, because of the enterprises'  build-up of tax and energy payments arrears. Also, part of 
the  banking  system's  non-performing  loans  to  enterprises  are  likely  to  become  a  liability  for 
the  state, through  future  bank  recapitalisation,  or  compensation  of  depositors  in case  of  bank 
failure.  Public  expenditures  are  now  dominated  by  wages  and  transfer  payments  to 
households,  mainly  pensions.  Together  these  two  categories  represent  almost  two  thirds  of 
total  government  expenditures.  Despite  the  continued  downward  pressure  on  expenditures, 
public  investment  has  been  maintained  at  around  3  percent  of  GDP.  Nevertheless,  the 
modernisation  of public infrastructure  may require an increase in public capital expenditures. 
A  social  security  system  has  been  created,  based  on  payroll  taxes.  Employers  contribute  30 
percent  of  wages  and  salaries,  and  employees  contribute  1 percent.  The  main  expenditure 
category  of  the  social  security  system  is  pensions.  Despite  the  current  equilibrium  of  the 
system,  there  is  a  risk  that  it  will  become  unsustainable  in  the  medium  term.  Although  the 
pension  age  is  being  gradually  increased,  the  ageing  of  the  population  and  a  relatively 
generous benefit  calculation method will make it difficult  to maintain the present  system. 

22 

Enterprise Sector:  Privatisation  and Enterprise Restructuring 

The first stage of Lithuania's  voucher privatisation  came to an end in  1995, almost  four  years 
after  its initiation.  During this period,  85 percent of eligible objects  were privatised.  This rate 
was characteristic for most sectors of the economy. According to official  estimates, the private 
sector's  share  in GDP was  68 percent  in  1996. However, this number  includes  a large  number 
of enterprises that are still partly state-owned. 

The voucher privatisation  programme has not been very conducive to enterprise  restructuring, 
partly  because of some structural features of the Lithuanian economy.  Attracting the  financial 
means  needed  for  restructuring  is  a  particularly  challenging  problem  when  distributing 
enterprises  free  of  charge to the population.  However, the availability  of  long-term  funds  for 
restructuring  has  also  been  limited  by  the  weakness  of  the  banking  sector,  and  the  lack  of 
important inflows  of foreign  direct investment, which have remained close to .only  1% of GDP 
in  the  last  few  years.  Moreover,  privatised  companies  are  now  owned,  to  a  large  extent,  by 
worker  co-operatives,  which  tend  to  favour  short-term  job  security  over  restructuring. 
Although  the  tight  fiscal  and  monetary  policy  has  put  major  pressure  on  the  enterprises  to 
restructure, the continued  direct  and indirect  support to important  sectors,  such  as energy  and 
agriculture,  slowed  down  restructuring  in  these  sectors.  Finally,  the  lack  of  an  efficient 
bankruptcy legislation has so far reduced the incentives for restructuring. 

Because  voucher  privatisation  did  not  generate  sufficient  • enterprise  restructuring,  the 
authorities  approached  the second stage of privatisation  differently,  selling the assets for  cash. 
In this way, the country also wants to attract more foreign  investment. Although the initial  list 
of enterprises to be privatised was rather limited, the authorities have recently  added a number 
of  key  enterprises  from  the  financial,  energy,  telecommunications,  and  transport  sectors, 
including 
the 
telecommunications  operator Lietuvos Telekomas. 

the  national  air  carrier  Lithuanian  Airlines,  major  state  banks  and 

Financial  Sector 

In  1992, a two-tier  banking  system  was created, whereby  the commercial  banking  operations 
of the Bank of Lithuania were separated  from  its central bank functions.  In the initial stage of 
financial  sector  reform,  Lithuania  witnessed  an important  increase  in the  number  of  financial 
institutions,  as  capital  requirements  and  other  prudential  regulations  were  fairly  weak. 
Nevertheless, the  sector remained very  concentrated, with the four  biggest banks  representing 
about two-thirds  of all deposits, while the three biggest banks were still  state-owned.  Most of 
the  banks  were  undercapitalised  and  had  an  important  portfolio  of,  often  politically  directed, 
non-performing  loans.  Initially,  the  real  value  of  these  loans  was  quickly  eroded  by  high 
inflation,  but when inflation  was gradually reduced, banks were faced with liquidity problems. 
Tighter  controls  by  the  BoL,  which  was  given  extensive  powers  to  supervise  the  banking 
system  and  enforce  prudential  regulations  by the  1994 Commercial  Bank  Law, forced  a  large 
number  of  smaller  banks to enter bankruptcy  procedures, and  the government  had  to  support 
some  medium-sized  banks  with  additional  liquidity.  At  present  28  banks  are  registered  with 
the  central  bank  although  only  12 banks  are  actually  active  on the  market.  The  state  holds  a 
majority  stake  in  three  banks,  the  Agricultural  Bank,  the  State  Commercial  bank  and  the 
Savings  Bank.  The  state  participates  also  in  the  capital  of  16  commercial  banks.  Foreign 
investors  account  for  about  16  per  cent  of  the  capital  of  the  banking  sector.  There  are 

23 

favourable  conditions  for  the  founding  of  foreign  subsidiaries,  and  amendments  to  the 
legislation introduced in  1996 provide for the possibility of foreign  banks opening branches in 
Lithuania. 

A  banking  crisis  erupted  in  December  1995,  when  one  large  and  two  medium-sized 
commercial  banks, representing  about  25 percent of the value of total deposits, were found  to 
be  insolvent.  Moreover,  auditing  reports  revealed  that  two  of  the  state-owned  major  banks 
would  also  need  to  be  recapitalised  in  order  to  meet  capital  adequacy  requirements.  The 
authorities  in  the  first  months  of  1996  hesitated  between  liquidating  and  bailing  out  the 
insolvent  banks,  but  finally  decided  to  renationalise  the  biggest  suspended  bank,  to 
recapitalise the banks in state hands, which now.represent almost three quarters of all deposits, 
and to establish a special asset management  company to take over the bad loans from  troubled 
banks. Recently, it has been announced that two of the state-owned  banks will be restructured 
and  privatised  in  1997.  The  insolvent  Innovation  Bank  is  being  liquidated-(and  depositors 
compensated).  Additionally,  a  new  law  on  deposit  insurance  was  approved,  according  to 
which  small  deposits  in  the  suspended  banks  would  be  reimbursed.  Other  banks  will  be 
eligible for the new insurance scheme only if they comply with Central Bank prudential  rules. 
The  budgetary  cost  of  the  bank  restructuring  programme  will  partly  be  financed  by  World 
Bank  support. 

The  banking  system  remains  fragile  and  the  performance  of  banks  weak  as  their  results  are 
adversely  affected  by the need to make provisions  for non-performing  loans and to cope  with 
increasing  competition.  Regulatory  and  supervisory  rules  have  been  tightened  following  the 
banking  crisis,  and  measures  have  been  taken  to  improve  banks'  flow  of  information  about 
credit risks. The maturity  transformation  in the banking  system is still limited as two thirds of 
bank loans have maturity of less than one year. However the number of loans extended  for  the 
financing  of investment projects  is rising. 

The  National  Stock  Exchange  of  Lithuania  began  operations  in  1993,  as  a  result  of  the 
privatisation  of state enterprises  and  state property. The capitalisation  is very  limited  (about  2 
percent  of  GDP)  and  the turnover  remains  low.  The  role  of the  stock  market  as  an  alternative 
source  of  finance  for  the  corporate  sector  is  quite  modest.  There  was  recently  some  interest 
from  companies  to  raise  capital  by  issuing  short-term  bonds.  The  secondary  market  for 
government  securities  is  not  significant,  although  efforts  are  being  made  to  encourage  it.  A 
new law on insurance should  bolster Lithuania's  insurance market. Companies and  individuals 
are  allowed  to  deduct  insurance  payments  from  their  taxes. The  law  has  a protectionist  side: 
when  foreign  insurance  companies  wish  to  enter the  market,  they  can  only  do  this  through  a 
tender and must prove that no local company is able to take on the work. 

Economic and Social  Development 

Social  Indicators 

Lithuania  is  a  small  country  with  3.7  million  inhabitants.  Although  the  population  is  still 
young  - 60 percent  are below the age of 40 - birth rates  started  to  fall  steeply  in recent  years. 
Life expectancy  at birth in  1994 was 62.8 years. 
The labour force  is skilled and enrolment rates are comparable to those in most of the Member 
States.  About  one  third  of  the  workforce  has  completed  tertiary  education  (including 

24 

vocational  training). However, teachers  are paid  low  salaries  and  can  find  better-paid jobs  in 
other industries. Over time, this could lead to a weakening of the education system. 

Sectoral  Differences 

Differences  between  urban  and  rural  areas  are  getting  more  important.  Employment  in  rural 
areas  is  being  affected  by  the  not  yet  completed  restructuring  of  the  agricultural'  sector. 
Although  urban  areas  have to  overcome  the  consequences  of  enterprise  restructuring,  this  is 
partially  offset  by the growth of the services  sector  in the cities. As a result,  some rural  areas 
are disproportionally hit by unemployment, with jobless rates of over 20 percent 

2.2  The  Economy  in  the  Perspective  of  Membership 

Introduction 

The  European  Council  in  Copenhagen  in  1993  defined  the  conditions  that  the  associated 
countries  in  central  and  eastern  Europe  need  to  satisfy  for  accession.  The  economic  criteria 
are: 

• 

the existence of a functioning  market economy; 

• 

the capacity to cope with competitive pressure and market forces  within the Union. 

These  criteria  are  linked.  Firstly,  a  functioning  market  economy  will  be  better  able  to  cope 
with  competitive  pressure.  Secondly,  in  the  context  of  membership  of  the  Union,  the 
functioning  market  is  the  internal  market.  Without  integration  into  the  internal  market, EU 
membership would lose its economic meaning, both for Lithuania and for  its partners. 

The adoption  of the acquis, and in particular the internal market acquis,  is therefore  essential 
for a candidate country, which must commit itself permanently to the economic obligations of 
membership.  This  irreversible  commitment  is needed  to  provide  the  certainty  that  every  part 
of the enlarged EU market will continue to operate by common rules. 

The capacity  to take on the acquis  has several  dimensions.  On the one hand,  Lithuania  needs 
to  be  capable  of  taking  on  the  economic  obligations  of  membership,  in  such  a  way  that  the 
single market functions  smoothly and fairly.  On the other hand, Lithuania's capacity to  benefit 
fully  from  the  competitive  pressures  of  the  internal  market  requires  that  the  underlying 
economic  environment  be favourable,  and that the Lithuanian  economy  have  flexibility  and a 
sufficient  level  of  human  and  physical  capital,  especially  infrastructure.  In  their  absence, 
competitive  pressures  are likely to be considered  too  intense by  some  sections of society, and 
there  will  be  a  call  for  protective  measures,  which,  if  implemented,  would  undermine  the 
single market. 

The capacity  and determination  of a candidate country to adopt and implement the acquis will 
be  crucial,  since  the  costs  and  benefits  of  doing  so  may  be  unevenly  spread  across  time, 
industries  and social  groups. The existence of a broad based consensus, about the nature of the 
changes to economic policy  which  membership  of the Union requires, and  a sustained  record 
of  implementation  of economic  reforms  in the  face  of  interest  group  pressure  reduce  the  risk 

25 

that  a  country  will  be  unable  to  maintain  its  commitment  to  the  economic  obligations  of 
membership. 

At the level of the public authorities, Membership of the Union requires the administrative  and 
legal  capacity  to  transpose  and  implement  the  wide  range  of  technical  legislation  needed  to 
remove obstacles to freedom  of movement within the Union and so ensure the working  of the 
single  market.  These  aspects  are  examined  in later chapters. At the  level  of individual  firms, 
the impact on their competitiveness  of adopting the acquis depends on their capacity to  adapt 
to the new economic  environment. 

The Existence of a Functioning Market Economy 

The  existence  of  a market  economy  requires  that  equilibrium  between  supply  and  demand  is 
established  by the free  interplay  of market  forces. A market economy  is functioning  when  the 
legal  system,  including the regulation  of property rights, is in place and  can be enforced.  The 
performance  of a market economy is facilitated  and improved by macroeconomic  stability  and 
a  degree  of  consensus  about  the  essentials  of  economic  policy.  A  well-developed  financial 
sector  and  an  absence  of  significant  barriers  to  market  entry  and  exit  help  to  improve  the 
efficiency  with which an economy works. Good progress in the implementation  of the  Europe 
Agreement should also help to complete the functioning  of the market economy. 

In its transition to a market economy, Lithuania has advanced considerably  in liberalising  and 
stabilising  the  economy.  The  introduction  of  a currency  board,  the  liberalisation  of  financial 
markets, the freeing  of foreign  transactions, and the reduction of fiscal  deficits  had  substantial 
stabilising  effects.  Price  liberalisation,  voucher  and  cash  privatisation,  trade  opening,  legal 
reform,  institutional  development,  and  social  safety  net  enhancement  have  also  been 
implemented  or are under way. The investment regime is relatively liberal. 

However, the more  fundamental  restructuring  of the economy  and the shift  to a higher  growth 
path  have  been  delayed.  Genuine  "hard  budget  constraints"  are  not  yet  in  place  (in  essence, 
this would require that loss-making enterprises know they will not, as in the past, be bailed out 
by the authorities).  Tax  collection  is weak; there  are mounting payment  arrears, especially  in 
the energy  sector;  bankruptcy  proceedings have been  ineffective  and  cash-based  privatisation 
designed to bring in strategic investors has only recently become a matter of priority. 

Administrative  controls remain in place for energy and housing. Some prices for transport  and 
utilities  fall  short  of  production  costs  (when  capital  replacement  is  included  in  the  cost 
calculation).  A newly  established  Agency  for  competition  has been  established,  but  it  has  no 
effective  power  to  break  up  monopoly  enterprises.  Competitive  pressures  coming  from  the 
liberal trade regime are insufficient  to reduce the very high profit  margins in retail  distribution 
networks  substantially. 

Property restitution has been impeded by administrative and legal difficulties  as well as cuts in 
the  budgetary  allocation  for  compensation  to  former  land  owners. A  cadaster  is  being  set  up 
but  the process  is  inherently  lengthy.  Uncertainty  surrounding  legal  ownership  of  properties, 
which  may  yet  be  returned  to  the  original  owners,  continues  to  complicate  a  number  of 
privatisation, cases.  However,  in view of its preparation  for  EU membership, in August  1996, 

26 

Lithuania  amended  Article  47  of  its  Constitution  so  as to  enable  foreigners  to purchase  land 
for business purposes. 

Lithuania's  banking  system  remains  fragile:  the  majority  of  banks  are  undercapitalised  and 
still  hold  a  large  amount  of  non-performing  loans.  Recently,  the  government  announced  a 
banking  sector restructuring  plan that envisages privatisation, recapitalisation,  and  liquidation 
of  insolvent  banks.  Only  when this  restructuring  phase  will  be  completed,  confidence  in  the 
financial  system  might  be  restored,  and  the  sector  might  start  to  fulfil  its  role  as  an 
intermediary between savings and investment. 

Public  administration  had  to  be  established  after  independence.  Moreover,  transition  to  a 
market  economy  poses  formidable  challenges  in  adapting  government  institutions  and  the 
legal  framework.  Some progress has been made, but many  areas need to be addressed  further 
legislation,  property  registers,  a 
in 
simplification  of business regulations, including licensing requirements, etc. 

the  period  ahead:  bankruptcy  and  competition 

The Capacity to Cope with Competitive Pressure and Market Forces 

It is difficult,  some years ahead of prospective membership, and before  Lithuania has  adopted 
and  implemented  the  larger  part  of  Community  law,  to  form  a  definitive  judgement  of  the 
country's  ability  to  fulfil  this  criterion.  Nevertheless,  it  is  possible  to  identify  a  number  of 
features  of Lithuania's development  which provide some indication of its probable capacity to 
cope with competitive pressure and market forces within the Union. 

This  requires  a  stable  macroeconomic  framework  within  which  individual  economic  agents 
can  make  decisions  in  a  climate  of  a  reasonable  degree  of  predictability.  There  must  be  a 
sufficient  amount  of  human  and  physical  capital  including  infrastructure  to  provide  the 
background  so  that  individual  firms  have  the  ability  to  adapt  to  face  increased  competitive 
pressures  in the  single  market.  Firms  need  to  invest  to  improve  their  efficiency,  so that  they 
can both compete  at home  and take advantage of economies  of  scale which  flow  from  access 
to  the  single  market.  This  capacity  to  adapt  will  be  greater,  the  more  firms  have  access  to 
investment  finance,  the better the quality of their workforce,  and the more  successful  they  are 
at innovation. 

Moreover, an economy will be better able to take on the obligations of membership the higher 
the degree  of economic  integration  it achieves  with  the Union  ahead  of  accession.  The  more 
integrated  a  country  already  is  with  the  Union,  the  less  the  further  restructuring  implied  by 
membership.  The  level  of  economic  integration  is  related  to  both  the  range  and  volume  of 
goods traded with member states. Direct benefits  from  access to the single market may also be 
greater  in  sectors  where  there  are  a  sizeable  proportion  of  small  firms,  since  these  are 
relatively more affected  by impediments to trade. 

Lithuania  has  made  substantial  progress  in  stabilising  its  economy  in  recent  years.  The 
introduction  of  the  currency  board  regime  and the  reduction  of  fiscal  imbalances  has  created 
the  conditions  for  a more  stable  economic  environment.  The  way  in which  the  economy  has 
been  able  to  absorb  the  negative  effects  of  a  relatively  serious  banking  crisis  without  a 
significant  relapse  in  the  stabilisation  process,  shows  the  durability  of  the  progress.  This 

27 

durability  is  also  illustrated  by  the  apparent  acceptance  by  the  financial  markets  of  the 
authorities' plans to gradually abolish the currency board regime. 

In general, enterprise restructuring, which is essential to make the economy competitive in the 
single market, has not made sufficient  progress, mainly as a consequence  of a lack  of capital, 
resulting  from  the  relatively  low  level  of  foreign  direct  investment  and  the  weakness  of  the 
banking sector. The lack of a hard budget constraint, voucher privatisation to insiders, and the 
absence  of  a  credible  bankruptcy  threat,  were  also  not  conducive  to  enterprise  restructuring. 
Consequently,  substantial  adjustments  still  have  to  be  made,  which  would  probably  result 
more in higher unemployment  than in further  important output reductions. Lithuania has  been 
caught in a vicious circle, where an old capital stock implies obsolete and costly products, loss 
of market  share,  loss  of profitability  and therefore  little possibility  of  financing  restructuring 
investments.  Nevertheless,  there  is  a  chance  that  this  vicious  circle  might  be  broken  by  the 
new  government's  policy  to  accelerate  the  completion  of  the  privatisation  process,  which 
might attract important amounts of foreign  direct investment. This would not only bring in the 
necessary  financial  means  for  restructuring,  but  would  also  contribute  to  product  innovation 
and  improved  management  skills.  Higher  foreign  involvement  in  the  economy  would  also 
improve  the  knowledge  by  enterprises  on  the  requirements  of  the  acquis  in  the  area  of  the 
single market, which should make access to the single market easier. 

Lithuania's  legacy  from  the Soviet era consisted mainly of a large-scale manufacturing  sector, 
including  an  important  energy  industry,  and  a  collectivised  agricultural  sector.  The 
profitability  of manufacturing  has been hampered  seriously  by the  adjustment  of  the  price  of 
its imported  inputs  to world  levels, and the  loss of most  of  its  output  markets.  The  ability  of 
these  enterprises  to  reorient  their  sales  towards  western  markets  is  limited  by  outdated 
technology  and  by  insufficient  quality  standards.  The  undercapitalised  privatised  agricultural 
sector also needs substantial  restructuring. 

The competitiveness  of the sectors that have been able to compete on external markets  (mainly 
textiles, chemicals, refined  oil, and food  products) is predominantly  based  on low wage costs. 
In  the  case  of  food,  the  high  protection  level  of  the  agricultural  sector  also  plays  a  role. 
Lithuania  may  also  still  be  benefiting  from  a  somewhat  undervalued  currency,  despite  its 
uninterrupted  real  appreciation.  To  offset  the  expected  gradual  erosion  of  these  competitive 
advantages,  there  is  an  urgent  need  to  increase  productivity,  and  to  diversify  production 
towards  sectors that  are more in line with Lithuania's  natural  endowments.  Provided  the right 
economic  incentives  were in place, such a process  would  be facilitated  by the  relatively  good 
level of Lithuania's human capital and R&D activities. 

Prospects  and  Priorities 

Over  the  past  few  years, policy  has  often  been  guided  to  a  substantial  degree  by  the  need  to 
obtain  support  from  the  International  Monetary  Fund  and to focus  on  short-term  stabilisation 
issues.  The  new  government  is  developing  a  more  articulated  medium-term  economic 
strategy.  A  "1997-2000  Action  Plan"  has  been  announced,  envisaging  strict  fiscal  policy, 
incentives  to  business  and  investment  activity,  accelerated  privatisation,  stabilisation  of  the 
banking  sector  and  improvements  in  living  standards.  A new  Ministry  for  European  Affairs 
large-scale 
instituted  with  responsibilities  for  FDI  and  export  promotion, 
has  been 
privatisation and law  approximation. 

28 

The plan  designed  to  solve  the problems  in the banking  sector,  resulting  from  the  December 
1995  crisis,  has  worked  well  to  date.  The  combination  of  privatisation,  liquidation,  and 
recapitalisation,  should  be  able  to  promote  the  further  consolidation  of  the  sector. 
Nevertheless,  as  long  as  the  precarious  situation  is  not  entirely  solved,  additional  budgetary 
pressures  could  emerge,  as the  whole  sector  remains  afflicted  by  liquidity  problems  and  bad 
loans. The expected consolidation of the banking sector, as prudential ratios are being  adjusted 
towards international  standards, will require that the authorities stick firmly to their  announced 
strategies. 

The  second  stage  of  privatisation  is  designed  to  attract  buyers  with  the  necessary  skills  and 
means, seeking to increase the enterprises' profitability,  rationalise the management,  introduce 
product  innovation,  and  develop  the  future  strategy  of  business.  To  attract  sufficient  interest 
from  suitable  investors,  authorities  have  to  respect  their  commitment  to  surrender  effective 
control of the enterprises to be divested. 

In the  energy  sector,  outdated  technology,  excess  capacity,  inefficient  pricing,  weak  payment 
enforcement,  and  political  intervention,  drive  public  energy  companies  into  chronic  deficits 
and provide  little incentive for profit-driven  management  or energy conservation.  To date, the 
sector  has  always  represented  an  important  drain  on public  finances.  The  decision  to  include 
some  enterprises  from  the  energy  sector  on the privatisation  list  is an important  step  towards 
solving  the  sector's  problems.  Nevertheless,  given  the  magnitude  of  the  problems,  the 
restructuring  process  in  the  energy  sector  could  take  considerable  time,  and  could  have 
widespread effects  on other sectors if the payment of energy bills is better  enforced. 

As  long  as  Lithuania's  competitiveness  remains  intact,  and  an  acceptable  trade  balance  is 
maintained,  the  currency  board  can  continue  its  role  as  a  stabilising  factor.  However,  when 
capital  inflows  no  longer  finance  the current  account  gap, which  also  happened  in early  1996 
after  the banking  crisis, reserves fall  and the money  stock shrinks through the currency  board 
system,  thus  causing  contractionary  effects  on  the  whole  economy.  Therefore,  industrial 
restructuring  and  productivity  increases  need  to  proceed  rapidly  and  continuously,  if 
macroeconomic  balance  is  to  be  maintained.  This  will  even  be  more  the  case  when  the 
currency board is gradually removed and will no longer be able to play its stabilising role. 

Removal  of  the  currency  board  will  greatly  increase  the  discretionary  power  of  the  central 
bank  and  allow  it  to  smooth  fluctuations  in  monetary  conditions.  The  corollary  is  that 
economic  agents  need  to  be  convinced  that  these  greater  powers  will  be  used  wisely  and 
prudently, so as to guarantee continued macroeconomic  stability. 

2.3  General  Evaluation 

Lithuania  has  made  considerable  progress  in  the  creation  of  a  market  economy.  Trade  and 
prices  have  been  largely  liberalized,  and  considerable  progress  has  been  achieved  in the  area 
of macroeconomic  stabilization.  However, further  progress is needed, particularly  in the areas 
of relative price  adjustment,  large-scale  privatization,  and bankruptcy  proceedings.  The  main 
element that is still missing is the enforcement  of financial  discipline for enterprises. 
Lithuania  would  face  serious  difficulties  to  cope with competitive  pressure  and  market  forces 
within  the  Union  in  the  medium  term.  The  marked  recent  improvement  in  policy  would,  if 

29 

sustained,  accelerate  the establishment  of a market  economy  and  strengthen  competitiveness. 
However,  substantial  enterprise  restructuring  is  still  required.  Agriculture  needs  to  be 
modernized, and the banking sector is still weak. 

3.  Ability to Assume the Obligations of Membership 

The European Council in Copenhagen included among the criteria for accession "the ability to 
take on the obligations of membership, including adherence to the aims of political,  economic 
and monetary  union". 

In applying for membership on the basis of the Treaty, Lithuania has accepted without  reserve 
the  basic  aims  of  the  Union,  including  its  policies  and  instruments.  This  chapter  examines 
Lithuania's  capacity  to  assume  the  obligations  of  membership  -  that  is,  the  legal  and 
institutional  framework,  known as the acquis, by means of which the Union puts into effect  its 
objectives. 

With  the  development  of the Union, the acquis has become progressively  more  onerous,  and 
presents  a greater  challenge  for  future  accessions than was the case in the past. The ability  of 
Lithuania  to  implement  the  acquis  will  be  central  to  its  capacity  to  function  successfully 
within the Union. 

The  following  sections  examine,  for  each  main  field  of the  Union's  activity,  the  current  and 
prospective  situation  of Lithuania.  The starting-point  of the description  and analysis  is a brief 
summary  of  the  acquis,  with  a  mention  of  the  provisions  of  the  Europe  Agreement  and  the 
White  Paper,  where  they  are  relevant.  Finally,  for  each  field  of  activity  there  is  a  brief 
assessment  of Lithuania's  ability to assume the obligations  of membership  on a medium-term 
horizon. 

3.1 

Internal Market Without Frontiers 

Article 7a  of  the  Treaty  defines  the  Union's  internal  market  as  an  area  without  internal 
frontiers  in which the free  movement  of goods, persons, services  and  capital  is ensured.  This 
internal  market,  central  to  the  integration  process,  is  based  on  an  open-market  economy  in 
which competition and economic and social cohesion must play a full  part. 

Effective  implementation  of the liberties enshrined  in the Treaty requires not only  compliance 
with  such  important  principles  as, for  example,  non-discrimination  or  mutual  recognition  of 
national  regulations  - as clarified  by Court of Justice rulings  - but  also  concomitant,  effective 
application  of  a  series  of  common  specific  provisions.  These  are  designed,  in  particular,  to 
provide safety,  public health, environmental and consumer protection, public confidence  in the 
services  sector,  appropriately  qualified  persons  to  practise  certain  specialist  occupations  and, 
where  necessary,  introduction  or  coordination  of regulatory  and  monitoring  mechanisms;  all 
systematic  checks  and  inspections  necessary  to  ensure  correct  application  of  the  rules  are 
carried out on the market, not at frontier  crossings. 

30 

It is important  to  incorporate  Community  legislation  into  national  legislation  effectively,  but 
even more important  to  implement  it properly  in the field, via the appropriate  administrative 
and judicial  structures  set  up  in the  Member  States  and  respected  by  companies.  This  is  an 
essential precondition  for  creating  the mutual trust  indispensable  for  smooth  operation  of  the 
internal market. 

This  chapter  must  be  read  in  conjunction  with,  inter  alia,  the  chapters  on  social, policy,  the 
environment, consumer protection and sectoral policies. 

The Four Freedoms 

A step-by-step approach is being taken to absorption of the acquis by the candidate countries: 

-  The  Association  Agreement  between  the  Community,  its  Member - States  and 
Lithuania was signed in  1995 and is being ratified.  With regard to the four  freedoms  and 
approximation  of  legislation,  the  Agreement  provides,  in  particular,  for  immediate  or 
gradual  application  of  a  number  of  obligations,  some  of  them  reciprocal,  covering,  in 
particular,  freedom  of  establishment,  national  treatment,  free  trade,  intellectual  property 
and public procurement. 

-  The  Commission's  1995  White  Paper  (COM  (95)  163  final),  guidelines  intended  to 
help  the  candidate  countries  prepare  for  integration  into  the  internal  market,  gives  a 
closer  definition  of  the  legislation  concerned.  It  identifies  the  "key  measures"  with  a 
direct  effect  on  the  free  movement  of  goods,  services,  capital  and  persons  and  outlines 
the  conditions  necessary  in  order  to  operate  the  legislation,  including  the  legal  and 
organizational  structures.  Twenty-three  areas  of  Community  activity  are  examined, 
dividing the measures into two stages, in order of priority, to provide a work  programme 
for  the pre-accession  phase. The  Technical  Assistance  and  Information  Exchange  Office 
(TAIEX)  was  set  up  with  the  objective  of  providing  complementary  and  focused 
technical  assistance  in the  areas  of  legislation  covered  in  the  White  Paper.  A  legislative 
database has recently been established by the  Office. 

-  The candidate  countries  will have to implement  all the acquis.  The  "Action  plan  for 
the  single  market"  submitted  to  the  Amsterdam  European  Council  gives  details  of  the 
priority  measures necessary to make the single market work better between the Fifteen  in 
preparation for  introduction of the single currency.  This will inevitably entail changes to 
the acquis. 

- General  Framework 

Whatever their field of activity, undertakings must be able to operate on the basis of  common 
rules.  These  are  important  since  they  shape the  general  framework  within  which  economies 
operate  and,  hence,  the  general  conditions  of  competition.  They  include  the  rules  on 
competition  (on  undertakings  and  State  aid)  and  tax  measures  discussed  elsewhere  in  this 
opinion,  the  opening-up  of  public  works,  supply  and  service  contracts,  harmonisation  of  the 
rules  on  intellectual  property  (including  the  European  patent),  harmonisation  of  the  rules  on 
company  law  and  accountancy,  protection  of  personal  data,  transfer  of  proceedings  and 
recognition of judgments (Article 220 EC conventions). 

31 

Descriptive  Summary 

A  new  law  on  Public  Procurement  was  adopted  by  the  Lithuanian  Parliament  in  1996.  This 
new law is intended to cover all types of procurement and governs the procedure for the award 
of  contracts  in  all  sectors, provided  that public  funds  are  used.  A  Public  Procurement  Office 
has  been  established  to  be  in  charge  of  managing  the  various  aspects  of public  procurement 
policy and supervising enforcement  of legislation. 

In the  area  of  industrial  property,  new  Laws  on patents, trade  marks  and  designs  have  been 
adopted in  1992 and  1993. The Civil Code regulates intellectual property. A new draft  Law, in 
compliance with the  acquis, is expected  during  1997. The trade related  aspects  of  intellectual 
property  rights  (TRIPs)  will  be  applicable  to  Lithuania  upon  its  accession  to  WTO  (World 
Trade Organisation). 

Company  law  is  governed  by  a number  of  statutes.  Several  different  types  of  enterprises  are 
provided for, including public and private limited companies and investment companies. As of 
3  June  1996  there  were  approximately  32,000  companies  registered.  Public  companies  may 
issue shares and  stock financing of companies  is common.  Shareholders  are protected  by  law. 
Minimum  capital  requirements  are  laid  down  by  law,  and  there  are  safeguards  to  protect  a 
company's  authorised  capital.  There  are  particular  obligations  relating  to  the  protection  of 
creditors.  Companies  are  obliged  to  publish  information  regarding  important  developments 
and a central register is kept with details of each company. The public is entitled to consult the 
register on payment of a basic fee. 

A  Law  of  Principles  of  Accounting  (1992),  different  decrees  and  notes  provide  the  basic 
framework  for  the  annual  accounts  of  companies.  Professional  requirements  for  auditors  are 
issued by the Ministry  of Finance. An Institute of Audit  and Accounting  was created  in  1996. 
The Institute will assist in preparing national accounting rules and it will be responsible for the 
training of auditors and professional  examinations. 

Lithuania  adopted  a law on the protection  of personal  data  on  11 June  1996.  This  sets up  an 
authority  empowered  to  check  that  personal  data  are  handled  properly  but  contains  no 
provisions on its statutes, organisation or powers. 

Current and Prospective  Assessment 

this 

legislation  does  not  apply 

The  Lithuanian  legislation  contains  the  essential  features  of  EC  public  procurement  rules. 
However, 
the  sectors  of 
telecommunications,  transport,  energy  and  water.  Moreover,  the  new  Law  still  maintains  a 
national preference  system. The review procedures established  seem to be in line with most of 
the requirements  of the EC rules. The Lithuanian  authorities  intend to  adopt new measures to 
ensure  that their  rules  are  fully  compatible  with the  Directives  by the  end  of  1998. It  appears 
in  general  that  Lithuania  is  heading  in  the  right  direction,  although  the  process  of 
approximation has not been completed. 

to  entities  operating 

in 

Lithuania  must  make  a  big  effort  on  adopting  and  implementing  intellectual  and  industrial 
property  legislation  to bring  its  laws  into  line with  the acquis.  This  legislation  is expected  in 

32 

1998.  A  management  organisation  has  started  to  collect  fees.  A  smaller,  but  nonetheless 
significant,  effort  must  also  be  made  on  industrial  property.  The  inexperience  of  the  Patent 
Office  staff raises doubts about effective  implementation of these laws in the medium term. 
On the basis of information  on company  law provided by Lithuania, its legislation  appears  to 
be  largely  consistent  with  the  First  and  Second  Directives,  and  legislation  to  bring  the 
remainder in line is intended to be adopted in  1997. The provisions of the Third, Eleventh and 
Twelfth  Directives  are  also  for  the  most  part  already  reflected  in  Lithuanian  law.  It  is 
understood  that  additional  legislation  to  align  Lithuania's  laws  fully  with  the  acquis  is 
intended to be adopted in 1998. 

The  1992  accounting  law  meets  most  of  the  requirements  of  the  4th  Directive,  but  some 
revisions  are  needed  to  bring  it fully  into line. Rules  for  consolidated  accounts  implementing 
the  7th  Directive  are  under  preparation  and  are  scheduled  to  be  adopted  before  the  end  of 
1997.  It  is  also  intended  to  modify  the  existing  law  and  decrees  to  make  the  regulatory 
framework  more  easily  accessible. The present professional  requirements  for  auditors need  to 
be adapted in order to comply with the 8th Directive, but no draft  to this effect  is yet available. 
Certain  transitional  problems  are  in  evidence  relating  to  the  practical  implementation  of  the 
new  rules,  including  a  shortage  of  qualified  accountants  and  auditors  which  requires  major 
efforts  in the medium term. 

The  1996  law  on  data  protection  is  clearly  based  on  the  Community  framework  Directive. 
However,  improvements  will  have  to  be  made  to  bring  it  fully  into  line  with  the  Directive. 
The  Commission  has  no  information  on  implementation  of  the  law,  particularly  on  the 
establishment  of  a monitoring  authority,  nor on the  secondary  legislation  provided  for  by  the 
1996 law.  There  are no immediate plans to accede to Council  of Europe  Convention No  108 
for the protection of personal data. 

Although  Lithuania  has  not  been  invited  to  accede to the  Lugano  Convention  on jurisdiction 
and the enforcement  of judgments  in civil and commercial matters, it intends to modernise  its 
civil code and civil law procedures. 

Conclusion 

The  process  of  approximation  in  the  field  of  public  procurement  needs  to  be  strengthened. 
Further  amendments  will  be  needed  to  meet  all  the  requirements  of  the  public  procurement 
directives. 

Lithuania  must  make  a  big  effort  on  adopting  and  implementing  intellectual  and  industrial 
property  legislation  to  bring  its  laws  into  line  with  the  acquis.  A  smaller,  but  nonetheless 
significant,  effort  must also be made on industrial  property. 

As  far  as  company  law  is  concerned,  no  major  problem  is  envisaged  with  Lithuania's 
implementation  of the  acquis  and  there  is no reason  at present  to  question  its  ability  to  meet 
the timetable  set for  bringing its legislation fully  in line. For accounting, legislation  alignment 
in the medium term is not expected to present a problem, but implementation  could pose more 
persistent  difficulties.  In  auditing,  the  information  provided  does  not  represent  a  sufficient 
basis  on  which  to  make  a  detailed  assessment  of  conformity  with  the  acquis  or  Lithuania's 
prospects of achieving this in the medium term. 

33 

Lithuania has made progress on data protection. Nevertheless further  efforts  are still needed to 
bring the legislation into line with the framework  Directive. 

- Free Movement of Goods 

Free  movement  of  goods  can  be  achieved  only  by  removing  measures  which  restrict  trade  -
not  only  customs  duties  and  quantitative  restrictions  but  all  measures  with  equivalent,  i.e. 
protectionist,  effect,  irrespective  of whether  or not they are specifically  aimed  at  domestic  or 
imported  products.  Where  technical  standards  are  not  harmonised,  the  free  movement  of 
goods  must  be  ensured  by  applying  the principle  of mutual  recognition  of  national  rules  and 
accepting  the rule that national  specifications  should  be no more  stringent  than  is required  to 
achieve their legitimate objectives. This rule was established in the Cassis de Dijon judgment. 

For  the  purpose  of  harmonisation,  the  European  Community  has  developed  the  "New 
Approach" which introduces an approach carefully  balanced between  government  and  private 
autonomous  bodies  and  in  which  European  Community  legislation  and  European  standards 
play  a  distinct  complementary  role.  Thus,  instead  of  imposing  technical  solutions,  European 
Community  legislation  is  limited  to  establishing  the  essential  requirements  which  products 
must  meet.  Products  manufactured  in  accordance  with  European  standards  are  presumed  to 
meet  such essential  requirements,  but  European  standards are not the only  way to prove  such 
conformity.  The  "New  Approach"  works  in  conjunction  with  the  "Global  Approach"  on 
product certification  which governs the apposition of the "CE Mark" on the product. For other 
products  such  as  pharmaceuticals,  chemicals,  motor  vehicles,  and  food  products,  European 
Community  directives  follow  the  traditional  regulatory  pattern  of  providing  fully  detailed 
rules. 

The  free  movement  of  goods  also  dictates  that  a  number  of  Community  harmonisation 
measures  be transposed  into national  law. Implementation  of health and  safety  harmonisation 
rules  is particularly  important  and  requires  the  establishment  of  appropriate  mechanisms  and 
organisations, both for businesses and the authorities. 

Two  of  the  "horizontal"  directives  essential  to  smooth  running  of  the  single  market  are  the 
Directive  on  general  product  safety  and the  Directive  on liability  for  defective  products.  The 
regulations  concerning  general  product  safety  are  covered  in  the  section  on  consumer 
protection. 

The rules on agricultural products  (compliance with veterinary and plant-health  standards)  are 
explained in detail in the section on agriculture. 

Descriptive  Summary 

Lithuania has made  good progress towards  establishing  the conditions  for  the free  movement 
of goods which requires abolishing  all quantitative restrictions  and eliminating  discriminatory 
measures. 
It  has  already  liberalised  most  of  its  price,  trade  as  well  as  foreign  exchange 
regimes.  Except  for  some  energy,  housing,  public  transport  and  utilities  price  restrictions, 
most prices are freely  determined  by the market. The principle of mutual recognition  of  goods 
is accepted. 

34 

Regarding  technical  barriers  to  trade,  the  process  of  alignment  is  progressing.  Licenses  are 
needed  for  importation  of  alcohol/spirits,  tobacco,  cars, pharmaceuticals,  arms,  and  metals. 
The principal  objective  of this system is the protection  of  public health. For alcohol, tobacco 
and  pharmaceutical  products,  the  procedures  for  obtaining  import  licenses  is  not  entirely 
transparent and may be favouring  local producers. 

According  to  the  Lithuanian  national  approximation  plan  a  first  set  of  New  Approach 
directives  should  be  adopted  as  early  as  1997,  although  no  evidence  exists  of  substantial 
progress  in this  field.  Similarly, no information  is available  on alignment  with the rest of the 
New  Approach  directives.  Some  measures  have  been  recently  adopted  on  pharmaceuticals 
products and building materials, and progress seems underway  in the foodstuffs  sector.  In the 
chemical and automotive sectors the bulk of work remains to be done. 

In the field of standardisation a draft  law in preparation should improve compatibility  with the 
EC  system,  in  particular  as  to  the  voluntary  application  of  standards.  The  Lithuanian 
Standards  Board  (LST),  which  is  an  affiliate  member  of  both  the  European  Committee  for 
Standardisation  (CEN)  and  the  European  Committee  for  Electrotechnical  Standardisation 
(CENELEC),  is  currently  a  government-linked  body  and  is  planned  to  perform  also 
accreditation  functions.  This is at variance with EU principles.  A draft  law also  exists in the 
field of  conformity  assessment  which  seems to have  a good  degree  of  compatibility  with  the 
EC Global Approach. 

Concerning  conformity  assessment  infrastructure,  no  quality  system  certification  body  exists 
at the  moment  for  lack  of  qualified  personnel  and  financial  resources.  This  human  resources 
and  funding  issue  needs  being  addressed  as  it  affects  management  and  upgrading  of 
laboratories and certification  bodies. 

Current  and  Prospective  Assessment 

The implementation of free trade in goods between Lithuania and the EU is well advanced and 
will  be  monitored  within  the  framework  of  the  Europe  Agreement,  including  the  full 
abdication  of any quantitative restrictions or discriminatory  measures. The price  system in the 
energy  sector must be liberalised  before the time of accession. The licensing  system will  need 
to be reviewed  and, as necessary,  adjusted. 

Moreover,  while 
towards  EC 
compatibility  is  under  way,  the  process  of  approximation  of  technical  legislation  to  the  EC 
acquis needs to be further  strengthened. 

the  establishment  of  a  general  regulatory  framework 

In the  areas  subject  to  national  rules  and  not  covered  by  Community  harmonisation,  there  is 
too  little  information  available  to  assess  whether  Community  legal  principles  on  the  free 
movement  of  goods  are properly  applied  in  Lithuania.  The  reporting  procedures  which  form 
part of the internal-market  machinery are not yet operational and so  cannot be used in the pre-
accession  period.  The  most  important  instruments  in  this  connection  are:  Directive  83/189, 
requiring  governments  to  report  draft  national  technical  standards  and  regulations;  Decision 
3052/95  on  measures  derogating  from  the  principle  of  the  free  movement  of  goods; 
procedures  by which  complaints  can  be submitted  to the  Commission;  and  Article  177 of the 

35 

Treaty,  enabling  Member  States to ask  for preliminary  rulings  from  the  Court  of Justice. It is 
also hard to assess whether Lithuania complies with the principle of mutual recognition; more 
information  is required  on its national  rules, and  on administrative  practices,  which  can  have 
an effect  on product sales. 

Conclusion 

Significant  progress  has  been  made  in  a  number  of  fields.  Nevertheless,  efforts  are  still 
required,  particularly  on  the  alignment  of  technical 
legislation  and  with  respect  to 
standardisation  and  conformity  assessment  as  well  as  on  price  liberalisation  and  licensing 
requirements.  However,  provided  current  efforts  are  continued  and  technical  expertise  is 
upgraded, free circulation of goods should be achieved in the medium term. 
The  Lithuanian  authorities  should  also  ensure  that,  in  areas  not  covered  by  Community 
harmonisation,  their  own  national  laws do not hamper trade. In particular,  they  should  check 
that measures are proportionate to their objectives. 

- Free Movement  of Capital 

The  Europe  Agreement  establishes  the  principle  of  the  free  movement  of  capital  between 
Lithuania  and the EU. This, as far  as the obligations  of Lithuania are concerned, applies  from 
the  entry  into  force  of  the  Europe  Agreement  as  regards  direct  and  portfolio  investment, 
commercial  credits  and  financial  loans  made  by  companies  already  established  in  Lithuania 
and,  as  regards  branches  and  agencies  of  Community  companies  (as  well  as  the  self-
employed),  gradually  during  the  transitional  period.  According  to  the  Agreement  the  parties 
shall  create  the necessary  conditions  for  the  further  gradual  application  of  Community  rules 
on the free movement  of capital. 

The  White  Paper  highlights  the  link  between  the  free  movement  of  capital  and  the  free 
movement  of  financial  services.  It describes and  suggests  a sequence  for  the  adoption  of the 
legislation in this field, and recalls the growing significance  of free international capital  flows. 

Descriptive  Summary 

Partly due to the slow pace of cash privatisation, foreign direct investment  (FDI) inflows  have 
been  disappointingly  low,  averaging  an annual  flow  of  approximately  1 percent  of  GDP. By 
1996, the  stock  of  foreign  direct  investment  in Lithuania  reached  230  MECU.  However,  the 
flow  of  foreign  direct  investment  in  Lithuania  has  picked  up,  reaching  1 %  of  GDP  and  is 
expected  to  continue  increasing  in  the  years  ahead.  The  new  government  has  introduced  tax 
incentives  to promote  investment  (new corporate  income tax).The improved  macro  economic 
results  of  1996  are  also  likely  to  encourage  foreign  direct  investment  to  pick  up  over  the 
medium term. 

The  investment  regime  is relatively  liberal.  Companies  may  be wholly  owned  and  managed 
by  foreigners.  Profits  may  be  expatriated  freely.  Since  1996,  an  amendment  to  the 
Constitution (article 47) has allowed foreigners to own land for business purposes. 
Moreover, among the main priority areas in the Action Programme  of the new government  for 
the  1997-2000  period  is  the  establishment  of  a  more  favourable  legal  and  economic 
framework  for  long  foreign  investment.  One of  the  first  steps  towards  this  objective  was  the 

36 

establishment  in  1997  of  a  Ministry  for  European  Affairs,  which  is  responsible  for  foreign 
investment promotion, large scale privatisation and export promotion. 

Current and Prospective Assessment 

In its transition to a market economy, Lithuania has advanced considerably  in liberalising  and 
stabilising  its  economy.  The  liberalisation  of  financial  markets  and  the  freeing  of  capital 
transactions  had  stabilising  effects.  The  investment  regime  is  relatively  liberal  and  the  new 
government's  policy  to  accelerate  the  completion  of  the  privatisation  process,  is  likely  to 
attract important amounts of foreign  direct investment inflows. Higher foreign  involvement  in 
the  economy  would  also  improve  the  knowledge  by  banks  and  investment  firms  on  the 
requirements of the acquis communautaire, which should facilitate  access to the single market. 

Conclusion 

The Lithuanian government's  efforts  to liberalise its capital markets have met with  success in 
some areas.  The recommendations  of both the White Paper and the Europe Agreement  have 
largely been  implemented. 

Further  efforts  are  required  in  order  to  complete  the  liberalisation  of  Lithuania's  capital 
markets,  especially  concerning  cross  border  restrictions  on  investment  companies  but,  given 
sufficient  political will, this should not be a significant  difficulty. 
The  degree  of  capital  liberalisation  introduced  by  Lithuania  is  in  line  with  the  obligations 
undertaken  under  the  Europe  Agreement.  Lithuania  should  have  no  difficulties  in  removing 
residual restrictions  and assume the Community  acquis in the area of capital  movement  in the 
medium term. 

- Free Movement of Services 

The basis of the  free  movement  of  services  is the prohibition  of discrimination,  in particular 
on  grounds  of nationality,  and rules on the  aligmnent  of divergent  national  legislation.  These 
rules often  concern both the right of establishment, which comes under the heading of the free 
movement  of persons, and the freedom  to provide  services. Their  implementation  implies  the 
establishment  of  administrative  structures  (banking  control  boards,  audio-visual  control 
authorities,  regulatory  bodies)  and  greater  cooperation  between  Member  States  in the  area  of 
enforcement  (mutual recognition arrangements). 

A substantial  amount  of the  legislation  applicable  to the  free  movement  of  services  relates  to 
financial  services. 
It  also  concerns  the  problems  relating  to  the  opening-up  of  national 
markets in the sectors traditionally  dominated by monopolies, e.g. telecommunications  and, to 
a certain  extent,  energy  and  transport.  These  subjects  will be dealt with  in the  sections  of the 
Opinion specifically  referring to them. 

Descriptive  Summary 

The  Banking  sector  was  threatened  by  a  crisis  in  December  1995  when  several  banks, 
including  the  largest  private  bank  in the country  were declared  insolvent.  The banking  sector 

37 

remains fragile although evident signs of recovery have followed  the Lithuanian  government's 
swift  reaction. 

At  the  start  of  1997  3  banks  in  which  the  majority  shareholding  was  owned  by  the  state 
occupied  a dominant  position  in the banking  system  of the country  (65% of the  assets  of the 
operating banks and 66% of the deposits were concentrated  in them). Recently the share of the 
state owned capital has greatly increased in them, after the new program of the recapitalisation 
of banks has been started in order to meet the required capital adequacy. 

When the state is not the majority  shareholder, the share of capital is decreasing. Private banks 
have a lower market share but their situation is improving. 

The Government is now preparing the program of privatisation of the state banks. The priority 
task  is  to  privatise  the  State  Commercial  Bank  of  Lithuania,  and  the  decision  relative  to 
another  bank  must  be  adopted.  In  addition,  the  Government  in  the  near  future  will  decide 
whether  some  banks  should  be  left  under  state  control  for  the  implementation  of  some  state 
programs. 

As far  as market  access to the banking  sector  is concerned,  foreign  banks  are not  allowed  to 
set up  subsidiaries  in Lithuania. As regards foreign  branches  only one has been  authorised  so 
far.  Banks  provide  deposit  guarantees  only  to  residents  in  Lithuania.  Banking  sector 
supervisory  functions  are carried  out by the Bank of Lithuania.  Its powers are similar than  in 
Member States. 
As  far  as  the  Securities  sector  is  concerned,  a  licence  is  required  for  membership  to  the 
National  Stock  Exchange,  granted  by  the  Lithuanian  Securities  Commission,  a  body  which 
supervises the compliance with the Law on Public Trading in Securities. 

According  to  the  Law  on  Insurance,  insurance  issues  are  co-ordinated  and  supervised  by  the 
State Insurance  Supervisory Authority under the Ministry of Finance. Pursuant to the new law 
on  Insurance  of  1996  (Art.  25  &  27),  EC  insurance  companies  have  the  right  to  establish 
insurance companies in Lithuania, after  registration. 

Current and Prospective  Assessment 

As regards  Banking  many  aspects  of  the  First  Banking  Directive,  Own  Funds  and  Solvency 
Directives  have been  incorporated  into Lithuanian  banking  law. However,  legislation  on both 
deposit  guarantee  scheme  and  prevention  of  money  laundering  compatible  with  the  relevant 
EU Directives has not yet been adopted. 

While  some key  elements  of the  Second  Banking  Directive  (notably,  recognition  of a  licence 
issued  in the  EU  and the principle  of home country  supervision)  have  been  implemented  and 
the  Annual  Accounts  and  Consolidated  Accounts  Directive  have  already  been  partially 
implemented,  large  exposures  legislation  is not  yet  in full  conformity  with  EU  requirements. 
In  addition  provisions  concerning  capital  adequacy  for  market  risks  and  supervision  on 
consolidated  basis are missing. 

Since June  1996 the legal situation in principle permits foreign  banks to open branch offices  in 
Lithuania,  provided  there  is  an  agreement  between  the  Bank  of  Lithuania  and  the  home 

38 

country's  supervising  authority.  Although  measures  foreseen  in the  White  Paper  on  banking 
legislation  should  be  in  piace  by  1999, profound  structural  reforms  must  take  place.  These 
include privatisation  of remaining  state owned  banks, introduction  of  capital  adequacy  ratios 
for  market  risks  and  sound  banking  principles, which  are  essential  for  a  participation  in  the 
Single Market. 

In the Securities sector, the current legal system is not yet in line with relevant EC Directives. 
However,  the  general  framework  is  well  structured,  with  particular  regard  to  the  supervisory 
authority's powers, mainly the Securities Commission. 

In the Insurance  sector, as well, the situation  as of today must  be described  as  unsatisfactory. 
But the new insurance law adopted in 1996, which is not fully  in force yet, should improve the 
situation.  Some  of  the  Stage  I  directives  should  be  implemented  within  1997  and  the  other 
ones and those of Stage II within  1998. 

Lithuania is on the right path towards creating an insurance  supervision  system  responding  to 
free  market  requirements,  both  in  terms  of  consumer  protection,  financial  supervision  and 
foreign  EC  access.  The  remaining  obstacles  are  practical  (more  actuaries,  more  experience) 
and  financial  (higher  capitalisation  of  companies  needed)  and  could  be  overcome  in  the 
medium  term  if  the  necessary  legal  framework  will  be  completed  as  scheduled  in  the 
Government's plans. 

Conclusion 

Full  free  establishment  in  the  areas  of  banking,  securities  and  insurance  still  has  to  be 
adequately  introduced  in the sectors'  legislative frameworks  and duly implemented.  However, 
provided harmonisation proceeds as planned and banking restructuring  is carried out, no  major 
difficulties  are  foreseen  in  achieving  full  approximation  to  the  acquis  communautaire 
concerning financial services. 

But  some  doubt  may  be  cast  on  the  capacity  of  the  Lithuanian  authorities  to  implement 
quickly  the  large  legislative  programme  they  have  committed  themselves  to  achieve.  The 
example  of the  "Insurance  Law" adopted  in  1996, but not yet  fully  in operation  is a  warning 
sign in this respect. Efforts  will be needed, as far as the whole financial  sector is concerned, to 
comply with the acquis in the medium term. 

- Freedom of Movement of Persons 

The  free  movement  of  persons  encompasses  two  concepts  with  different  logical  implications 
in the Treaty.  On the one hand, Article 7a in Part  One of the Treaty  on  'Principles'  mentions 
the  concept  in. connection  with  the  establishment  of  the  internal  market  and  implies  that 
persons  are  not  to  be  subject  to  controls  when  crossing  the  internal  frontiers  between  the 
Member States. 

On  the  other  hand,  Article  8a  in  Part  Two  of the  Treaty  on  'Citizenship  of  the  Union'  gives 
every citizen of the Union the individual right to move and reside freely  within the territory of 
the Member  States,  subject  to certain  conditions.  The abolition  of frontier  checks  must  apply 

39 

to  all  persons,  whatever  their  nationality,  if  Article 7a  is  not  to  be  meaningless.  While  the 
rights  deriving  from  Article 8a  apply  in  all  Member  States,  those  stemming  from  Article 7a 
have not yet been fully  applied throughout the Union. 

a)  Free  Movement  of  Union Citizens.  Freedom  of  Establishment  and  Mutual  Recognition  of 
Diplomas and  Qualifications 

The  Europe  Agreement  provides  for  the  non-discriminatory  treatment  of  workers  that  are 
legally  employed  (as  well  as  their  families). 
It  covers  the  possibility  of  cumulating  or 
transferring  social  security  rights,  and  encourages  member  states  to  conclude  bilateral 
agreements  with  Lithuania  on access to labour markets.  From  1999, the Association  Council 
will examine further  ways of improving the movement of workers. 

The  White  Paper  considers  the  legislative  requirements  in  order  to  achieve  a  harmonious 
labour  market,  whilst  simultaneously  preventing  distortions  of 
development  of 
competition. 

the 

The  free  movement  of  workers  is  one  of  the  fundamental  freedoms  enshrined  in  the  Treaty; 
freedom  to practise  certain professions  (e.g.  in the  legal  and  health  fields)  may,  however,  be 
subject to certain conditions, such as qualifications.  Depending on the case, these may be dealt 
with  through  coordination  or  by  applying  the  principle  of  mutual  recognition.  Freedom  of 
establishment  is  also  guaranteed  under  the  Treaty  and  covers  the  economic  activity  of  self-
employed natural persons and companies. 
The  free  choice  of  place  of  residence  may  thus  be  subject  to  minimum  conditions  as  to 
resources  and  health  insurance where the person does not exercise a profession  in the  country 
concerned. 

Descriptive  Summary 

The  legal  status of  foreigners  in the  Republic  of Lithuania  is determined  by the  Law on 
Temporary  Employment  of  Foreigners  as  well  as  the  Law  on  Immigration  which 
establishes the conditions for entry for foreigners  for permanent residence. 

Foreigners can reside in Lithuania if they are issued  a visa for  a period of up to 90 days. 
Foreigners  with  special  working  visas  can  reside  in  Lithuania  for  a  period  up  to  two 
years,  renewable.  Permits  for  permanent  residence  in Lithuania  can be  granted  to  those 
holding  Lithuanian  citizenship  before  1990 and are currently  residents  and to those who 
were permanent residents before  1990 and are currently still residing. 

Regarding  mutual  recognition  of  Diplomas  and  Qualifications  the  timetable  provided  by 
Lithuania foresees  implementation  of stage  1  of the White Paper by  1997, stage 2 by  1998 and 
stage  3 by the end of  1998. The formal  transposition of the acquis has been completed  but the 
question  of  implementation  and  enforcement  needs  to  be  further  strengthened.  It  will  be 
necessary  to  establish  supplementary  structures  (bodies)  to  issue, attest  and  receive  diplomas 
and  certificates. 

Concerning  training  (where  coordinated  by Directives),  for  doctors, dentists,  midwives, 
architects,  veterinary  surgeons  and  nurses,  the  basic  training  period  seems  to  be  in 

40 

conformity.  Concerning  enforcement  structures,  ministries,  a  few  bodies  and  some 
professional  associations (mainly trade unions) exist. 

Current and Prospective  Assessment 

Lithuanian  legislation  will  need  to  be  prepared  for  the  equal  treatment  of  EU  citizens 
with  nationals  working  in  Lithuania.  Such  measures  are  foreseen  in  Article  37  of  the 
Europe Agreement. 

Transposition  of legislation is needed on the protection of data, among others, in regard of the 
definition  of  personal  data  and  the  access  to  databases.  Although  some  progress  has  been 
made,  significant  efforts  will  be  necessary  to  establish  the  required  border  control  system. 
This should be possible in the medium term. 

As regards mutual recognition of professional  qualifications, the setting up or strengthening  of 
the necessary enforcement  structures will need to be intensified  if they are to be in place in the 
mid-term perspective. 

Conclusion 

The necessary  structures  in this area are in place, but it is hard to assess their real  effect 
and enforcement.  From a technical point of view, adaptations of regulations with regard 
to the free movement of persons are feasible  in the medium term, 
(b) Abolition  of Checks on Persons at Internal Frontiers 

The  free  movement  of  persons  within  the  meaning  of  Article 7a  of  the  EC  Treaty,  i.e.  the 
abolition  of checks  on all persons, whatever their nationality,  at the  internal  frontiers  has  not 
yet  been  fully  implemented  in the  Union.  Doing  away  with  checks  on  persons  is  conditional 
on the introduction  of a large number  of accompanying  measures,  some  of which  have  yet to 
be  approved  and  implemented  by  the  Member  States  (see  separate  section  on  Justice  and 
Home  Affairs). 

However,  that  objective  has  been  achieved  by  a  limited  number  of  Member  States  in 
accordance with the Schengen Convention  (seven Member  States already  apply it and  another 
six are working towards implementation). 

The draft  Treaty  aims to make that objective easier to achieve within the Union by including a 
new  chapter  on  "an  area  of  Freedom,  Security  and  Justice"  and  incorporating  the  Schengen 
acquis into the EU. 

Lithuania  has  stated  its  desire  and  readiness  to  fulfil  the  provisions  of  the  Schengen 
Agreement to become party to the Schengen acquis.  It has begun preparations to this end and 
has  sought  assistance  in  this  connection  from  Member  States,  notably  in  regard  to  the 
strengthening of border controls. 

General  Evaluation 

41 

1.  Lithuania's  progress  in  the  implementation  of  legislation  relating  to  the  White  Paper  is 
summarised  in the  annex. According to the table, Lithuania considers that by 30 June  1997 it 
will  have  adopted  national  implementing  legislation  for  316  of  the  899  directives  and 
regulations in the White Paper. That figure  covers provisions for which Lithuania considers  it 
will  have  adopted  implementing  legislation  or  which  it  will  have  checked  for  compatibility 
with  Community  rules  and  does  not  prejudge  actual  compatibility  as  such,  on  which  the 
Commission is not able at this stage to state an opinion. 

2. Lithuania has made  some progress  towards compliance  with  Internal  Market  legislation.  It 
has in particular achieved a substantial degree of alignment with Community rules in the areas 
of company  law, accounting  law,  data protection  and,  to  a certain  extent,  in  the  area  of  Free 
Movement  of  Goods.  Most  of  the  measures  have  been  partly  implemented  according  to  the 
Lithuanian  authorities, although at this stage the Commission  is unable to judge whether  they 
are  fully  compatible  with  Community  law.  By  contrast,  serious  problems, remain  in  such 
important fields as public procurement, intellectual property and financial  services. 

3.  A  severe  problem  for  further  progress  may  be  the  weakness  of  the  Lithuanian  public 
administration,  which  affects  not  only  the  pace  of  approximation  of  legislation  but  also  the 
quality  of  its  enforcement.  Similar  doubts  must  be  raised  about  the  capacity  of  the  various 
structures  necessary  to  implement  internal  market  legislation,  but  since  the  legislation  is 
mostly  of such recent  date, and the  structures themselves  have in some  cases not yet been  set 
up, there is insufficient  evidence at this stage on which to base a definitive judgement. 
As things  currently  stand,  the  Commission  cannot  yet  express  an  opinion  on the  capacity  of 
companies, particularly small and medium-sized businesses, to implement the  acquis. 
4. Leaving aside certain  specific  aspects relating to agriculture, checks at the internal  frontiers 
of  the  Union  can  only  be  abolished  once  sufficient  legislative  harmonisation  has  been 
achieved. 

This  calls  for  mutual  confidence,  based  in  particular  on  sound  administration  (e.g.  the 
importance  of safety  checks  on  some products  at the place  of departure). As  far  as  goods  are 
concerned,  the  completion  of  the  internal  market, on  1  January  1993  was  only  achieved  by 
doing away with all the formalities  and checks performed  by the Member  States at the internal 
borders  of  the  Union.  In  particular  these  checks  covered  technical  points  (product  safety), 
veterinary,  animal-health  and  plant-health  matters,  economic  and  commercial  matters  (e.g. 
prevention  of  counterfeiting  of  goods),  security  (weapons,  etc.)  and  environmental  aspects 
(waste,  etc.). In  most  cases, the  abolition  of  checks  was  only  made  possible  by  the  adoption 
and  application  of  Community  measures  harmonising  the  rules  on movement  and  placement 
on  the  market  (particularly  as  regards  product  safety)  and,  where  applicable,  by  shifting  the 
place where controls and formalities  are conducted  within the Member  States or their  markets 
(in  particular  as  regards  VAT  and  excise  duties,  veterinary  and  plant-health  checks,  and  the 
collection  of  statistics).  A  section  of  Lithuania's  present  borders  will  become  the  Union's 
external frontier  and this means border checks will need to be stepped up (see separate  section 
on Customs). 

In view of the overall assessment that can be made of progress achieved  to date and the rate at 
which work is advancing  in the various areas concerned, it is difficult  at present to put  a time-
scale on Lithuania's  ability to take over and implement  all the instruments  required  to  abolish 
internal border checks and to transfer  those checks to the Union's external  frontier. 

42 

5.  Lithuania  has  already  adopted  significant  elements  of  the  acquis  relating  to  the  Single 
Market. However, the Commission  is not yet able to take a position  on every  measure  whose 
transposition  has  been  reported  by  Lithuania.  Further  progress  will  be  needed  with  regard 
notably  to  public  procurement,  financial  services  and  intellectual  property.  In  most  areas, 
enforcement  needs  to  be  strengthened.  Strong  efforts  will  be  necessary  with  regard  to  the 
strengthening  of  the  administration.  In  the  medium  term,  provided  considerable  efforts  are 
undertaken,  Lithuania  should  have  adopted  and  implemented  most  of  the  Single  Market 
legislation and made the necessary progress on the mechanisms of enforcement,  in order to be 
able to participate fully  in the Internal Market. 

Competition 

European  Community  competition policy derives from Art. 3 (g) of the Treaty providing  that 
the  Community  shall  have  a  system  ensuring that competition in the internal market  is not 
distorted.  The main areas of application are anti-trust and state aid. 

The  Europe  Agreement  provides  for  a  competition  regime  to  be  applied  in  trade  relations 
between  the  Community  and  Lithuania  based  on the criteria  of Articles  85 and  86 of the  EC 
Treaty  (agreements  between  undertakings/abuses  of  dominant  positions)  and  in  Article  92 
(State  aid)  and  for  implementing  rules  in these  fields  to be  adopted  within  three  years  of  the 
entry  into  force  of  the  Agreement.  Furthermoje,  it  provides  that  Lithuania  will  make  its 
legislation compatible with that of the Community in the field of competition. 

The White Paper refers to the progressive application of the above provisions and those of the 
Merger Regulation (4064/89) and of Art. 37 and 90 (Monopolies and Special Rights). 

Descriptive  Summary 

Competition  rules  applicable  to  undertakings,  where  a  new  Law  on  Competition  has  been 
drafted  in  1996, are broadly  in line with EC Law, mainly  in terms of procedural  aspects.  The 
investigative powers of the Competition Committee are, to some extent, similar to those of the 
Commission. 

The  Competition  Authority  of  Lithuania,  (State  Competition  and  Consumer  Protection 
Office)  was established  in  1995 under the  supervision  of the government.  It covers  two  main 
activities: promotion and  protection of competition/consumer  rights protection. 

Important  steps  towards  the  liberalisation  of  previously  regulated  sectors  have  been  taken 
recently.  Thus,  the  telecommunication  sector  has  been  liberalised  as  regards  terminal 
equipment,  voice telephony,  closed  user groups and the construction  and operation  of  mobile 
telephony  systems  and  satellite.  Railway  transport  is  in the  process  of  being  liberalised  and 
the energy sector seems in principle open to competition subject, however, to alicense  system. 

In  some  sectors,  such  as the  oil  sector  and  the  sector  for  beverages,  further  clarifications  are 
needed  in  order  to  assess  whether  the  state  regulation  is  compatible  with  the  Community 
acquis. 

43 

In  1997 the Government has adopted a Government Resolution for the monitoring of state  aid 
which  gives  the  power  to  control  the  granting  of  state  aid  to  the  State  Competition  and 
Consumer  Protection  Office.  The  Resolution  is based  on the  Community  state  aid  rules.  It 
provides, in particular, that all aid needs to be notified  and approved  by the State  Competition 
and  Consumer  Protection  Office  prior to its granting, that the Office  has the power  to  collect 
all  information  necessary  to  examine  the compatibility  of the  aid  and  that  the  Office  has  the 
power to adopt a negative decision  on the aid and the possibility  to go to Court  if its  decision 
is not complied with. 

In respect of the establishment of a state aid inventory further  work still needs to be done. 

Current and Prospective  Assessment 

Overall, the  substantive  provisions  of the Lithuanian draft  law on Competition  (1996)  reflect 
the  relevant  EC  rules  to  a  reasonable  degree,  and  is  oriented  towards  EC  competition  rules. 
The approximation of competition legislation process is well underway. 

Substantial  training  and  other  kinds  of  assistance  will  be  needed  in  the  future  for  the 
Monitoring  Authority  to carry  out  a credible control of state  aid in Lithuania.  The  important 
progress  made  in terms  of  approximation  of  legislation  in this field with  the  adoption  of  the 
Government  Resolution on the monitoring of state aid is welcomed. However, transparency  is 
still lacking.  An immediate priority will be the establishment of an aid inventory  based  on the 
methodology applied by the Commission in its own aid surveys. 

Certain  aid  measures  seem  to  be  contingent  upon  export  performance  which  is  clearly  not 
compatible with the Europe Agreement.  Moreover, an important part of state aid  seems to be 
granted through  indirect  forms  of state aid, such as tax reliefs,  debt write-offs  and tax  arrears. 
These  aid  measures  constitute  operating  aid  which  are  only  allowed  under  very  strict 
conditions.  Due  to  the  lack  of  transparency  it  is  as  yet  unclear  whether  the  conditions  for 
granting operating aid are complied with. 

In Lithuania state  monopolies  of commercial  character  are in place for Alcoholic  Beverages, 
Tobacco Products, Sugar and Metals and Scrap Metal sectors.  Licensing requirements  for  the 
production,  distribution  and  import  of all of these  state monopolies  will  have to be  reviewed, 
as  they  raise  concerns  over  conformity  with  the  competition  acquis,  within  the  meaning  of 
Article 37 of the Treaty. 

Licences  for  the  purchase  and  sale  of  copper  and  other  non-ferrous  metals  may  only  be 
granted  to  enterprises  registered  in  Lithuania.  The  existence  of  exclusive  rights  to  purchase 
specified  types  of  non-ferrous  metals  and  scrap  metals  raises  concerns  under  Articles  37 and 
90 (1) of the Treaty  and Article  66 and the free  movement  of goods provisions  of the  Europe 
Agreement. 

In  addition  to the  adoption  of  legislation  sufficiently  approximate  to that  of  the  EU,  credible 
enforcement  of competition  law requires the establishment  of well  functioning  anti-trust  and 
It  requires  moreover  that  the  judicial  system,  the  public 
state  aid  monitoring  authorities. 

44 

administration  and  the  relevant  economic  operators  have  a  sufficient  understanding  of 
competition law and policy. 
Conclusion 
In  the  field  of  anti-trust,  significant  progress  has  been  made  towards  satisfying 
the 
requirements  as regards approximation  of legislation. The competition  authority  needs  further 
support to carry out its activities and to ensure a wide information  of the concerned  operators 
in the market place. 

As regards state aid, the required transparency is still lacking and an aid inventory covering all 
measures  granted  by the  State, regional  or local authorities  or through  state resources,  should 
be  established  as  a  matter  of  priority.  A  considerable  effort  will  be  necessary  to  fulfil  the 
requirements  as  regards  transparency  over  the  medium  term.  Close  cooperation  with  the 
Commission in this field will be necessary. 

It  appears,  moreover,  that  in  certain  sectors  exclusive  or  special  rights  exist  which  are  not 
compatible  with  the  Community  acquis.  These  problems  should  be  addressed  in  the  near 
future. 

Innovation 
3.2 
Information  Society 
Present  Situation 
The economic  and  social effects  made possible by the combination of information  technology 
and telecommunications  are great.  In Lithuania these possibilities were neglected before  1990 
although education generally was not and awareness of their importance was high.  One result 
was the  creation  of  a Ministry  for  Communications  and  Informatics,  the  only  one  in  Europe. 
Trade data for the information  technology  sector (IT) are lacking but there are said to be three 
Pes  per  100  inhabitants  of  which  20%  are  connected  to  communications  networks. 
Nevertheless,  the  apparent  number  of  host  computers  on  the  Internet  (only  0.5  per  1000 
inhabitants),  as  a  relative  measure  of  development  towards  the  IS, suggests  that  Lithuanians 
have yet to discover the Internet  in large numbers.  The underdeveloped  state of the telephone 
network  is likely  to act as a brake on information  society  (IS) developments  for  several  years 
more. 
Conclusion 
The  underdeveloped  state  of  the  telephone  network  is  likely  to  act  as  a  continuing  brake  on 
Information  Society  developments  unless  the  growth  in  the  economy  and  investments  in 
telecommunications  greatly increase. 
Education. Training and Youth 
Articles  126  and  127  of  the  EC  Treaty  provide  that  the  Community  shall  contribute  to  the 
development  of  quality  education  and  implement  a  vocational  training  policy  aimed  at 
promoting  the  European  dimension  in  education  and  at  enhancing  industrial  adaptation  and 
the responsiveness of the labour market through vocational training policies. 
The  Europe  Agreement  provides  for  co-operation  in  raising  the  level  of  education  and 
professional  qualifications.  The White Paper includes no measures in this field. 
Descriptive  Summary 
Lithuania's  spending  on  education  amounts  to  5.5%)  of  GDP.  It  takes  22.8%>  of  the  state 
budget. 

45 

There are 2,380  schools  in Lithuania  with  537,000 pupils  and 47,000 teachers.  At  university 
level, there are  15 higher education institutions and 54,000 students. 
The  Lithuanian  government  attaches  high  priority  to  reform  of  the  educational  system,  with 
legislation in  1991 and  1993.  The reforms published are still being implemented; they include 
priority  for  teacher's  training,  new  teaching  materials  and  quality  control  and  for  higher 
education the introduction of teaching methods comparable with other European systems. 
Vocational  training  is in a transition  phase.  A draft  law on vocational  training  and  a draft  of 
the fundamental  scheme for adult vocational training and counselling are being developed. 
The  Tempus programme  has  contributed  to the achievement  of the  goals of  higher  education 
reform  and created the basis for cooperation with the EU higher education institutions. 
About  16.2  %  of  the  total  population  of  Lithuania  is  aged  between  15  and  25  (age  group 
eligible  to  the  Youth  for  Europe  programme).  Some  Lithuanian  youth  organisations  have 
been participating  in European youth activities  since  1995, in the framework of the Youth  for 
Europe programme, as a first step towards participation of Lithuania to this programme. 
Current and Prospective  Assessment 
One  of  the  most  important  elements  of  Lithuania's  accession  process  is  the  provision  of  a 
solid  background  in education  and training.  The institutional reforms  and the development  of 
curricula  should  support  education  in  those  professional  areas  which  contribute  directly  to 
accession.  The  development  of European  Studies, the introduction  of new courses  and  study 
programmes  in the field of regulated  professions,  the application  of modern technologies  and 
the establishment  of quality assurance systems are the immediate challenges of the  Lithuanian 
education  system. 
Significant  attempts have been made to reform the vocational training system.  There is a great 
need  to  develop  a  system  to  ensure  quality  in  terms  of  pedagogic  standards,  as  well  as 
management  and administration  to the vocational training  system itself.  A further  problem  is 
the  lack of legal  base for  vocational  training policy.  There  is a strong need  for  final  approval 
of the-outstanding  draft vocational training law. 
The  participation  of  Lithuania  in  Community  Programmes  in the  field  of  education,  training 
and  youth  (Socrates,  Leonardo  da  Vinci,  Youth  for  Europe  programmes)  will  have  positive 
effects  on the people concerned and represent a good preparation for  integration. 
Conclusion 
In the perspective of accession, no major  problems should be expected in these fields. 
Research and Technological Development 

Research  and  Technological  Development  activities  at  Community  level,  as provided  for  by 
the  Treaty  and  in  the  Framework  Programme,  aim  at  improving  the  competitiveness  of 
European  industry,  the  quality  of  life,  as  well  as  supporting  sustainable  development, 
environmental  protection, and other common policies. 

The  Europe  Agreement  will  provide  for  co-operation  in  these  areas,  notably  through 
participation  in the Framework  Programme.  The  White Paper  includes  no direct  measures  in 
this field. 

Descriptive Summary 

Presently  the  Ministry  of  Education  and  Science  has  the  complete  responsibility  for  scientific 
activities  in  Lithuania.  The  funds  are  allocated  directly  to  the  research  institutes  by  the 

46 

Government  upon  the  recommendation  of  the  Ministry  of  Education  and  Science  and  the 
Science Council of Lithuania. 

• 

After  the  restitution  of  independence  the  main  changes  in the  organisation  of  this  sector  have 
been the transfer of the large institutes from the Lithuanian Academy of Sciences to the Ministry 
of Education and Science and the creation of Science Council of Lithuania. Neither the nature of 
the institutes nor their method of financing has changed in a fundamental  sense. 

The current science expenditure represents about 0.5 % of GDP. 

Until  now  the  stated  objective  of  science  policy  is  to  preserve  the  operation  potential  of 
Lithuanian  science  and  to  fulfill  the  needs  of  the  economy  and  culture  of  the  country.  The 
government has still to reach consensus on a strategy. In the beginning of 1997 a commission  for 
the restructuring of the sector has been installed. 

National  priorities  are  fundamental  and  applied  research  in  the  fields  of  Lithuanian  language, 
culture,  history  and  nature;  research  of  high  international  level,  and  research  involved  in 
international  research  programmes;  applied  research  which  is  necessary  to  carry  out  the  state 
programmes  of the  development  of  Lithuanian  economy,  culture,  social  sphere,  care  of  public 
health, environmental protection. 

Regular cooperation with the European  Community started in 1992 with the 3rd Research and 
Technology  Development  Framework  Programme. 
So  far,  cooperation  was  mainly 
concentrated  on  COPERNICUS  (Specific  Programme  for  Cooperation  with  CECs  and  NIS) 
and remains low for participation in the 4th Framework Programme. 

Since  1997, the statistics on RTD are compatible with OECD standards. 

Current and Prospective Assessment 

Lithuania has a number of good, even excellent research institutions and individual  researchers, 
also  by  international  standards. Nevertheless  there  is  a need  for  further  changes  aiming  at  the 
reorganisation of institutions and replacement of central funding  by the competitive  merit-driven 
funding  system. 

Lithuania  has  recently  stated  its  interest  in  some  form  of  association  with  the  5th  Framework 
Programme. 

Conclusion 

In the perspective  of accession, no major  problems are expected  in this  field.  Accession  would 
be of mutual  benefit. 

Telecommunications 

The  objectives  of  EC  telecommunications  policy  are  the  elimination  of  obstacles  to  the 
effective  operation  of  the  Single  Market  in  telecommunications  equipment,  services  and 
networks, the opening of foreign  markets to EU companies and the achievement  of universally 

47 

available  modern  services  for  EU  residents  and  businesses.  These  are  achieved  through 
harmonisation  of  the  standards  and  conditions  for  service  offerings  the  liberalisation  of  the 
markets  for  terminals,  services  and  networks  and  the  adoption  of  necessary  regulatory 
instruments.  The  Directives  and  policies  needed  to  achieve  this  have  now  been  established, 
but the liberalisation  of public voice telephony  and operation  of related  infrastructure  will  be 
deferred  for a year or two after  1998 in certain member states. 

The Europe Agreement  provides  for  co-operation  aimed at enhancing  standards  and  practices 
towards  EC  levels  in  telecommunication  and  postal  policies,  standardisation,  regulatory 
approaches  and  the  modernisation  of  infrastructure.  The  White  Paper  focuses  on  the 
approximation  of  regulation,  networks  and  services,  followed  by  further  steps  ensuring 
gradual sector liberalisation. 

Descriptive  Summary 
A new telecommunications  law was  enacted  in  1991 which  created  the  operating  companies 
subordinate to the Ministry  of Communications  and Informatics.  In  1995 a new law removed 
the monopoly  enjoyed  by  the  national  operator,  Lietuvos  Telekomas  (LT)  by  permitting  the 
government  to  licence  other  companies.  There  are  at  least two  mobile  telephone  companies 
operating networks using the pan-European digital standard (GSM). 
The Ministry  is the  formal  regulatory  body but,  in practice, it controls  LT  and manages  most 
of the sector through its shareholders rights. 
LT  had  expanded  the  telephone  penetration  rate  to  25.4  per  100  by  the  end  of  1996.  The 
Government's  plan  (amended  in  1996) describes  its aim as eliminating  the  waiting  list by the 
year 2000 and  having  32.2  lines per  100 at that time.  Digital  access  using  the  pan-European 
ISDN  standard  is  not  planned  before  the  year  2000.  The  national  postal  operator  has  the 
exclusive rights for the delivery of letters and payment of pensions.  The sector is regulated by 
the  Communications  Law of  1995.  The  Government  is subsidising  Lithuanian  Post  to  cover 
the  deficit  of  the  letter  and  parcel  services.  The  restructuring  of  the  sector  is  not  yet  very 
advanced. 
Current  and Prospective  Assessment 
Degree of  Liberalisation 
Although Lithuania has created a liberal telecommunications  regime where the monopoly  has 
been  removed  from  the  government  controlled  public  operator  (Lithuania  Telecom-  LT)  and 
in  which  many  companies  are  providing  a  variety  of  services  there  is  still  no  effective 
competition  for  the  public  operator.  Apart  from  the  public  network,  the  markets  for 
infrastructure  have  been 
liberalised.  For  example,  CATV  networks  and  alternative 
infrastructure  can  provide  telecommunications  services.  The  markets  for  services  have  also 
been  liberalised,  with  three  competing  mobile  service  operators  (one  of  them  GSM),  50 
private CATV operators, and 32 paging operators. Data and  satellite communications  markets 
are open to competition.  Although  operators of telecommunications  services  are permitted  by 
law  to  connect  to  the  to  the  public  network,  the  conditions  set  by  LT  present  an  effective 
barrier to interconnection  in practice. The government plans to privatise LT by the year 2000. 
Approximation  to  EC Law 
In  1991,  general  legislation  for  the  telecommunications  sector  was  passed  and  the  new 
Ministry  of  Communications  and  Informatics  was  created.  Further  telecommunications 
legislation  was  passed 
in  December  1995,  providing  for  the  liberalisation  of  some 
telecommunications  services  and requiring  all companies  wishing  to  operate  such  services  on 
Lithuanian territory to be granted a licence. 

48 

In preparation  for  the privatisation  of  LT by the  year  2000  the  Ministry  of  Communications 
and  Informatics  is  planning  new  legislation  for  1998.  The  new  telecommunications  law 
planned for  1998 will establish the legal framework  in which LT will be obliged to operate. Its 
content, currently unknown, and the degree of enforcement  will dictate how quickly  Lithuania 
conforms to the acquis. In order to approximate to EU law, the new law would need to  ensure 
that the regulatory  entities  are effectively  separated from operating  entities, and  that  effective 
provisions  are made  for  interconnection  and universal  service. Although  there has been  good 
progress to  date,  it  is doubtful  if there  is  sufficient  administrative  capacity  to  implement  and 
enforce the remaining legislation needed to comply with the acquis. 
Infrastructure 

LT had expanded the telephone penetration rate from 22.0 per  100 inhabitants  in  1992 to 26.8 
per  100 by  the  end  of  1996 but  the  waiting  time  for  a new  connection  is  still  about  2 years. 
About  80%  of  the  local  switches  are  electro-mechanical  equipment  of  Russian  design  and 
these will need  either expensive modifications  or replacement  when tariff  rebalancing  will  be 
addressed. 
The  Government's  plan  (amended  in  1996)  aims  at  eliminating  the  waiting  list  by  the  year 
2Ô00 and  having  32.2 lines per  100 at that time. About  5% of the network  had  been  digitised 
in  1995 (compared  to a current average of 62.4% for Portugal, Greece and Ireland). By the end 
of  1997, fibre optic cable connections will enable fast  communication  with  all its neighbours. 
LT  has  been  purchasing  small  digital  switches  designed  and  manufactured  locally  by  the 
Sigma company  in addition to other small amounts of digital equipment from  the EU.  Digital 
access using the pan-European ISDN standard is not planned before the year 2000. 
Securing this level of investment will be difficult,  even taking into account the privatisation  of 
LT, given the low competitiveness of the public operator. 
Competitiveness  of the Sector 

Based on the GDP per capita level expressed as a purchasing power, the revenue per telephone 
line  (about  86  ecu  in  1995)  cannot  be  increased  enough  to  support  a  network  undergoing 
modernisation  of LT's present  size. Performance  as judged  by the number of employees/1000 
lines  (10.6)  is  low  relative  to  an  average  of  6.2  for  Portugal,  Greece  and  Ireland.  Tariffs 
remain  extremely  distorted  in  order  to  keep  local  service  affordable.  Lithuania  may  have 
inherited  more  lines  from  the  past  than  the  country  can  afford  to  modernise.  Without 
substantial  economic  growth,  and  substantial  further  investment,  it  will  be  well  after  2000 
before  a modern telephone  service could be universally  available  on demand,  and many  more 
years before  the penetration approaches present EU levels 
In  its  Master  Plan  for  the  year  2005,  LT  foresees  the  full  digitisation  of  the  network  and  a 
penetration rate of 40 main telephone lines per  100 inhabitants. Implementing this Master Plan 
is estimated to cost about ECU 400 million (about  1% of GDP for the period). 
Conclusion 

Subject  to  maintaining  the  current  efforts,  there  are  prospects  for  telecommunications  in 
Lithuania  to  comply  with  EC  law.  Greater  competitiveness  of the  public  operator  must  be 
achieved to attract the investment needed to modernise and face up to competition. 

Audio-visual 

49 

The audio-visual acquis aims, in the context of the Internal Market, for the provision  and free 
movement  of  audio-visual  services  within  the  EU  as well  as the  promotion  of  the  European 
programme  industry.  The  Television  Without  Frontiers  Directive,  which  is  applicable  to  all 
broadcasters  regardless  of  the  modes  of  transmission  (terrestrial,  satellite,  cable)  or  their 
private or public nature, contains this acquis, setting down basic rules concerning  transfrontier 
broadcasting.  The  main  points  are:  to  ensure  the  free  movement  of  television  broadcasts 
throughout  member  states;  to  promote  the  production  and  distribution  of  European  audio 
visual works (by laying down a minimum proportion of broadcasting time for European works 
and  those  by  independent  producers);  to  set  basic  standards  in  the  field  of  television 
advertising; to provide for the protection of minors and to allow for the right of reply. 

The  Europe  Agreement  provides  for  co-operation  in the  promotion  and  modernisation  of  the 
audio-visual  industry, and the harmonisation of  regulatory aspects of audio-visual policy. 

The Television Without Frontiers Directives is a Stage I measure in the White Paper. 

Descriptive  Summary 

Only limited information  is available concerning the situation in this field in Lithuania. 

The  legal framework  for the audio-visual  sector is determined  by the  1990 Law on  Press 
and Mass Media, the  1995 Law on Communications, and the Law on Licensing of Postal 
and Telecommunications  activities. 

The  main  television  broadcaster  is the  Lithuanian  State  Radio  and  Television  Company 
(LRT), although many private channels operate. 

State  subsidies  are  granted  to  the  Lithuanian  State  Radio  and  Television  Company  to 
encourage national film production and distribution. 

Current and Prospective  Assessment 

The  audio-visual  sector  in  Lithuania  is  attempting  to  reestablish  itself  after  major 
upheavals  in recent years, and  is characterised  by rapid  growth and constant  change.  Its 
ability  properly  to  adhere  to the  acquis presupposes  an upgrading  of the capacity  of  the 
programme-making  industry  to  meet  the  important  challenges  of  an  adapted  regulatory 
framework. 

Although  full  information  on  Lithuanian  audio-visual  legislation  is  lacking, the  analysis 
of  available  legislation  to  date  reveals  a considerable  number  of  deficiencies,  including 
questions  of  freedom  of  reception,  jurisdiction,  the  promotion  of  European  works, 
advertising and sponsorship rules, protection of minors, and the right of reply. 

Draft  laws  on  multimedia  and  broadcasting  are  currently  under  discussion  in  the 
Lithuanian Parliament.  The effect  of these Laws remains to be determined.  Prospects  for 
alignment to the acquis are consequently  uncertain. 

Conclusion 

50 

More  complete  information  is  required  on  the  evolving  legislative  situation.  However, 
provided  that the  necessary  legislative measures  are pursued  with  sufficient  urgency  and  that 
they  are accompanied  by the necessary  structural  adaptations  of the  industry,  it is  reasonable 
to expect that Lithuania should be able to meet  EC requirements in the audio-visual  sector in 
the medium  term. 

3.3.  Economic  and  Fiscal  Affairs 

Economic and Monetary Union 

By the time of Lithuania's accession, the third stage of EMU will have commenced.  This will 
mark  important  changes  for  all  Member  states, including  those  that  do  not participate  in  the 
euro  area.  All  Member  states, including  the new  ones, will  participate  fully  in  the  economic 
and  monetary  union.  Their  economic policies  will  be a matter  of common  concern  and  they 
will be involved  in the coordination  of economic policies (national  convergence  programmes, 
broad  economic  guidelines, multilateral  surveillance, excessive  deficit  procedure).  They  will 
be  required  to  respect  the  stability  and  growth  pact,  to  renounce  any  direct  central  bank 
financing  of  the  public  sector  deficit  and  privileged  access  of  public  authorities  to  financial 
institutions, and to have completed the liberalisation of capital movements. 

Accession  means  closer  monetary  and  exchange  rate  co-operation  with  the  European  Union. 
This  will  require  strengthening  structural  reforms  in the  area  of  monetary  and  exchange  rate 
policies.  Member  states  not  participating  in  the  euro  area  will  be  able  to  conduct  an 
autonomous  monetary  policy  and  participate  in  the  European  System  of  Central  Banks 
(ESCB)  on  a  restricted  basis.  Their  central  banks  have  to  be  independent  and  have  price 
stability  as their  primary  objective.  Monetary  policy  has to be conducted  with  market-based 
instruments  and  has  to  be  "efficient"  in  transmitting  its  impulses  to  the  real  economy. 
Therefore,  reforms  need to be pursued to tackle factors  that hinder the efficiency  of  monetary 
policy,  such  as  the  lack  of  competition  in  the  banking  sector,  the  lack  of  development  of 
financial  markets  and  the problem  of  "bad  loans" in the banking  sector.  Finally  all  Member 
states shall treat their exchange rate policy as a matter of common interest and be in a position 
to stabilise their exchange rates in a mechanism yet to be decided. 

As  membership  of  the  European  Union  implies  acceptance  of  the  goal  of  EMU,  the 
convergence  criteria  will  have  to  be  fulfilled  by  Lithuania,  although  not  necessarily  on 
accession.  While  the  fulfilment  of  the  convergence  criteria  is  not  a  precondition  for  EU 
membership,  they  remain  key  points  of  reference  for  stability  oriented  macroeconomic 
policies, and must in time be fulfilled  by new member states on a permanent basis.  Hence the 
successful  conclusion  of  systematic  transformation  and  market  oriented  structural  reforms  is 
essential.  Lithuania's economic situation and progress has already been analysed  in preceding 
chapters of this Opinion. 

Current  and  Prospective  Assessment 

The  Lithuanian  Central  Bank  is  largely  independent  from  the  government  in  terms  of  the 
appointment  procedure  of  the  governor  and  the  conduct  of  monetary  policy.  Its  formal 

51 

objective  is  the  stability  of  the  currency.  The  Law  on  the  Central  Bank  does  not  explicitly 
prohibit the financing of the budget deficit.  Lithuania has adopted a currency board since April 
1994 and the monetary policy conduct is severely limited by the amount of foreign  reserves in 
the central  bank  balance  sheet.  Within  the currency  board  arrangements  there  is very  limited 
scope for discretionary monetary policy or for central bank budget deficit  financing. 

Lithuania  has  always  adopted  the  "hard"  version  of  the  currency  board,  where  domestic 
liabilities were more than fully  covered by foreign  assets in the Bank's portfolio.  This strategy 
has  left  the  Bank  enough  room  for  manoeuvre  which  it  used  on the  occasion  of the  banking 
crisis of December  1995. The recovery  from  the crisis has started: most banks recorded  good 
results in  1996 and managed to improve the quality of their loan portfolio.  The government  is 
actively  pursuing  its  three-pronged  policy  based  upon  a  strengthening  of  the  regulatory 
framework,  a rapid  clean-up  of the troubled  banks' balance-sheets  and  eventual  privatisation. 
The privatisation  of two main state banks out of three is envisaged by end-September,  and the 
loan  restrictions  imposed  on the third  one have been  lifted.  A  definitive  solution  for  the  two 
private  banks  whose  insolvency  triggered  the  December  1995  crisis  may  be  approaching. 
However,  a  full  recovery  of  the  financial  system  still  has  to  be  achieved.  The  effective 
implementation of the new regulations remains to be tested and no divestiture has been carried 
out  as  yet.  As  the  fall  of  deposits  and  loans  in  real  terms  during  1996  shows,  investor 
confidence  has not yet been recovered. 

The  exchange  rate  is  fixed  (against  the  USD)  as  the  currency  board  arrangement  requires. 
There  has  been  no  significant  turmoil  on  the  foreign  exchange  market  and  the  central  bank 
was able to react  to  the  1995 banking  crisis  by raising  domestic  interest  rates  and  preserving 
the credibility of the peg. 

Gradually,  over the next two years, Lithuania has planned to abandon the  currency  board  and 
to  peg  to  the  US  Dollar  before  possibly  switching  to  a more  flexible  exchange  rate  regime. 
Hence, the Central  Bank will gradually assume the classic functions  of a modern central bank. 
At  that  moment,  the  issue  of  the  central  bank's  independence,  of  the  efficiency  of  monetary 
policy  in  stabilising  price  and  the  ability  to  maintain  a  stable  exchange  rate  will  become 
relevant. 

Conclusion 

It is premature to judge whether Lithuania will be in a position, by the time of its accession, to 
participate  in  the  euro  area;  that  will  depend  on  the  success  of  its  structural  transformation 
permitting  to  attain  and  to  adhere  permanently  to  the  convergence  criteria,  which  are  not 
however a condition of accession. 

Lithuania's  participation  in the  third  stage of  EMU  as  a non-participant  in  the  euro  area  still 
poses  problems  in  the  medium  term.  It  will  be  necessary  that  in  the  transition  from  the 
currency  board  to  the  establishment  of  a  modern  central  bank,  the  legislation  regarding 
monetary  and fiscal policy made fully  compatible with  EC rules. In particular  it is  important 
that the full  recovery of the financial  system is achieved. This will have a major  impact  on the 
future  ability  of  the  central  bank  to  efficiently  conduct  monetary  policy  actions,  based  on 
indirect  instruments. 

52 

Taxation 

The  acquis  in  the  area  of  direct  taxation  mainly  concerns  some  aspects  of  corporation  taxes 
and  capital  duty.,  The  four  freedoms  of  the  EC  Treaty  have  a  wider  impact  on  national  tax 
systems. 

The indirect taxation acquis consists primarily of harmonised legislation  in the field of  Value 
Added  Tax and excise duties.  This includes the application  of  a non-cumulative  general  tax 
on consumption  (VAT)  which is levied on all stages of production  and distribution of  goods 
and  services.  This  implies  an  equal  tax  treatment  of  domestic  and  non-domestic  (import) 
transactions.  The  VAT  acquis  also  contains  transitional  arrangements  for  the  taxation  of 
transactions within the European Union between taxable persons.  In the field of excise  duties 
the  acquis  contains  harmonised  tax  structures  and  minimum  rates  of  duty  together  with 
common rules on the holding and movement of harmonised excisable goods (including the use 
of fiscal  warehouses).  As a result  of the introduction  of the  Single Market,  all  fiscal  controls 
at the Community's  internal frontiers  were abolished in January 1993. 

The  mutual  assistance  between  Member  State  tax  authorities  is  an  important  feature  of 
administrative  cooperation  in the  Internal  Market; the respective  Directive  covers  both  direct 
and indirect taxation. 

The  Europe  Agreement  contains  provisions  on  approximation  of  legislation  in  the  area  of 
indirect  taxation. 

The White Paper  contains as Stage I measures those which make up the main requirements  of 
the  indirect  taxation  acquis  (essentially,  those  measures  applied  in  the  Community  up  to 
1993),  and  as  Stage  II  measures  those  which  are  in  addition  necessary  to  implement  the  full 
indirect taxation  acquis. 

Descriptive  Summary 

Direct  Taxation 

The two  company  Directives  and the Arbitration  Convention  provide for  a mechanism  which 
applies  on  the  basis  of  reciprocity.  Respective  provisions  can  therefore  by  definition  not  be 
expected to exist before  accession. 

Indirect  Taxation 

The  overall  contribution  of VAT  and  excise  duty revenue to the Lithuanian  state  budget  was 
about  34%)  for  VAT 
in  1995  and  about  14%  foi  excise  in  1996.  More  recent  statistics 
indicating trends in these figures  are not currently available. 

Value Added  Tax 

The current  Lithuanian  VAT  system  was introduced  in May  1994.  Lithuania  applies  a single 
VAT rate of  18%) which is applicable to all taxable transactions, including imports. 

53 

Certain  activities  are  exempt  from  VAT  without  the  right  to  claim  the  input  credit  on  such 
supplies.  These  exemptions  relate  mainly  to  activities  in  the  public  interest,  financial  and 
insurance  services.  Taxable  persons  are  entitled  to  deduct  VAT  incurred  on  their  purchases 
for  business  purposes  of  goods  and  services.  However,  the  Lithuanian  VAT  Act  does  not 
contain  any  provisions  enabling  tax  to be refunded  to  taxable  persons not  established  within 
the country. 

Lithuania applies special VAT schemes to small farmers  and supplies of second-hand goods. 

Excise 

Since April  1997, a new range of excise rates is in application  in Lithuania,  designed  to be in 
line  with  EC  requirements.  Excises  were  increased  for  tobacco,  alcohol  and  oil  products. 
Equal excise tariffs  are applied to imported as well as to domestic products.  . _ 

Mutual  Assistance 

The tax administration  has not  yet  had to  develop  its capacity  for  mutual  assistance  with  the 
tax  authorities  of  Member  States,  since  mutual  assistance  is  a  feature  which  would  only 
become applicable on accession. 

Current  and Prospective  Assessment 

Value Added  Tax 

The  current  VAT  system  in  Lithuania  has  been  based  on  the  main  principles  of  the  VAT 
legislation  of  the  Community.  However,  it  is  characterised  by  being  very  general  and 
inconsistent in its application. 

The Lithuanian  approach regarding exempt transactions deviates to a large extent from that of 
the  Community  legislation  both  in  terms  of  scope  and  substance.  Since  Lithuania  does  not 
operate  any  arrangements  for  the  refund  of  VAT  to  non-registered  foreign  taxable  persons, 
VAT represents an increased cost to such traders. 

Lithuania's  membership  of  the  European  Union  would  require  substantial  additional 
adjustments  to  bring  the  VAT  legislation  into  line  with  the  requirements  of  the  Community 
acquis,  both  in  respect  to  the  general  provisions  of  the  Community  VAT  legislation  and  as 
regards the system of taxation necessary in a Community with no internal frontier  controls. 

The  Lithuanian  national  strategy  plan  for  implementing  the  recommendations  of  the  White 
Paper regarding VAT is limited to implementing  measures for refund  schemes for tourists and 
taxable persons not established within Lithuania. 

Excise 

There remain discrepancies between the Lithuanian excise regime and  EC requirements. 

54 

There  exists  no  excise  suspension  system  where  goods  can  move  between  authorised  tax 
warehouses  without  payment  of  duty. 
In  addition,  the  registration  of  traders  for  excise 
purposes needs to be reviewed. 

In  the  event  of  accession,  any  excise  duties  remaining  on  products  not  belonging  to  the 
harmonised  excise  duties  within the  Community  could  continue to  apply  provided,  however, 
that  they  would  not  give  rise  to  border-crossing  formalities  in  trade  between  member  states 
and  that  they  complied  with  the  principles  of  non-discrimination  between  national  products 
and products originating from  other member states. 

In order to ensure a correct application of the Community  excise legislation  it is essential  that 
Lithuania  sets up  a warehousing  system based on the Community  model  as  soon  as possible, 
strengthens  control  procedures  and  adapts the structure  and  level  of  its excise  rates  in  such  a 
way that they  comply  with  the  Community  principle  of non-discrimination, between  national 
products and those originating from  other member states. 

The  Lithuanian  national  strategy  plan  for  implementing  the  provisions  of  the  White  Paper 
does  not  provide  a  clear  and  detailed  timetable  for  future  adjustments  of  Lithuanian  excise 
legislation.  A short term objective  consists of the gradual approximation of excise rates to the 
EC minimum levels.  However no full harmonisation of legislation is planned. 

Mutual  Assistance 

There  would  also  be  a  need,  on  accession,  to  implement  the  appropriate  arrangements  for 
administrative  cooperation  and  mutual  assistance  between  Member  States. 
These 
requirements are essential for the functioning  of the Internal Market. 

Conclusion 

The acquis in respect of direct taxation should present no significant  difficulties. 

As regards indirect taxation, although some progress has been made a considerable  effort  will 
continue  to be required  if Lithuania  is to comply with the acquis concerning  VAT and  excise 
duties in the medium term. 

It  should  be  possible  to  start  participating  in  mutual  assistance  as  the  tax  administration 
develops its expertise in this respect. 

Statistics 

The  main  principles  of  the  Community  acquis  relate  to  the  impartiality,  reliability, 
transparency,  confidentiality  (of  individual  information)  and  dissemination  of  official 
statistics.  In addition there exists an important bod} of principles and practices concerning the 
use  of  European  and  international  classifications,  systems  of  national  accounts,  business 
registers, and various categories of statistics. 

The Europe Agreement provides for co-operation to develop effective  and reliable statistics, in 
harmony with international  standards and  classifications. 

55 

The White Paper includes no provisions in this field. 

Descriptive  Summary 

The  Department  of  Statistics  (LDOS)  is  the  central  body  charged  with  producing  and 
disseminating official  statistics in Lithuania. 

The legal basis for Lithuanian official  statistics consists of the  1993 Law on Statistics. 

Current and Prospective  Assessment 

The Lithuanian  legislation made available for assessment to date is vague; further  information 
is required.  Issues concerning respect of the main principles of statistics  needxlarification. 

There are deficiencies  in sectors such as business statistics, capital and financial  accounts, and 
regional data. 

Conclusion 

On the basis of information  received to date, Lithuania will require a sustained  effort  if it is to 
comply with EU requirements for official  statistics in the medium term. 

3.4  Sectoral  Policies 

Industry 

EC industrial policy  seeks to enhance competitiveness, thus achieving rising living  standards 
and  high  rates  of  employment.  It  aims  at  speeding  up  adjustment  to  structural  change, 
encouraging  an  environment  favourable  to  initiative,  to  the  development  of  undertakings 
throughout  the Community, and to industrial  co-operation,  and fostering  better exploitation  of 
the industrial potential of policies of innovation, research and technological  development.  EU 
industrial  policy  is  horizontal  by  nature.  Sectoral  communications  aim  at  transposing 
horizontal  concepts  into specific  sectors.  EC industrial policy results from  an articulation  of 
instruments  from  a number of Community  policies; it includes both instruments related to the 
operation  of  markets  (product  specification  and  market  access,  trade  policy,  state  aids  and 
competitions  policy)  and  measures  related  to  industry's  capacity  to  adapt  to  change  (stable 
macro-economic  environment, technology, training etc.). 

In order to cope with competitive pressure and market forces  within the Union, the industry of 
applicant  countries  needs  to  have  achieved  a  certain  level  of  competitiveness  by  the  time  of 
accession.  The  applicant  countries  need  to  be  seen  as  pursuing  policies  aimed  at  open  and 
competitive  markets  along  the  lines  set  out  in  Article  130  ("Industry")  of  the  Treaty.  Co 
operation  between  the EU and the  candidate  countries  in the fields of  industrial  co-operation, 
investment,  industrial  standardisation  and  conformity  assessment  as  provided  for  in  the 
Europe Agreement  is  also an important indicator of development  in the right direction. 

56 

Descriptive  Summary 

Industrial  output  of  Lithuania  stood  at  around  1.2  bn Ecu  in  1995, equivalent  to  one-third  of 
the industrial production  of Luxembourg.  The transition process entaileb! a marked  decline in 
industrial  production  and  in  the  period  1990-1995  the  share  in  GDP  dropped  from  43%> to 
36%.  Industrial  production  reached  its  bottom  in  1994,  but  production  has  been  growing 
slightly since then. 

Industry  accounts  for  245,000 jobs  (21%> of total  employment).  Textiles/clothing,  food  and 
wood  processing  industries  are  the  main  employers.  The  total  number  of  enterprises  in 
industry is estimated at around 2,000of which 88% have less than 250 employees. 

Industrial  development  in Lithuania began on a large scale following  the country's  annexation 
by the USSR after  World War II (before the war 15% of the population worked in agriculture). 
During  the  Soviet  era,  Lithuania  was  specialised  in  a  combination  of  heavy  and  light 
industries,  i.e.  machine-tools,  electric  motors,  shipbuilding,  machinery  for  agriculture, 
fertilisers,  bicycles  and  TV  sets.  After  independence  and  the  loss  of  its  main  outlets  in  the 
countries  of the  former  Soviet  Union,  industrial  output  plummeted.  Some productions  such 
as  electric  motors,  TV  sets  and  fertilisers  are  holding  relatively  steady  partly  thanks  to 
continuing  exports  to  the  CIS  or/and  FDI  inflows.  However  industrial  growth  tends  to 
concentrate  on  "new"  light  industrial  sectors,  namely  food  processing,  textiles  and  clothing, 
wood processing and construction, which are relatively successful  in attracting FDI. 

Lithuanian  Industry: Main Production  Sectors in 1996 

Sector 

%-share industrial 
production 
(value added) 

%-share  industrial 
employment 

Food processing / Tobacco 

Refined  petroleum  products 
Textiles / Clothing / Leather 

Chemicals 
Non-metallic  mineral products 
Electronic engineering 
Machinery & equipment 
Transport equipment 

Electrical machinery and apparatus 
Wood processing 

Pulp / Paper / Printing / Publishing 

Furniture 
Total of the above 
Other sectors 
Total Industry 
Industrial  production  as  % GDP/ % employment 

36 

17 
14 

9 
4 
3 
3 
2 

2 
2 

2 

2 
96 
4 
100 
28 

20 

n.a. 
24 

4 
6 
5 
9 
3 

2 
6 

4 

4 
87 
13 
100 
21 

Food  processing  industry  (meat  and  dairy  products)  is the  leading  sector.  During  the  last  3 
years  it  has  been  stabilising,  which  is  also  reflected  by  the  stabilisation  of  imports  from  the 
West.  However  deep  restructuring  is  necessary  to  sustain  competitive  pressures  from  EU 

57 

companies.  Currently the average utilisation of capacity  is estimated  at 45% and the  share  of 
private  capital  at 40%.  Medium-sized  enterprises have been more  successful  in  modernising 
both  management  and  equipment.  The  development  of  the  food  processing  industry  also 
depends on the increase in standards of living. 

Oil  processing  industry  has  been  developing  again  since  1996.  Prospects  of  further 
development  should  arise  from  the  privatisation  of  the  oil  sector  in  the  Russian  Federation. 
There is a market for low quality oil products in both the Baltics and the CIS. 

The  flagship  of Lithuania  is textiles/clothing.  Despite a further  need  for  modernisation,  this 
sector  has  been  steadily  growing.  FDI  have  largely  contributed  to  this  growth.  Lithuanian 
companies  already  compete  with  the  EU.  The  biggest  privatised  companies  in  clothing 
depend  on  90  to  100%  on  outward  processing  trade.  New  technologies  have  already  been 
introduced, notably through Joint-Ventures.  The same applies to furniture.  .. 

Chemicals  has been recovering  since  1994, notably  the production  of fertilisers.  80% of  the 
production is exported. 

Construction  is developing fast essentially  in  medium-sized enterprises.  Cement is exported 
to Germany, Belgium and the Netherlands. 

Following  Turkish investment, the production of tubes for TV sets has picked up.  More  than 
80 % of this production is exported. 

Machinery  is still  declining  (the lowest  figures  were registered  in  1996) and  face  difficulties 
in  restructuring.  Like  the  defence  industry  (left  without  markets),  a  qualified  work  force 
remains. 

In  spite  of the government's  intentions  to promote  pharmaceuticals  via reduced  corporation 
taxes  and  VAT  exemptions,  the  sector  remains  small  and  under-developed.  Only  10%  of 
pharmaceuticals  consumed  in  the  country  are  produced  locally,  but  35%  of  the  production 
(low-quality  generics) are exported to CIS countries. 

The privatisation performance  is slower than originally envisaged.  In June  1995 after  the  first 
round  of  "voucher  privatisation",  only  30%  of  all  state  assets  in  industry  were  sold.  The 
second  round of privatisation  (sales for  cash through  open tenders)  is behind  schedule, due to 
the  difficulties  in  attracting  private  investment.  Yet  in  some  sectors  such  as  machinery  and 
electrical  apparatus, motor vehicles, leather products, paper  industry,  furniture,  chemicals  and 
pharmaceuticals, privatisation is already advanced. 

The  sector  with  the  most  significant  shares  of  foreign  capital  include  plastics,  wood 
processing, textiles, food processing, leather products, electrical equipment, and clothing. 

Current  and  Prospective  Assessment 

Several  indicators  support  the  assessment  that  Lithuania  is  not  yet  very  advanced  in  the 
transformation  process.  While  considerable  progress  has  been  made  in  macroeconomic 

58 

liberalisation, privatisation of large enterprises has been limited, energy pricing is still a problem 
and Lithuania's trade has less shifted to western markets than other applicant countries. 

The  underpricing  of  energy  is  probably  behind  the  fact  that  the  Lithuanian  economy  has  the 
highest energy intensity of all applicant countries.  It appears that Lithuania has so far preserved 
a  larger part  of the  energy  intensive  industries  inherited from the  Soviet regime than the  other 
Baltics.  Since growth prospects for these sectors are limited, a restructuring towards less energy 
and  more  labour  intensive  sectors (Lithuania  has the  lowest  wages  of  all  applicants)  and  food 
processing appears overdue. 

The  domestic  financial  system  cannot  yet  provide  medium  to  long  term  capital,  since 
stabilisation  is  recent  and  the  restructuring  of  the  banking  system  has  only  started  recently. 
Growth prospects are also hampered by a still inadequate framework and administrative  system 
for FDI. 

Industrial  production  should  continue  to  grow  in  the  coming  years,  even  if  the  recovery  of 
domestic  demand  remains modest.  However,  it is expected  that, by the year  2000,  industrial 
output will still only be 40% of its  1990 level. 

As  regards  privatisation,  the  government  intends  to  speed  up  the  process  and  start  the 
privatisation  of  14  state-owned  "strategic"  enterprises  of  the  telecommunications,  transport 
(including  shipyards)  and  energy  sectors,  by  the  end  of  1997,  through  international  public 
tender.  The  privatisation  of  the  national  télécoms  enterprise  was  already  launched  in  March 
1997. 

The  main  difficulty  faced  by  the  Lithuanian  industry  is  the  lack  of  long-term  finance  to 
continue  progress  towards  full  privatisation  and  restructuring.  Attracting  foreign  direct 
investment will in fact  be one of the main responsibilities of the Minister for European  Affairs 
in  the  newly  appointed  government  (December  1996).  The  government  estimates  that  six 
years will be required to complete industrial  restructuring. 

Conclusion  for  Industrial  Competitiveness 

Provided  that  current  positive  trends  in  restructuring  and  privatisation  continue,  in  the 
medium  term  most  of  Lithuanian  industry  should  be  able  to  cope  with  the  problems  of 
integration within the European single market. 

An evaluation of the acquis specific to the free circulation of industrial goods is to be found  in 
the separate section on the internal market. 

Agriculture 

The Common  Agricultural  Policy  aims to maintain  and develop a modern  agricultural  system 
ensuring  a  fair  standard  of  living  for  the  agricultural  community  and  the  supply  of  food  at  a 
reasonable  price  for  consumers,  and  ensuring  the  free  movement  of  goods  within  the  EC. 
Special  attention  is  given  to  the  environment  and  rural  development.  Common  market 
organisations  exist  to  administer  the  CAP.  These  are  complemented  by  regulations  on 
veterinary  health,  plant  health  and  animal  nutrition  and  by  regulations  concerning  food 

59 

hygiene.  Legislation also exists in the area of structural policy, originally developed  primarily 
to  modernise  and  enlarge  agriculture,  but  more  recently  with  an  increasing  emphasis  on  the 
environment,  and the regional differentiation  of the policy.  Since reforms  in  1992, increasing 
contributions  to  farm  support  have  come  from  direct  aid  payments  compensating  cuts  in 
supports prices. 

The  Europe  Agreement  provides  the  basis  for  agricultural  trade  between  Lithuania  and  the 
Community  and  aims  to  promote  co-operation  on  the  modernisation,  restructuring  and 
privatisation  of Lithuania's  agriculture  sector  as well  as the  agro-industrial  sector  and  phyto-
sanitary  standards.  The  White  Paper  covers  the  fields  of  veterinary,  plant  health  and  animal 
nutrition  controls,  as  well  as  marketing  requirements  for  individual  commodities.  The 
purpose  of  such  legislation  is to protect  consumers, public health  and  the  health  of  animals 
and plants. 

Descriptive  Summary 

Agricultural  Situation 

The  value  of  the  agricultural  production  in  1995  was  approximately  0.12%  of  that  of  the 
Union. 

After  a  sharp  fall  in the  beginning  of,  the transition  period,  the  contribution  of  agriculture  to 
total  GDP  has  stabilised  and  accounted  for  9.4%  of  GDP  in  1995.  In  1996  the  share  of 
agriculture  in  GDP  increased  to  11.4%, mainly  because  of  good  grain  harvests.  Agriculture 
maintains  a  very  important  place  in  the  country's  economy,  with  a  share  in  national 
employment  increasing  from  18% in  1990 to  24%  in  1995  reflecting  the  lack  of  alternative 
employment.  Of the 6.53 million ha of total land, the agricultural  areas equals 3.5  Million ha. 
Arable land represents  84% of total agricultural area. 

The restitution of ownership rights or the payment of compensation in cash or kind formed  the 
cornerstone  of  land  reform  in  Lithuania.  At the  end  of  1996, land  ownership  titles  had  been 
restored  to  only  250,000  farmers  but  the  documentation  was well  advanced  for  many  others. 
The  process  of  privatisation  resulted  in  the  establishment  of  almost  400,000  private 
"household"  plots  with  an  average  size  of  2.1  hectares  and  135,000  individual  farms,  which 
averaged  8.4  hectares.  The  individual  farms  account  for  34% of  agricultural  land.  This  has 
led  to  fragmentation  not  only  of  ownership  but  also  of  operation  since  many  small-scale 
private  farms  were  created  that  were  unlikely  to  provide  sufficient  income  for  full-time 
farmers. 

Almost  one-third  of  the  agricultural  land  (1.2  Mio  ha)  in  Lithuania  is  farmed  by  agricultural 
companies  (Bendrove).  These  entities  have  the  legal  status  of  private  limited  liability 
companies, but under current legislation cannot acquire ownership titles to the land they work. 

Agricultural  companies  are  not  only  involved  in  agricultural  production,  but  are  also  often 
engaged  in  processing  activities  and  retailing  through  a  network  of  retail  shops.  The 
development  of  this  closely  related  chain  involving  production,  processing  and  retailing  has 
resulted  in  increased  competition  for  the  remaining  monopolies  in  the  food  processing  and 
distribution sectors. 

60 

There  were  2,000  agricultural  companies  in  existence  at  the  beginning  of  1997,  but  that 
number is likely to decline in the near  future. 

The  loss  of  markets  in  the  former  Soviet  Union,  the  fall  in  domestic  consumption  and  the 
gradual adjustment  to the new economic environment, all combined to bring about a sharp  fall 
in Lithuania's agricultural production, which shrank by 50% during the transition period.  The 
worst  hit  activity  was  livestock  production,  which  declined  by  over  50%,  while  crop 
production fell by more than 40%. 

Agricultural  partnerships  account  for  45% of  grain production,  half  of  sugar  beet  production 
and possess  60% of cattle and  54% of pigs.  Household plots on the other hand produce two-
thirds  of  potatoes,  60%  of  vegetables  and  have  51% of  dairy  cows.  Private  farms  produce 
some 30%> of arable crops but have a very low share of the livestock  sector. 

Lithuania  is  self  sufficient  (1995)  in  many  products  (milk;  1.8  Miot;  163%; beef  meat 
87,000t;  106%;  vegetable:  121%, but  not  for  cereals  (2.5  Miot;  83%)  and  pigmeat 
(93,000t; 93%). 

The  processing  industry  has  been  privatised  to  a  certain  extent,  but  30%  of  most  sectors 
remain  in  state  hands.  While  part  of  the  downstream  food  processing  sector  continues  to 
function  under monopolistic  arrangements, a more competitive environment  has developed  as 
a  result  of  food  imports  and  the  activities  of  the  new  processing  and  distribution  plants 
In  1995,  the financial* situation  in  the  food 
established  by  the  agricultural  companies. 
processing sector remained weak, with a high level of debts in the food  industry. 

With regards to trade, Lithuania is dependant  on export revenues, since its domestic market  is 
small.  Agricultural  and  food  products  continue  to  account  for  a  large  share  of  Lithuania's 
total trade (1995: 18%).  In  1995, EU accounted for  61% of Lithuania's  imports and 30.5% of 
its  exports  for  this  sector.  However,  Russia  remains  a  significant  trading  partner,  taking 
almost  half  of  its  food  exports  in  1995.  Trade  with  other Newly  Independent  States  of  the 
former  Soviet Union, which had been negligible in the early transition  years, has increased  in 
recent years. 

Agricultural  Policy 

The  PSE  (Producer  Subsidy  Equivalent)  calculated  by the  OECD  was  3% in  1995  compared 
to 49% in the EU. 

As  part  of  its  agricultural  policy,  the  "National  agricultural  development  program"  was 
established  by  the  Government  in  1994  in  order  to  co-ordinate  government  support  and  to 
stabilise farm  income.  It intends to provide low interest credits and to support the  agricultural 
sector in research, education and training. 

Under  the  provisions  of  the  1994  Law  on  the  State  Regulation  of  Economic  Relations  in 
Agriculture,  minimum  purchase  prices, purchase  quotas,  input  subsidies,  direct  payments  for 
less  favoured  areas, export  subsidies, and  subsidies  for  storage  have  been  introduced  in  1995 

61 

for the main agricultural products.  Minimum  support prices were set so as to provide a  "floor 
price" for producers. 

However,  the  Government  has no  institutional  mechanisms  for  enforcing  minimum  purchase 
prices  and  totally  relies  on  competition  among  processors  to  ensure  that  producers  receive 
these minimum prices.  The subsidies are then paid directly to the processing industry to keep 
consumer prices lower than they would otherwise be. 

The change in government of December  1996 has resulted in a reorientation of the agricultural 
policies.  The  objective  of  the  policies  is  to  support  the  development  of  a  competitive  farm 
sector.  The  main  trend  is  to  gradually  abolish  consumer  price  subsidies  currently  applied 
through subsidies to the processing  industry  and to support farm  incomes through  application 
of support prices for main agricultural products, direct payments and investment  support. 

In  1995, about  10% of  the  national  budget  was  spent  on  agriculture.  About  50%  (ECU  23 
million  in  1995)  of  the  agricultural  budget  was  spent  on  price  support  measures  for 
commodities,  such  as  milk,  grain  and  beef/pig  meat.  Direct  payments  and  soft  credits  are 
administered  through  funds  such  as  the  "Farmers  Support  Fund",  which  invests  in  rural 
infrastructure  projects.  27  million  Litas  (ECU  5.16  million)  were  spent  on  export  subsidies 
mainly  for the dairy and pig sectors and  13.8 million Litas (ECU 2 million) on aid to  farming 
in less favoured  areas.  Since the beginning of  1997, funding  for agricultural  support has been 
concentrated  in a single fund through the Rural Support Fund. 

In terms of price support measures, agricultural  prices are significantly  lower than  EC prices. 
Milk  and  beef  prices  were  30-35%  of  EC  average,  while  wheat  and  pig  meat  prices  are 
relatively high, about 70-80% of  EC prices in 1995. 

With  the  reorientation  of  agricultural  policies,  increasing  attention  is  given  to  rural  and 
structural  development  policies.  56% of the  Lithuanian  population  live  in  rural  areas.  From 
1992 to  1995, it  allocated  ECU  16 million  for  infrastructure  assistance,  2 MECU  were  used 
for  covering  part of farmers  interest payments  on equipment  and to cover running  production 
costs.  Support  in  less  favoured  areas  is  allocated  according  to  soil  quality  (must  be  one 
quarter below average productivity). 

It  aims  to  compensate  for  income  losses  due  to  natural  handicaps.  In  1995, 2  MECU  were 
spent on the programme. 

The  Free  Trade  Agreement  between  Lithuania  and  the  European  Community  entered  into 
force  on  1  January  1995.  Reciprocal  agricultural  concessions  are  included.  Community 
concessions were improved in 1996. 

Since  April  1995,  Lithuania's  border  protection  policy  is  based  entirely  on  a  differential 
system  of  tariffs  which  distinguishes  between  conventional,  preferential  and  autonomous 
tariffs.  Protection ranged from  5% for olive oil (no domestic production) to 87% for grain and 
35%  for  refined  sugar.  Higher tariffs  are applied  on processed products  like  sugar  and  butter 
in order to protect the domestic processing  industry. 

62 

Lithuania  is  also  a  member  of  the  Baltic  Free  Trade  Agreement;  since  January  1997  this 
includes agricultural products - Lithuania is now negotiating membership of the WTO. 

Lithuania is beginning to introduce the legislation identified  in the White Paper. 

In December  1996, the Ministry of Forestry has been merged with the Ministry of Agriculture 
and  an  overall  restructuring  of  the  services  has  taken  place  with  the  aim  to  concentrate 
responsibility  while  at  the  same  time  favouring  the  decentralisation  of  the  implementation 
aspects  of  agricultural  policy.  The  "organisational  infrastructure"  of  agriculture  is  not  well 
developed  in Lithuania,  and  there  are  several  agricultural  producers  associations,  such  as  the 
Chambers  of  Agriculture,  the  Association  of  Agricultural  Companies,  the  Union  for  Family 
Farmers, and the Association  for  Landowners.  The food  industry  has also  become  organised 
into sectional lobby groups. 

Current and Prospective  Assessment 

One  of  the major  problems  which  Lithuania  will  face  over the next  few  years  is the  issue  of 
completing  land registration.  At the present rate, the establishment  of full  ownership titles is 
likely to take up to ten years to complete.  Indeed, the unresolved  issues  of restitution  claims 
and  ownership  patterns  are blocking  the  development  of  a  functioning  "land  market".  As  a 
consequence,  farm  investment,  which  is  essential  for  modernising  agriculture,  is  not  taking 
place either due to the unavailability of mortgage credit. 

The  industries  suffer  from  overcapacity,  outdated  equipment  and  high  indebtedness. 
Moreover,  most  plants  do not meet  EC quality  and hygiene  standards  and  are  consequently 
not able to export to the  EC market.  However 2-3 poultry  farms  are expected  to obtain  EC 
hygiene  certification  soon.  This  sector  faces  problems  of  increasing  competition  due  to 
liberalisation  of  trade  policies  and  growing  imports.  Overall,  while  part  of  the  agro  food 
processing  sector  continue  to  function  under  monopolistic  arrangements,  a more  competitive 
environment  has  developed  as  a  result  of  food  imports  and  the  activities  of  new  processing 
and distribution plants established by agricultural companies. 

There  are  a  number  of  impediments  to  agricultural  policy-making  in  Lithuania,  at  least  as 
regards medium-term  policy goals.  For example, alternative markets for agricultural  products 
are  limited  because  of  quality  requirements,  and  strong  competition  from  other  CEECs. 
Despite the liberalisation of domestic retail prices, most commodity prices in Lithuania remain 
substantially  below world market prices. 

Over the next few  years, Lithuania will not have sufficient  public funds  to support  agriculture 
in any  significant  way  and foreign  currency  constraints will  continue to  limit  imports  of  feed 
grains and other essential inputs. 

It appears to be  in the process of establishing  a more structured  agricultural  policy,  including 
price  support  mechanisms,  structural  and rural  development  measure.  While  some  elements 
the  main  market  policy 
of  the  current  policies  have  some  resemblance  with  EC  policies, 
instruments  applied  in  the  EC  are  not  applied  in  Lithuania.  This  includes  key  instruments 
such  as  dairy  quotas,  key  features  of  the  arable  crop  schemes  (base  area,  set-aside, 

63 

compensatory  payments  and  premia  in  the  livestocks  sector),  as  well  as  certain  rural  and 
structural development programmes. 

these  measures  would  require  relatively  sophisticated 
Management  and  control  of 
administrative 
cattle 
land 
identification/registration  systems.  As a general  observation, it is clear that the administrative 
capacity  would  need  to  be  further  developed  in  these  areas  if  these  measures  were  to  be 
applied in Lithuania. 

appropriate 

including 

systems, 

register 

and 

an 

It  is  difficult  to  foresee,  at  this  stage,  what  will  be  the  development  of  agricultural  support 
prices  in  Lithuania  in  the  period  before  accession;  this  will  depend  on  a  number  of  factors 
including  the  domestic  economy,  the  situation  on  export  markets  and  the  development  of 
price supports levels in the Union. 

Although  progress  has  been  made  in  adapting  rural  and  structural  policies,  a  number  of 
policies and input subsidies appear to be inconsistent with EC policies.  A detailed  analysis of 
eligibility criteria is needed to fully  assess compatibility with EC measures. 

Lithuania is introducing the legislation identified  in  the White Paper. 

In the veterinary  field  adaptation  of Lithuanian  legislation  is in an early  stage  of  preparation. 
Although  legislation  appears  to  be  adequate  for  the  purposes  of  assuring  public  and  animal 
health  in Lithuania,  important  differences  exist between  their  legislation  and the  acquis.  The 
testing  and  diagnostic  facilities  are  still  inadequate  for  Community  veterinary  control.  The 
system of registration of holdings and identification  of animals will need to be adjusted  to the 
EC systems.  Substantial legislation in the field of animal nutrition also needs to be adopted. 

Moreover,  harmonisation  of  legislation  is  needed  in  areas  of  plant  protection  products, 
pesticide  residues,  organic  farming,  seeds  and  propagation  material  as  well  as  plant  health. 
The  control  and  inspection  arrangements  for  plant  health  need  to  be  strengthened  to  ensure 
appropriate levels of protection. 

Conclusion 

Substantial  sustained  efforts  of alignment  to the  acquis  are still necessary,  although  progress 
has been made in adopting the measures mentioned in the White Paper. 

Particular efforts  are needed in relation to : 

- 

the  implementation  and  enforcement  of  veterinary  and  phytosanitary  requirements  and 
upgrading  of  establishments  to  meet  EC  standards;  this  is  particularly  important  with 
regard to the inspection and control arrangements for protecting the EU  external border; 

-  strengthening  of the administrative structures to ensure the necessary capacity to  implement 

and enforce  the policy  instruments of the CAP; 

- 

further  restructuring of the agro-food  sector to improve its competitive  capacity. 

64 

Since only  a limited  number  of the mechanisms  of the common  agricultural  policy  presently 
exist,  a fundamental  reform  of the agricultural  policy will be needed,  and  a  substantial  effort 
will be necessary to prepare for accession in the medium term. 

Fisheries 

The  Common  Fisheries  Policy  includes  common  market  organisations,  structural  policy, 
agreements  with  third  countries,  management  and  conservation  of  fish  resources,  and 
scientific  research in support of these activities. 

The  Europe  Agreement  includes  measures  concerning  trade  in  fisheries  products  with  the 
Community  and  provides  for  co-operation.  The  White  Paper  includes  no  measures  in  this 
field. 

Descriptive  Summary 

Total  employment  in  the  fishery  sector  in  Lithuania  reached  3,510  in  1996  as  opposed  to 
10,261  in  1992.  In  1995, the  total  catch  was  about  54,000t  and  its  value  about  48  million 
ECU.  Klaipeda  State  Sea Port (main port), Nida and Sventoji  are regions that mostly  depend 
on fishing. 

The  ocean  fleet  was  comprised  of  57  vessels  in  1996  which  caught  33,000t  (down  from 
109,000t  in  1993)  valued  at  32  million  ECU.  About  40% of the  ocean  and  Baltic  fleets  are 
over  20  years  old.  The  Baltic  fleet  consisted  in  1996  of  70  vessels  and  150  smaller  boats 
which caught 20,000t (up from  7 OOOt in 1993). 

In  1996, 54 processing companies employed an average total of 2050 people. Total  production 
has decreased between  1993-1996, owing to a drastic drop in frozen products. 

As  a  trading  partner  of  the  Community,  Lithuania  represents  0.09%  of  EC  total  imports 
(independently  of  origin)  of fisheries  products  and  3.6%  of  EC  imports  of  fisheries  products 
from  the  candidate  countries  alone  (in  terms  of  value).  As  regards  EC  exports,  Lithuania 
imports  0.34%  of  EC  total  exports  of  fisheries  products  and  4.1% of  our  exports  of  these 
products to CECs candidate countries (in terms of value). 

Management  of the fishing  resources in the Baltic is currently  accomplished  between  EC and 
Lithuania  in  the  framework  of  a  common  body  -  the  International  Baltic  Sea  Fishery 
Commission  (IBSFC).  Lithuania  has  concluded  fisheries  agreements  with  Faeroe  Islands, 
USA and Canada.  The latter texts do not provide for the exchange of quotas. 

Current  and  Prospective  Assessment 

Lithuania's  fisheries  production  and  foreign  trade  data,  when compared  to  the  corresponding 
EC  figures,  are  quite  low  and  therefore  they  should  not  have  a  significant  impact  upon  the 
Community  as a whole, in the medium term. 

65 

The changeover from state to private ownership of structures has already made some progress. 
However,  although  the adaptation  period  is far  from  over,  it can be seen that the break-up  of 
the ocean fleet has had a profound  effect  on all branches of the sector.  Whether the sector can 
check its decline before  accession is uncertain but it is clear that assistance will be required to 
deal with the aftermath  of this decline and the modernisation of the whole industry. 

According  to  the  data  available  as  regards  fisheries  agreements  concluded  and  Lithuania's 
membership to  international  or regional  fisheries  organisations, no major  problems  should  be 
expected. 

The reduction of the fleet  capacity  and the modernisation  of the whole sector will become the 
main issues. 

It  will  be  necessary  for  Lithuania  to  establish  a  fisheries  administration  with  corresponds  to 
the  Community  requirements  of  managing  fishing  stocks,  fishing,  fish  processing  and  fish 
trade, and which is capable of collecting data and co-ordinating the necessary  restructuring. 

Conclusion 

Significant  efforts  are  needed  to  adapt  the  sector  for  accession.  The  integration  of  the 
Lithuanian fisheries  sector into the Common Fisheries policy will not cause major  problems. 

Energy 

Main  EU  energy  policy  objectives,  as reflected  in  the  Commission  White  Paper  "An  energy 
policy  for  the  EU"  include  enhancement  of  competitiveness,  security  of  energy  supplies  and 
protection  of  the  environment.  Key  elements  of  the  energy  acquis  comprise  of  Treaty 
provisions  and  secondary  legislation  particularly  concerning  competition  and  state  aids, 
internal  energy  market  (including  directives  on  electricity  ,  price  transparency,  gas  and 
electricity  transit,  hydrocarbons  licensing,  emergency  response  including  security  stock 
obligations,,  etc.),  nuclear  energy,  as  well  as  energy  efficiency  and  environmental  rules. 
Development  of  Trans-European  Energy  Networks  and  support  for  energy  R&D  are  other 
important  elements  of energy policy.  Ongoing  developments  include  liberalisation  of the gas 
sector, energy efficiency  acquis and the Auto-oil programme. 

In  the  field  of  nuclear  energy,  the  Community  acquis  has  evolved  substantially  from  the 
original  EAEC  Treaty  to  a  framework  of  legal  and  political  instruments,  including 
international  agreements.  At  present,  it  addresses  issues  of  health  and  safety,  including 
radiation  protection,  safety  of  nuclear  installations,  management  of  radioactive  waste, 
investment  including  EURATOM  financial  instruments,  promotion  of  research,  nuclear 
common market, supplies, safeguards, and international relations. 

The Europe Agreement provides for co-operation to develop the progressive integration of the 
energy  markets  in  Europe  and  includes  provisions  on  assistance  within  the  related  policy 
areas.  The  White  Paper preparing  CEECs for  the  internal  energy  market  underlines  the  need 
for  full  application  of  key  internal  market  directives  in  combination  with  EC  competition 
law.  As  to  the  nuclear  sector,  the  White  Paper  refers  to  nuclear  supply  safeguards  and 
shipments of nuclear waste. 

66 

Descriptive  Summary 

Lithuania  has  only  limited  indigenous  energy  resources  (oil,  wood,  peat,  hydro  and 
geothermal).  It  relies  for  60% on  imports  (oil, gas, nuclear  fuel  and  also  coal)  mainly  from 
Russia,  but  has  excess  capacity  of  electricity  generation  and  oil  refining  (the  Maizeikai 
refinery  is the only one in the Baltic region) which allow export earnings. 

The energy  sector  is three to four  times less efficient  than the EU average due to the  heritage 
of  low prices, inadequate policies and obsolete technologies. 

Lithuania  wishes  to  link  energy  networks  increasingly  to  the  European  Union.  A  possible 
future  Baltic  electricity  ring  could  contribute  to  such  connections  but  in  the  short/medium 
term the  country  will  most  likely  remain  essentially  linked to the Russian  power  system.  Its 
present and future  oil terminals play, also for the country's refinery,  a regional role.  Lithuania 
is a strategic transit country for oil, gas and electricity supplies to Kaliningrad. 

Lithuania operates two  large RBMK nuclear reactors (Chernobyl  type)  at Ignalina,  producing 
85%  of  the  country's  electricity  in  1995  and  exporting  electricity  to  neighbouring  countries. 
Improvements  are  ongoing  at  the plants  mainly  through  the  assistance  of  the Nuclear  Safety 
Account  of  the  ERBD.  The  assistance  is  linked  to  an  extensive  Safety  Report  made  with 
support  of  Western  experts.  This report provides many recommendations  to be  implemented 
by  the  plant  to  get  the  safety  Authority  license  for  further  operation.  The  intention  is  to 
operate the plant until the limit for channel re-tubing is reached.  Re-tubing is precluded by the 
Nuclear Safety  Account Agreement, but the position of the government needs clarification..  A 
review  of the  safety  report by  independent  experts insists on the implementation  of  all  urgent 
recommendations  before  restart  after  their  present  annual  shutdown  for  maintenance. 
Comprehensive  and  realistic  programmes  including  closure  as  necessary  have  to  be  agreed 
After  closure  of  the  reactors,  an  important 
upon  and  implemented  in  due  course. 
decommissioning  programme will have to be implemented. 

Current and Prospective  Assessment 

Lithuania's  1994  National  Energy  Strategy,  which  is  in  line  with  EU-principles,  aims  at 
addressing  the  key  issues  of the  energy  sector:  security  of energy  supplies; introducing  more 
competition;  protection  of the environment  and increasing energy efficiency;  rehabilitation  of 
the energy  infrastructure;  and  increased  co-operation  with the other  Baltic countries  and  with 
the  EU.  Particularly  in  the  energy  sector  regional  Baltic  co-operation  is  beneficial  due  to 
complementarities of the countries concerned. 

The  competition  framework  in  the  energy  sector  does  not  yet  fulfil  the  directives  of  the 
internal  energy  market  in combination  with the application  of  EC competition  law. The  law 
on competition  is only partly  applicable to the energy  sector and the Energy Act, laying down 
global  principles,  does  not  ensure  compliance  with  EC  rules.  The  enactment  and 
implementation  of  the  necessary  complementary  legislation,  which  should  ensure  regulation 
of the sector, should therefore  be stepped up. 

67 

The  sector  is  characterised  by  State  dominated  monopolies.  Oil  exploration  and  production 
licenses have however been issued to foreign  EU-based  companies, bringing  in the  necessary 
investments,  whereas  foreign  operators  are  also  active  in  the  Lithuanian  oil  products  retail 
market or gas import. 

Energy  price  increases  have  been  applied,  but  particularly  those  for  household  energy 
consumption (gas, electricity, heating) do not recover costs..  Accumulation of arrears between 
the  state  owned  energy  company  Lietuvos  Energija  and  municipalities  had  been  an 
impediment  to  restructuring  of  the  energy  sector.  However,  recent  energy  sector  price 
liberalisation  and  decentralisation  increase prospects  for  restructuring  of  the  sector  including 
the privatisation of energy companies. 

Lithuania  does not  fulfil  the  EC acquis on emergency preparedness  including the  obligation 
to hold ninety days of oil stocks although work for compliance has started.  Both  considerable 
legislative and financial  efforts  are to be made. 

The country will have to make considerable efforts  to comply with EC energy efficiency  (e.g. 
labelling  appliances,  minimum  efficiency  norms)  and  environmental  (e.g.  fuel  quality) 
legislation.  In  this  context,  it  is  not  yet  clear  how  the  country's  refinery,  in  which  major 
investments are to be made, would function  on the saturated European market. 

The  safety  measures  recommended  in  the  recently  issued  safety  report,  the  capability  of  the 
Lithuanian  regulatory  body  for  nuclear  energy  (VATESI)  to  implement  the  western-style 
licensing regime need to be strengthened as a priority. 

Nuclear fuel  is directly imported in manufactured  form from  Russia, partly in exchange for the 
electricity  exported  to  Russia.  These  arrangements  seem  potentially  uncertain  and  since 
accession by Lithuania would increase an enlarged EU's dependence on Russia, there could be 
security  of  supply  concerns.  Attempts to diversify  nuclear  fuel  supplies  have  so far  not  been 
successful  for  technical  and economic reasons.  The common nuclear  materials  supply  policy 
of  security  through  diversification  of  sources will  apply  to  supply  contracts  concluded  after 
accession.  Spent  fuel  is  stored  in ponds  at the plant  site.  Future  intermediate  dry  storage  is 
under development.  Provision  for  spent fuel  handling and decommissioning  is in the process 
of being included  in the electricity tariff  structure. 

Upon  accession,  Lithuania  needs  to  comply  with  the  provisions  of  the  Euratom  Treaty,  in 
particular  with  those  related  to  supply  of  nuclear  material,  the  nuclear  common  market, 
safeguards,  health  and  safety  and  international  agreements.  Lithuania  is  not  yet  party  to  all 
international  regimes  in  these  fields  (notably  the  Nuclear  Suppliers  Group  and  the  IAEA 
scheme  for  extended  reporting  on  certain  nuclear  material  transfers)  or  has  not  yet 
implemented them fully  in its legal order, but draft  legislation is under preparation.  Lithuania 
also  has  a  full-scope  safeguards  agreement  with  the  IAEA.  Hence  in  these  areas,  no  major 
difficulties  in  applying  Community  legislation  are  expected.  The  development  towards  an 
independent  safety  authority should be further  supported. 

Conclusion 

68 

Provided  that  current  efforts  are  intensified,  no  major  problems  are  foreseen  to  approximate 
progressively  to  the  EC  acquis  in  the  medium  term.  Of  specific  importance  in  the  pre-
accession  period  will  be  the  adjustment  of  monopolies  including  import  and  export  issues, 
access  to  networks,  energy  pricing,  emergency  preparedness  including  the  building  up  of 
mandatory oil stocks, energy efficiency  and environmental norms. 

No  major  difficulties  are foreseen  for  compliance  with Euratom  provisions.  Lithuania  has  to 
implement  certain  international  nuclear  regimes  or  implement  them  in  its  legal  order.  The 
safety  of  the  Ignalina  nuclear  power  plant  requires  continued  particular  attention  and  rapid 
implementation  of 
the  programmed  closure  of  the  nuclear  power  plant  and  longer  term 
solutions for waste need to be  found. 

Transport 

Community transport policy consists of policies and initiatives in three fundamental  areas: 

•  Improving  quality  by  developing  integrated  and  competitive  transport  systems  based  on 

advanced technologies which also contribute to environmental and safety  objectives. 

•  Improving  the  functioning  of the  single market  in order to promote  efficiency,  choice  and 

user-friendly  provision of transport services while safeguarding  social standards; 

•  Broadening  the  external  dimension  by  improving  transport  links  with  third  countries  and 
fostering  the  access  of  EU  operators  to  other  transport  markets(  The  Common  Transport 
Policy Action programme,  1995-2000). 

The  Europe  Agreement  provides  for  approximation  of  the  legislation  with  Community  law 
and co-operation  aiming to restructure  and modernise transport, the improvement  of access to 
the  transport  market,  the  facilitation  of  transit  and  the  achievement  of  operating  standards 
comparable  to  those  in  the  Community.  The  White  Paper  focuses  on  measures  for  the 
accomplishment  of  Internal  Market  conditions  in the transport  sector,  including  such  aspects 
as competition, legislative harmonisation and standards. 

Descriptive  Summary 

Lithuania's ice-free  Baltic port meant that it was a significant  transit route for trade between  the 
former  Soviet Union and the West.  As a result, its port developed capacities for particular trades 
which  are  no  longer  fully  exploited.  The  country's  role  as a transit  corridor  between  Western 
Europe and Russia,  Belarus, the Ukraine and the Central Asian  States is however dependent  on 
the  state  of  relations  with  Russia;  these  have  not  always  facilitated  this  traffic,  although  the 
current  situation  is  relatively  easy  and  transit  traffic  started  to  increase.  The  establishment  of 
the 
new  frontiers  with  Belarus,  Russia  (Kaliningrad)  and  Latvia  has  also  affected 
competitiveness of Lithuania as a transit route.  Lithuania is therefore  investing in improvements 
to its East-West transport network and to improve border crossing infrastructures  at all the  new 
borders,  as  well  as  in  its  ports.  The  Lithuanian  territory  is  issued  by  two  Pan-European 
Corridors, as identified  at the Pan-European Transport Conference  in Crete. 

The  changes  in  the  Lithuanian  economy  have  led  to  a sharp  decrease  in  the  transport  demand 
since the opening of the country, although transport is taking an increasing share of GDP.  At the 
same  time  there  is  an  accelerating  change  in  the  modal  split,  with  road  transport  of  goods 

69 

increasing  its share, and railways declining, losing two-thirds  of their traffic  between  1990 and 
1995.  Use of private cars has grown very rapidly and it is now dominant in passenger transport, 
resulting in an increase in congestion in the cities and around them, as well as at certain  border 
crossings. 

Although  the  modal  split  is  not  very  different  from  that  in  some  Member  States,  the 
competitiveness of railways is handicapped by the poor situation of the track and by the fact that 
most of the rail network is at Russian track gauge, different from the European one, except one 
line from Poland to Kaunis. 

Current and Prospective  Assessment 

As regards  completion  of the  internal  market,  Lithuania  has made  great  efforts  to  implement 
the  existing  Community  legislation.  To  a  large  extent,  the  international  transport  sector  in 
Lithuania  already  applies  rules  similar  to  the  Union  rules.  However,  further  progress  must 
still  be  made,  particularly  on  safety  and  passenger  transport  by  road.  Road  freight  transport 
will  also have to be made compatible with the Community  rules, particularly  on admission  to 
the profession,  driving licences, weights and dimensions and road taxation.  In the case of the 
railways, over  the next  few  years effective  application  of the existing  Community  legislation 
on public  service  obligations  and  harmonisation  of  accounts  will  have  to  be  monitored.  As 
regards  air  transport,  the  rules  in  force  are  compatible  with  the  general  principles  of  the 
Community  legislation, although more specific measures must still be adopted. 

The Lithuanian authorities have taken account of the objective of developing an integrated and 
competitive  transport  system.  The  two  principal  constraints  in this  area  will  probably  be  to 
achieve  acceptable  safety  standards  and  optimum  use  of the transport  system.  Lithuania  has 
made encouraging progress on safety.  On the other hand, the objective  of a coherent  transport 
system seems harder to achieve.  Lithuania will probably have to face a steady increase in road 
use  and  to  concentrate  its  efforts  on  use  of  rail,  despite  the  handicap  of  having  a  different 
gauge from  its Western neighbours. 

To  improve  links with the Union Member  States and  its neighbours, between  1995 and  1999 
Lithuania plans to invest ECU 0.5 billion from  its own budget  in transport  infrastructure  used 
by  international  traffic,  principally  the pan-European  corridors.  This  is  equivalent  to  around 
1.2%  of GDP and should be  sufficient. 

Conclusion 

Lithuania is likely to be able to comply with most of the Community transport acquis (air, rail, 
road, maritime) in the medium term. 

Accession  appears  unlikely  to pose  significant  problems  for  Lithuania  in the transport  sector, 
on  condition  that  adequate  attention  is  given  in  the  pre-accession  period  to  safety 
improvements  (notably  in  maritime  safety),  harmonisation  of  environmental  standards  in 
transport  (air pollution,  noise) and  acquis implementation  for  road  transport  of  goods  and  for 
railways. 

70 

It  will  also  be  necessary  to  make  sure that the  resources  necessary  to  lay  the  foundation  for 
extension  of  the  future  trans-European  transport  network  to  the  acceding  countries  are 
provided.  It would  also be prudent  rapidly  to reinforce  Lithuania's  administrative  structures, 
including the supervisory bodies, for example for  safety. 

Small and Medium  Enterprises 

EU  enterprise  policy  aims  at  encouraging  a  favourable  environment  for  the  development  of 
SMEs  throughout  the  EU,  at  improving  their  competitiveness  and  encouraging  their 
Europeanisation  and  internationalisation.  It is characterised  by a high degree  of  subsidiarity. 
The  complementary  role  of  the  Community  is  defined  and  implemented  through  a 
Multiannual  Programme  for  SMEs  in  the  EU.  This  programme  provides  the  legal  and 
budgetary basis for the Community's  specific  SME policy actions.  The acquis has so far  been 
limited to recommendations  on specific  areas, although legislation in other sectors also  affects 
SMEs (e.g. competition, environment, company law). 

The  Europe  Agreement  provides  for  co-operation  to  develop  and  strengthen  SMEs,  in 
particular  in the  private  sector,  inter  alia through  provision  of  information  and  assistance  on 
legal, administrative and tax conditions.  The White Paper contains no specific  measures. 

Descriptive  Summary 

In  Lithuania,  65% of joint  stock  companies  are  small  and  medium-sized  enterprises  (SMEs) 
with  have  less  than  50  employees,  while  only  about  12% have  more  than  250  employees. 
SMEs are concentrated  in the wood  industry, the food  industry, the clothing and  fur  industry, 
the publishing  and printing  industry, and in non-metallic mineral products.  Since  1995, small 
scale privatisation has been comprehensive. 

In its policy  document,  the  SME  Development  Programme,  (1995), the  government  provides 
for  a  wide  range  of  services  directed  at  SMEs,  such  as  export  promotion,  training,  and 
incentives  for  foreign  capital.  The  Law  on  Small  Enterprises  of  1991, amended  in  1995, 
grants  a  tax  reduction  of  70%  for  the  first  two  years  of  operation  of  a  company  to  firms 
employing up to 50 persons. 

Amongst  the  structures  for  SME  support,  six  Business  Advisory  Services  Centres  provide 
counselling and training to start-ups and to self-employed  entrepreneurs. 

Current and Prospective  Assessment 

There  is a specific  programme  aimed at SME development  in Lithuania and the basic  support 
structures  for  SMEs  are  in  place.  There  is  however,  a  need  for  further  strengthening  of  the 
support  structures  as  well  as  further  measures  aimed  at,  simplifying 
legal  and 
administrative  environment  in order to make it more "SME  friendly".  Efforts  should  also  be 
directed towards the improvement of SME's access to  financing. 

the 

The on-going  efforts  to strengthen the SMEs during the pre-accession period will  therefore 
need to be continued. 

71 

Conclusion 

There are no problems regarding Lithuania's integration specific to SMEs. 

3.5  Economic  and  Social  Cohesion 

Employment and Social Affairs  ' 

Community  social  policy  has  been  developed  through  a variety  of  instruments  such  as  legal 
provisions, the European  Social Fund and actions focused  on specific  issues, including  public 
health,  poverty  and  the  disabled.  The  legal  acquis  covers  health  and  safety  at  work,  labour 
law  and  working  conditions,  equal  opportunities  for  men  and  women,  social  security  co 
ordination for migrant workers and tobacco products.  Social legislation in thé Union has been 
In  addition,  the  social  dialogue  at 
characterised  by  laying  down  minimum  standards. 
European  level  is  enshrined  in  the  Treaty  (Article  118B),  and  the  Protocol  on  social  policy 
refers to consultation of the social partners and measures to facilitate the social dialogue. 

The  Europe  Agreement  provides  for  approximation  of  the  legislation  with  Community  law 
and  co-operation  on improving  standards of health and safety  at work,  labour  market  policies 
and the modernisation  of the  social  security  system.  It also provides  for  Community  workers 
legally  employed  in  Lithuania to  be treated  without  discrimination  on grounds  of  nationality 
as  regards 
for 
approximation in all the areas of the acquis. 

their  working  conditions.  The  White  Paper  provides  for  measures 

Descriptive  Summary 

The  social  dialogue  takes place  between  four  major  trade  unions  with  regular  contacts  to  the 
European  Trade  Union  Confederation  (ETUC)  and  several  employers'  organisations  which 
are  not  members  of the Union  of Industrial  and Employers'  Conference  of Europe  (UNICE). 
There  are  close  to  80  trade  unions  in  Lithuania  which  complicates  the  question  of 
representation.  The tripartite  social dialogue appear to work well, while bipartite  negotiations 
need to be developed  further. 

The  level  of  unemployment  was  about  6,2  %  in  1996  according  to  ILO  methodology. 
However,  this  figure  is  likely  to  conceal  considerable  hidden  unemployment.  Regional  and 
structural  disparities  are  substantial. 
The  already  high  proportion  of  agricultural 
unemployment has grown over recent years to 25%. 

Lithuania has developed a regionalised employment service to conduct labour market policies. 
Lithuania  should  be  encouraged  to  further  develop  labour  market  institutions  appropriate  for 
integration into the European single market. 

Lithuania's  social  security  system underwent considerable  changes in  1990 and  1991, but 
further  reform  is  needed  to  strengthen  the  administrative  structures  and  to  develop,  for 
instance,  social  insurance.  Although  social  security  is  public,  various  private  security 
schemes exist alongside.  A pension reform  introducing a pension fund  is presently on the 

72 

table.  Expenditure  on  social  security  was  about  10% of GDP  in  1995 and  has  increased 
considerably  over the last few  years.  It is mainly financed by  social  tax which  is largely 
paid  by  employers.  Continued  efforts  are  required  to  ensure  that  measures  of  social 
protection are developed. 

The health system in Lithuania has to be significantly  improved. 

Current and Prospective Assessment. 

In  1993, Lithuania  adopted  a new Labour  Protection  Act which  lays  down  the  principles  for 
the  protection  of  health  and  safety  at  work  and  which  has  been  modelled  on  the 
EC 
framework  directive.  Many of the specific  measures have still not been introduced.  They  are 
in  the  course  of  being  taken  or  readapted  to  the  new  strategy.  The  Lithuanian  Labour 
Inspection  Services  are  in  the  starting  phase  now  as  regards  the  implementation  of  the  new 
inspection  structure.  Appropriate  independence in compliance with ILO convention  81 has to 
be granted to existing inspection structures. 

On  labour  law.  Lithuania  is  developing  a system  which  is  generally  in  compliance  with  EU 
requirements.  A  draft  law  to  protect  employees  interests  in  the  event  of  insolvency  of  the 
employer  is  under  preparation.  Some  amendments  might  be  needed  to  bring  provisions  on 
work  contracts  and  the  protection  of  workers  in  case  of  a transfer  of  the  undertaking  in  line 
with  EC rules.  The information  and consultation of workers on company  level as requested 
by a number of  EC  Directives  should  be strengthened.  An Act to reinforce  the  information 
and consultation right is under preparation. 

On  equal  opportunity,  the  basic  provisions  of  EC  non  discrimination  law  between  women 
and men are covered by Lithuanian legislation.  The non discrimination principle is not always 
respected, particularly  in the field of equal pay for equal work and in gender based  advertising. 
The difference  in pay between women and men is considerable. 

Concerning the right to the free  movement  of workers, there would  appear  to be no  obstacles 
to  prevent  Lithuania  from  being  able  to  implement  the  provisions  of  the  acquis  in  this  area. 
The  introduction  of  the  right  to  free  movement  will  however  require  changes  in the  national 
law, particularly  as regards access to employment and a treatment  free  from  discrimination  on 
grounds of nationality. 

In  the  field  of  social  security  of  migrant  workers,  accession  does  not,  in  principle,  pose  any 
major problems, although some technical adaptations will be necessary.  More important is the 
administrative  capacity  to  apply  the  detailed  co-ordination  rules  in  co-operation  with  other 
countries.  It  is  not  clear  whether  Lithuania  has  the  administrative  structures  required  to 
integrate  into  the  co-ordination  system.  A  great  deal  of  further  planning,  preparation  and 
training  will  be  necessary  in  order  to  prepare  their  administration  for  the  tasks  of  co 
ordination. 

The Directives on tobacco, respectively  on the warning  labelling of cigarette packages and the 
maximum tar content have been transposed to the Lithuanian  legislation. 

73 

Conclusion 

Social reform  should be pursued, and the public health system to be significantly  improved. In 
addition,  the  social  dialogue  needs  to  be  further  developed.  Lithuania  will  need  to  make 
substantive  efforts  to ensure the realignment  of its legislation with  EC requirements  in areas 
such  as health  and  safety,  labour  law and  equal  opportunities  and  to  continue  to  develop  the 
structures  needed  to  ensure  the  effective  implementation  of  legislation.  Provided  Lithuania 
pursues  its efforts,  it  should  be possible  to take  on the  obligations  of  EU  membership  in  the 
social area in the medium term. 

Regional Policy and Cohesion 

In  accordance  with  Title  XIV  of  the  Treaty,  the  Community  supports  the strengthening  of 
cohesion,  mainly  through  the  Structural  Funds.  Lithuania  will  have  to  implement  these 
instruments  effectively  whilst respecting the principles, objectives  and procedures  which  will 
be in place at the time of its accession. 

The  Europe  Agreement  provides  for  co-operation  on  regional  development  and  spatial 
planning,  notably  through  the  exchange  of  information  between  local,  regional  and  national 
authorities  and  the  exchange  of  civil  servants  and  experts.  The  White  Paper  contains  no 
specific  provisions. 

Descriptive  Summary 

In  1995, Lithuania's national  GDP per capita was at some  24 % of the EC average.  The main 
income  disparities  exist  between  the  cities  and  the  country  side  which  cannot  be  quantified 
due to the lack of regionalised  information  for GDP. 

National  unemployment  levels  have  increased,  since  independence,  up  to  8%  in  1996. 
Regional  disparities  of  registered  unemployment  range  from  1.7%  in  Kaunas  to  10.3%  in 
Silales and recent estimates have stressed they are growing. 

For  the  time  being,  Lithuania  has  a  rather  complete  range  of  problems  of  regional 
development : 

low  quality  of  infrastructures,  (they  were  only  satisfactory  "by  Soviet  standards")  their 
condition is now considered as critical, particularly in rural areas; 
pockets of industrial decline or urban crisis; 
conversion of the activities of defence; 
general decrease of incomes in rural areas (where the population is still numerous). 

Lithuania  has  a  less  concentrated  urban  structure  than  its two  Baltic  neighbours.  The  urban 
functions  are  shared  between  Vilnius, Kaunas  and  Klaipeda.  The previous  planning  systems 
tried to develop this multipolarity by promoting other secondary cities. 
There  is  no  structure  of  independent  regional  government  in  Lithuania.  The  10  counties 
(average  population:  371000 
territorial 
administrative  units.  As  part  of  the  State  administration,  they  are  led  by  an  appointed 

inhabitants)  are 

formed  higher 

the  newly 

74 

governor,  who implements  the state policy. However  it is still highly  centralised  and  there is 
no self governing body at county level. 

Under  the  law  on  the  territorial  administrative  units  of  the  Republic  of  Lithuania,  56  self 
governing  municipalities  (average  population:  66300  inhabitants)  have  been  established, 
coming  from  a grouping  of around  500 villages in rural areas into 44 new units and  12 urban 
municipalities. 

There  is  currently  no  regional  development  policy  in  Lithuania.  A National  Strategy  Plan  is 
under preparation.  Yet it deals foremost with spatial planning. 
Regional  policy  instruments  in  the  strict  sense  do  not  exist  in  Lithuania.  The  share  of 
Lithuania's total  development  related expenditure which could constitute counterpart  funds  to 
the 
EC  structural  policy  cannot  be  determined.  Therefore,  Lithuania's  co-financement 
capacity cannot presently be evaluated with sufficient  reliability. 

Current  and  Prospective  Assessment 

According  to  available  information,  the  Lithuanian  authorities  do  not  appear  to  have 
considered  the issue of implementing  community regional policy on their territory  and do not 
intend to create a regional policy in the short term. 

the  adrninistrative  and  budgetary 
in  establishing 
Consequently,  Lithuania's  progress 
procedures necessary to channel the EC structural funds  is clearly limited.  Indeed, most of the 
necessary administrative structures and instruments still need to be created if Lithuania is to be 
ready to implement  EC structural programmes within its territory. 

Conclusion 

Lithuania's  progress  in  establishing  a  differentiated  development  policy  addressing  rising 
regional  disparities  is  clearly  limited.  A  general  framework  for  an  integrated  development 
strategy  which,  given  its  size,  could  constitute  an  integrated  part  of  a  national  development 
strategy,  should  be  introduced.  Moreover,  Lithuania's  administrative  capacity  to  manage 
integrated  regional  development  programmes  clearly  needs  to  be  improved.  Significant 
reforms  thus need to  be implemented  before  Lithuania can apply the  Community  rules  and to 
channel effectively  the funds  of the  EC structural policies. 

3.6  Quality  of  Life  and  Environment 

Environment 

The  Community's  environmental  policy, derived  from  the Treaty, aims towards  sustainability 
based  on  the  integration  of  environmental  protection  into  EU  sectoral  policies,  preventive 
action,  the  polluter  pays  principle,  fighting  environmental  damage  at  the  source,  and  shared 
responsibility.  The  acquis  comprises  approximately  200  legal  acts  covering  a wide  range  of 
including  water  and  air  pollution,  management  of  waste  and  chemicals, 
matters, 
biotechnology,  radiation  protection,  and  nature  protection.  Member  states  are  required  to 

75 

ensure that an environmental  impact  assessment  is carried  out before  development  consent  is 
granted for certain public and private projects. 

The Europe Agreement  stipulates that Lithuanian development policies shall be guided by the 
incorporate  environmental 
principle  of  sustainable  development  and  should 
considerations.  It also identifies  environment  as an area for  bilateral  co-operation,  as well  as 
for approximation of legislation to that of the Community. 

fully 

The White Paper covers only a small part of the environmental acquis, namely  product-related 
legislation, which is directly related to the free circulation of goods. 

Descriptive  Summary 

The environmental  situation  in Lithuania  is less severe than elsewhere  in the region.  Decline 
in  industrial  and  agricultural  activity  has  led  to  a  reduction  in  pollution  levels.  Water 
pollution  remains  the  most  acute  environmental  problem,  but  other  problem  areas  include 
waste management and disposal. 

River,  ground  and  coastal  water  pollution  from  urban  wastes  and  agriculture  is  particularly 
important.  However,  the  significant  investments  in  sewage  treatment  plants  in  all  the  major 
cities  should  radically  reduce  polluting  discharges  to  water  by the  year  2000.  In  the  area  of 
waste  management,  particular  concern  is  caused  by  hazardous  wastes  which  are  currently 
dumped  in  inadequate  municipal  landfills  or  burnt  in  incinerators  that  do  not  meet  EU 
emission  standards.  Air  pollution,  mainly  originating  from  industrial  and  other  stationary 
sources has been declining, but  emissions  from  mobile  sources have been  increasing.  Overall 
the situation with respect to air pollution is relatively  good. Lithuania possesses  areas of great 
natural value, which would represent an asset to the environment of an enlarged Union. 

The Environmental  Protection Act of  1992 is Lithuania's main environmental  framework  Act, 
and a National Environment  Strategy was adopted in 1996.  The polluter-pays-principle  is also 
embodied  in  two  tax  laws  and  the  prevention  principle  is  set  out  in  the  draft  Law  on 
Environmental  Impact  Assessment.  A  Law  on  Charges  for  the  Contamination  of  the 
Environment  (air  pollution),  including  charges  on  pollution  from  mobile  sources  into  the 
atmosphere  was  adopted  in  1991. 
In  the  area  of  nature  conservation,  various  types  of 
protected  areas  are  governed  by  the  Law  of  Protected  Territories.  An  important  part  of 
sectoral  environmental  legislation  including  standards  and lower level regulations  is  inherited 
from  the  Soviet  era, although this should change over  1997.  Economic  instruments  are  being 
introduced,  with  tax  differentials  for  unleaded  petrol,  and  the  development  of  a  revolving 
environmental  fund,  based on pollution fees and fines. 

Lithuania  has  ratified  both  the  1974 and  the  1992 Helsinki  Conventions  on the  protection  of 
the Baltic sea, and has shown commitment to cleaning up Baltic Sea "hot spots". 

Current and Prospective  Assessment 

Lithuania  has  made  considerable  progress  in  adapting  its  environmental  legislation  to  EU 
standards  and  also  by  way  of  implementing  secondary  legislation  and  strengthening  the 

76 

necessary  institutions.  However,  the country  still has much to do  to  achieve  either  formal  or 
effective  compliance. 

In  the  water  quality  sector,  standards  for  pollutants  have  been  prepared  on  the  basis  of 
comparable  EC Directives for water management.  Lithuania has recently established new air 
pollution  standards  for  power generation combustion plants  and new air quality  standards  are 
under elaboration.  In the waste sector, new legislation is being introduced  in accordance with 
the  acquis  and  an  action  plan  on hazardous  waste  is under  preparation.  In the  area  of  nature 
conservation,  a  number  of  draft  laws  under  discussion  are  adapted  to  the  provisions  of  the 
Community  Birds  and Habitats  Directives.  While Lithuania has  adopted  a  framework  act  on 
nuclear  safety,  this  needs  to  be  supplemented  by  legislation  on  radiation  protection  and 
radioactive  waste  management,  and  emergency  planning. 
In  this  area  there  is  at  present 
generally  a  lack  of  safety  culture.  Particular  attention  should  be  given  to  the  quick 
transposition  of  framework  directives  dealing  with  air,  waste,  water  and  the  Integrated 
Pollution  Prevention  and  Control  (IPPC)  directive,  as wellas  the  establishment  of  financing 
strategies for legislation in the water, air and waste sectors requiring major  investments. 

Lithuania  aims  at  completing  transposition  of  the  White  Paper  legislation  by  the  year  2000. 
As regards  remaining  environmental  legislation, the country  is fairly  advanced  in preparing  a 
detailed accession strategy, which should be ready during  1997. 

In  order  to  achieve  effective  compliance  to  the  EC  acquis,  Lithuania  will  have  to  greatly 
increase environmental  investment, and strengthen implementation and enforcement  structures 
and instruments, as well as public awareness and participation. An important bottleneck which 
needs  to  be  addressed  is  the  lack  of  human  resources  with  expertise  to  conduct  the 
approximation  process.  The  country's  environmental  accession  strategy  should  include 
implementation timetables for meeting the  EC environmental  acquis, starting amongst  others 
with implementation of the framework  and IPPC directives mentioned above. 

Conclusion 

With current trends and the recent acceleration  in legislative and policy reforms,  transposition 
of  the  environmental  acquis  in  Lithuania  could  be  achieved  in  the  medium  term.  However, 
effective  compliance  with  a  number  of  pieces  of  legislation  (e.g.  drinking  water,  aspects  of 
waste management  and air pollution  legislation)  could only  be expected  in the  long term, and 
will  require  a  significant  increase  in  environmental  investment,  as  well  as  a  major  effort  to 
reinforce  administrative  capacity. 

Consumer  Protection 

The  Community  acquis  covers  protection  of  economic  interests  of  consumers  (including 
control  of misleading  advertising, indication of prices, consumer  credit, unfair  contract terms, 
distance selling, package travel, sales away from  business premises and timeshare property) as 
well as general safety  of goods and the specific  sectors of cosmetics, textile names and toys. 

The  Europe  Agreements  provides  for  approximation  of  the  legislation  with  Community  law 
and co-operation with a view to achieving full  compatibility  between the systems of consumer 
protection  in  Lithuania  and  the  Community.  Stage  I measures  of  the  White  Paper  focus  on 

77 

improving  product  safety,  including  cosmetics, textiles  and toys, and  on the protection  of the 
economic  interests  of  consumers,  notably  measures  on  misleading  advertising,  consumer 
credit,  unfair  contract  terms  and  indication  of  prices.  Stage  II  measures  relate  to  package 
travel, sales away from business premises and time-share property. New EU legislation  which 
has been adopted recently (distance selling) or will be adopted  soon (comparative  advertising, 
price indication) will also need to be taken into account. 

Descriptive  Summary 

The Consumer Protection Act was adopted'by the Lithuanian  Parliament  in  1994. Although  it 
provides a basis for protecting consumer rights, it is not adequate to implement EC legislation. 
The  draft  of  a  new  Consumer  Protection  Act  is  now  under  discussion. 
It  introduces  new 
provisions  and  amendments  to ensure that Lithuania can meet EC requirements  for  consumer 
affairs. 

Overall responsibility  for  consumer  policy  and affairs  resides with the  State  Competition  and 
Consumer Protection Office.  The role of the Office  is to co-ordinate the activities of state and 
In  1989,  Lithuania  established  an 
public  institutions  in  the  field  of  consumer  protection. 
independent consumers' association  which brings together a number of consumer groups. 

Current and Prospective  Assessment 

Consumer protection policy has been a priority for the Lithuanian government  in recent years. 
The  new  draft  version  of  the  Consumer  Protection  Act  aims  at  implementing  different  EC 
directives,  such  as  unfair  terms,  package  travel,  sales  away  from  business  premises  and 
consumer  credit.  In  addition,  there  are  separate  drafts  under  preparation  concerning  the 
indication  of prices, package  travel, and general  safety  of goods  and  services.  There  appears 
to be no planned initiatives for timeshare property. 

Although the Consumer Act contains some provisions relating to product safety, the subject  is 
not covered  fully  according  to  EC  legislation.  A draft  on a separate General  Product  Safety 
Act  is under preparation  which will  help alignment  with  EC  standards.  For  sectors  such  as 
the safety  of toys, textile names  and cosmetics, there are occasional  piecemeal  provisions  but 
no specific measures to protect the consumer. 

The  development  of  a  strong  and  independent  consumer  movement,  sustained  by  public 
authorities, will need to accompany the introduction of the acquis. 

Conclusion 

There  are  important  gaps  in  Lithuanian  consumer  protection  legislation  compared  to  EC 
Directives,  particularly  on  general  products  safety.  Although  Lithuania  has  created  the 
institutional  structures  to  implement  legislation  on  consumer  protection,  enforcement  of 
existing  legislation  appears  to  be  a  pressing  problem.  But  provided  that  the  harmonisation 
efforts  are  continued,  Lithuania  should  be  ready  to  take  on  the  EC  acquis  on  consumer 
protection in the medium term. 

78 

3.7  Justice  and  H o me  Affairs 

The Present Provisions 

The  Justice  and  Home  Affairs  (JHA)  acquis principally  derives  from  the  framework  for  co 
operation  set  out  in  Title VI  (Article  K)  of the  Treaty  on  European  Union  (TEU),  "the  third 
pillar",  although certain  "first  pillar"  (EC Treaty) provisions  and legislative measures  are also 
closely  linked. 

The  EU  JHA  framework  primarily  covers:  asylum;  control  of'external  borders  and 
immigration;  customs  co-operation  and  police  co-operation  against  serious  crime,  including 
drug  trafficking;  and judicial  co-operation  on criminal  and civil  matters.  The TEU  stipulates 
key  principles  upon  which  such  co-operation  is  based,  notably  the  European  Convention  on 
Human  Rights  and  the  1951 Geneva  Convention  on the  Status  of Refugees.-  It  is  also  based 
implicitly  on  a  range  of  international  conventions  concerning  its  fields  of  interest,  notably 
those of the Council of Europe, the United Nations and the Hague Conference.  The legislative 
content  of third  pillar  acquis is different  from  the first pillar;  it consists  of  conventions, joint 
actions, joint  positions  and  resolutions,  (including  the  agreed  elements  of  draft  instruments 
which  are  in  negotiation).  A  number  of  EU  conventions  (including  the  1990  Dublin 
Convention,  and  conventions relating  to extradition,  fraud  and EUROPOL)  have been  agreed 
by the Council and are now in the process of ratification  by national Parliaments; several other 
conventions,  including  one  on  external  frontiers  are  in  various  stages  of  negotiation  in  the 
Council.  The  JHA  acquis  involves  a  high  degree  of  practical  co-operation,  as  well  as 
legislation and its effective  implementation. 

The New  Treaty 

For  many  of  the  above  matters,-  the  entry  into  force'  of  the  Treaty  resulting  from  the 
Amsterdam  Inter-Governmental  Conference  will  mark  the  end  of  the  current  cooperation 
framework. 

Reiterating  the  objective  of  developing  the  Union  into  an  "area  of  freedom,  security  and 
justice", the new Treaty brings these matters, including the free movement of persons, asylum 
and immigration, into the Community's sphere of competence. 

On the free  movement  of persons  in particular, the new Treaty  provides  for  the  incorporation 
of the Schengen acquis into the framework  of the European Union and binds any candidate  for 
EU membership to accept that acquis in full. 

With regard to matters remaining within the cooperation framework,  i.e. policing and criminal 
justice, the new Treaty provides for the reinforcement of the cooperation  system. 

The Europe Agreement  and the White Paper 

The Europe Agreement  includes provision for co-operation in the fight against drug abuse and 
money  laundering. 

79 

The White Paper does not deal directly with third pillar subjects, but reference  is made to first 
pillar  matters  such  as  money  laundering  and  freedom  of  movement  of  persons  which  are 
closely  related  to  Justice  and  Home  Affairs  considerations.  Reference  is  also  made  to  the 
Brussels and Rome conventions. 

Descriptive  Summary 

General Preconditions for  JHA Co-operation 

Lithuania  joined  the  Council  of  Europe  in  1993  and  has  ratified  the  most  important 
instruments concerning human rights.  The Constitution provides for  an independent judiciary 
according to the rule of law. 

Institutional  reform  of JHA institutions is underway, although there are stilL important  human 
resource  and  management  systems  constraints.  Progress  has  been  made  in  all  areas  of  the 
third pillar.  Lithuania  has not yet signed the  1990 data protection convention,  but parliament 
adopted  a  data  protection  law  in  July  1996  designed  to  meet  the  requirements  of  the 
convention and the EC Directive.  (See also  separate section on Single Market). 

Asylum 

Lithuania  ratified  the  Geneva  Convention  and  the  1967  Protocol  in  January  1997.  This 
ratification  brings  into  force  the  law  on  refugees,  adopted  by  the  Parliament  in  1995.  The 
processing  of  asylum  applications  began  in  May  1997.  This  law  has  been  designed  to  be 
generally in line with EU provisions and includes for example the safe third country provision. 
A  key  feature  of  the  Lithuanian  practice  is  the  screening  procedure  for  migrants  (at  the 
Foreigner Registration Centre in Pabrade) before potential refugees  are admitted to the  refugee 
centre  at  Rukla.  Facilities  for  refugee  reception  and  support  are  now  being  built  up,  with 
support from  EU countries (notably Denmark) and UNHCR and IOM. 

Immigration/Border  Control 

There is a growing  problem  of illegal migrants, mostly from  Asia, aiming to transit  Lithuania 
to  the  west.  Organised  gangs  are  involved  in  attempts  to  traffic  illegal  immigrants  through 
Lithuania to Poland.  In early  1997 some 600 such migrants and potential refugees  were being 
held  at  the  Registration  Centre  pending  resolution  of  their  status.  Lithuania  has  visa-free 
agreements  with  the  UK,  Ireland,  Denmark,  Norway,  Sweden,  Finland,  several  central 
European countries, and third countries, as well as Estonia and Latvia, with which it operates a 
It  is  adopting  the  EU  third  country  list  for  which  visas  are  required. 
visa  free  space. 
Lithuania's  citizenship  and  aliens  legislation  generally  respects  democratic  norms.  Lithuania 
has  readmission  agreements  Estonia,  Latvia,  Denmark,  Sweden,  Finland,  Switzerland, 
Norway  and  the  Ukraine.  Lithuania  is  seeking  to  conclude,  but  has  not  yet  reached, 
readmission  agreements  with  Belarus  and  Russia.  Border  management  with  Belarus  and 
Russia is still inadequate, with the border not being effectively  demarcated.  The border  guard 
suffers  from  institutional  and  human  resource  deficiencies  and  a  shortage  of  surveillance 
equipment. 

80 

Police Co-operation 

Organised  crime  is  active  in  Lithuania  in  particular  in  the  fields  of  smuggling  of  human 
beings,  weapons,  alcohol  and  tobacco,  money  laundering  and  financial  fraud;  violence  and 
extortion  are used, notably  against companies operating in the  "grey  market"  (evading taxes). 
The police service and other law enforcement  bodies have been given extraordinary powers of 
detention  when  dealing  with  organised  crime.  The  Government  has  recently  adopted  a 
programme  on  crime  prevention,  including  plans  to  amend  the  criminal  and  criminal 
procedure  codes,  the  code  of  conduct  of  civil  servants,  and  to  strengthen  the  law  on  money 
laundering.  Reorganisation of the key institutions is also underway.  Lithuania has ratified  the 
separate  section  on  Single  Market). 
(See  also 
1990  Money  Laundering  Convention. 
Lithuania  experiences  no  internal terrorist  threat.  It has  signed  the  key  international  terrorist 
conventions and has adopted appropriate legal and administrative measures against terrorism. 

Drugs 

Opiates, cannabis and cocaine are occasionally  found. 

Domestic  demand  and production  are a growing  concern  although  drug  abuse  is still  limited. 
Lithuania  is party  to most  of the main  international  drugs conventions  and plans to ratify  the 
others soon.  A State Drugs Control Commission has been established to develop strategy  and 
prevention policy  for drugs abuse and a Drug Control Unit is part of the police force. 

Judicial  Co-operation 

Reform  of  the  judiciary  and  preparation  for  EU  accession  are  still  at  an  early  stage,  but 
increasingly progressing.  Lithuania has ratified  the main criminal conventions and is revising 
its criminal  and civil code to allow for judicial co-operation.  Lithuania has not ratified  any of 
the  Hague  Conventions,  but  legislation  is  in  preparation  for  the  key  ones.  It  is  planned  to 
apply  for  accession  to the Lugano  Convention  and legislation  ensuring  compatibility  with  the 
Rome and Brussels Conventions is under preparation. 

Current  and Prospective  Assessment 

Lithuania  has made  progress  in putting  a legislative  and  implementation  framework  in place, 
in  line  with  the  EU  acquis.  The  Government's  priorities  for  the  near  future  are  focusing  on 
illegal  immigration,  developing  effective  border  control  systems,  and  tackling  organised 
crime. 

The  main  institutional  problems  lie  in  the  field  of  resource  constraints  and  the  impact  of 
organised  crime  and  institutional  corruption.  The  new  Government  is  committed  to  take 
action  in these areas  and  is currently  reviewing  its policy  and  institutions  in  the  JHA  sector. 
Some  officials  have  experience  of  co-operation  with  EU  counterparts;  the  Government  is 
concerned to promote the development of such expertise. 

81 

Conclusion 

Lithuania has made some progress in important areas such as asylum.  Nevertheless, given the 
scale of the problems facing  Lithuania in the JHA field, a significant,  sustained  effort  will be 
needed  if it is to meet the justice and home affairs  acquis  (present and future)  in the  medium 
term. 

3.8  External Policies 

Trade and International Economic Relations 

The  acquis  in this  field  is made  up  principally  of the  Community's  multilateral  and  bilateral 
commercial policy commitments, and its autonomous commercial defence  instruments. 

The  Europe  Agreement  includes  provisions  in  several  areas  requiring  parties  to  act  in 
accordance with  WTO/ GATT principles, or other relevant international obligations. 

The White Paper includes no provisions in this field. 

Descriptive  Summary 

Lithuania  has  developed  an  open,  trading  economy  and  is expected  to  become  a member  of 
the  World  Trade  Organisation  (WTO)  in  1998.  Lithuania  has  observer  status  in  the 
Government  Procurement  Agreement  and,  upon  accession  would  have  to  comply  with  the 
obligations of the plurilateral WTO agreements to which the Community  is a party. 

At  present  Lithuania  does  not  maintain  quantitative  restrictions  on  any  textile  or  clothing 
products.  On accession  the  Community  textiles policy would  be extended  to  Lithuania;  any 
Community  restrictions  still maintained  at the date of accession would  require  adjustment  by 
an appropriate amount to take account of Lithuanian accession. 

Current and Prospective  Assessment 

On  accession  Lithuania would  have to apply  the  Community's  Common  Customs Tariff,  and 
the  external  trade  provisions  of  the  Common  Agricultural  Policy.  The  post  Uruguay  Round 
weighted  average  level  of  most  favoured  nation  duties  for  industrial  products  will  be 27.5% 
for Lithuania and 3.6% for the  Community. 

In  its  relations  with  international  organisations  Lithuania  should  ensure  that  its  actions  and 
commitments  respect  the  Europe  Agreement  and  ensure  a harmonious  adoption  of  its  future 
obligations as a member of the Community. 

On  accession  Lithuania  would  become  party  to  the  Community's  various  preferential 
agreements.  Preferential  agreements between Lithuania and third countries would, in general, 
have to be terminated on accession. 

82 

In the area of trade in services and establishment, Lithuania has sought to keep its multilateral 
commitments  under  GATS  as consistent  with those  of the  Community  as possible  during  its 
negotiations  to join  the  WTO.  It  should  be  possible  to  resolve  any  remaining,  significant 
inconsistencies. 

On  accession  Lithuania  would  have  to  repeal  national  legislation  in the  field  of  commercial 
defence instruments, and EC legislation would become applicable there. 

Experience from previous accessions has shown that the automatic extension of existing  anti 
dumping measures to new member states prompts third countries to raise problems in terms of 
the  compatibility  of  this  approach  with  relevant  WTO  provisions.  It  has  also  shown  that 
accession creates a potential for circumventing measures adopted by the Community under the 
commercial defence  instruments.  This happens when, prior to accession, substantial  quantities 
of  the  products  subject  to  measures  are  exported  to  the  territory  of  the  future  member  state 
and,  on  accession,  are  automatically  released  for  free  circulation  in  the  enlarged  customs 
territory.  These  two  problems  would  have  to  be  addressed  during  Lithuania's  pre-accession 
phase. 

Lithuania  is not  a member  of any non-proliferation  regime, although  it has expressed  interest 
in  membership.  The  Lithuanian  control  list  of  dual-use  items  is  a  direct  translation  of  the 
Community  control  list.  Arms  export  is also  controlled.  There  appears to be  no  obstacle  in 
principle to Lithuania applying EC legislation in this field. 

Conclusion 

Lithuania should be able to meet Community requirements in this field in the medium term. 

Development 

The acquis in the development  sector  is made up principally  of the Lomé Convention,  which 
runs until early 2000. 

Neither the Europe Agreement or the White Paper include provisions in this field. 

Descriptive  Summary 

Lithuania  has  no  preferential  trade  agreements  with  ACP  countries,  and  no  GSP  schemes 
apply.  No duty free  access is granted by Lithuania. 

Lithuania has no budget for development aid. 

Current  and  Prospective  Assessment 

On  accession,  Lithuania  should  apply  its  preferential  trade  regime  to  the  ACP  States  and 
participate,  together  with  the  other  member  states,  in  financing  the  European  Development 
Fund (EDF), which provides financial aid under the Lomé Convention. 

83 

Lithuania  could  confront  some  difficulties  in  applying  the  present  Lomé 
integrally from  the date of accession. 

trade  regime 

Normally, new member  states accede to the Lomé Convention  by means of a protocol  on the 
date of their accession to the EU. 

Conclusion 

Lithuania will need to make  significant  progress  if it is to meet EU requirements  in this field 
within the next few years. 

Customs 

The  acquis  in  this  sector  is  the  Community  Customs  Code  and  its  implementing 
provisions; the  EC's  Combined  Nomenclature;  the  Common  Customs  Tariff  including 
trade  preferences,  tariff  quotas  and  tariff  suspensions;  and  other  customs-related 
legislation outside the scope of the customs code. 

The Europe Agreement  covers the establishment  of a free trade area with the  Community 
and the progressive removal  of customs duties on a wide range of products, according  to 
clear timetables starting from  the date of entry into force of the agreement. 

The  White  Paper  includes  in  Stage  I,  measures  to  consolidate  and  streamline  the  free 
trade established  under the Europe Agreement,  including  legislation  compatible  with  the 
Customs  Code, Combined  Nomenclature, etc.  Stage II concerns the adoption  of the  full 
Community legislation, with a view to joining the customs union upon accession. 

Descriptive  Summary 

On  accession  the  Lithuanian  customs  authorities  would  be  required  to  assume  all  the 
responsibilities  necessary  for the protection and control  of their part of the EU's  external 
border.  Besides  the  provisions  on  indirect  taxation,  they  would  be  responsible  for  the 
implementation  and  enforcement  at  the  external  border  of  the  Community's  common 
commercial policy, the common agricultural policy, the common fisheries  policy etc. 

Lithuania's  capacity  fully  to  apply  the  acquis  presupposes  the  possibility  to  adopt  and 
implement  the  Community  legislation;  and  the  existence  of  an  adequate  level  of 
infrastructure  and  equipment,  in particular  in terms  of computerisation  and  investigation 
means  and  the  establishment  of  an  efficient  customs  organisation  with  a  sufficient 
number  of  qualified  and  motivated  staff  showing  a  high  degree  of  integrity.  Lithuania 
has  experienced  severe  problems  with  corruption  in  the  customs  administration;  it 
instituted important measures, in March  1997, to combat this. 

With the support  of the technical  assistance provided  by customs programmes,  Lithuania 
has drafted  a Customs  code harmonised  with the  Community's  customs  code  which  will 
enter  into  force  on  1 January  1998.  At  present,  the  legislation  in  force  as  well  as  the 
customs-related  legislation outside the scope of the customs code is not EC  compatible 

84 

Lithuania  has  almost  aligned  its  national  goods  nomenclature  to  the  Community's 
Combined  Nomenclature.  However,  at his  stage the Lithuanian  administration  does  not 
have  an  integrated  tariff  which  will  make  the  comparison  of  the  Lithuanian  tariff  rates 
with the Common  Customs Tariff rates difficult.  However, Lithuania operates a Binding 
Tariff Information  system similar to the one applied in the Community. 

Lithuania adopted  on  1 April  1997 the new system of cumulation of origin between  European 
countries. 

Lithuania  has  applied  to  become  a  contracting  party  to  the  EC/EFTA  Common  Transit 
Convention  and  the  Single  Administrative  Document  Convention.  A  Community  Task 
Force  is  assisting  Lithuania  in  this  field.  Accession  to  the  Transit  Convention  will 
require a period of considerable further  preparation. 

Current and Prospective  Assessment 

Lithuania  would  need  to  adapt  its  national  procedures  to  the  Community  legislation 
regarding  suspensive  arrangements  and  customs  procedures  with  economic  impact.  At 
the  moment  of  accession,  some  technical  transitional  arrangements  would  be  needed, 
notably  for  operations  beginning  before  the  date  of  accession  but  which  are  concluded 
after that date. 

It will  be  important  that the Lithuanian  customs  authorities  can participate  appropriately 
in  the  various  computerised  systems  necessary  for  the  management,  in  the  customs 
union/internal  market,  of  the  customs  and  indirect  tax  provisions,  as  well  as  the 
computerised  systems  for  mutual  administrative  assistance  in  customs,  agricultural  and 
indirect  tax  matters.  Computerisation  is  at  a  very  preliminary  stage  of  development  in 
Lithuania. 

Lithuania would  need on accession to dismantle customs controls at the borders with EU 
member  states  and  with  other  acceding  countries.  The  resources  needed  for  the 
reinforcement  of  the  border  posts  along  its frontiers  with  non-EU  member  states  should 
be taken  into account in its strategic planning. 

Conclusion 

Lithuania  will  need  to  continue  major  efforts  to  align  its  organisation  and  staff  to  the 
duties  that  have  to  be  carried  out  by  a  modern  customs  administration.  If  it  does  so  it 
may be able to meet  EC requirements in the medium term. 

Common Foreign  and Security Policy 

Since  regaining  its  independence  in  1991, Lithuania  has  orientated  its  foreign  and  security 
policy  towards  the  EU  and  NATO.  Lithuania  has  a  constitutional  act  of  non-alignment  to 
post-Soviet  Eastern  alliances  of  8 June  1992.  This  act  forbids  the  government  from  joining 
any  alliance  "formed  on the basis  of the former  USSR"  and also forbids  the stationing  of any 
forces  from  the former USSR on Lithuanian territory.  Lithuania has been an active participant 

85 

in the arrangements provided for under the Union's Common Foreign and Security Policy and 
when invited has supported EU actions within that framework. 

Lithuania  is  a  member  of  the  UN,  OSCE,  Council  of  Europe  and  many  other  international 
organisations.  It  is an associate  partner  of WEU, participates  in the NACC, the PfP  and  has 
made clear its desire to become a member of the WEU and NATO as soon as possible.  It has 
sent  troops  to  participate  in  IFOR/SFOR. 
It  also  participates  in  a  number  of  regional 
organisations  including  the  Council  of  Baltic  Sea  States,  the  Baltic  Council  and  intends 
joining  CEFTA. 

There  are  no  territorial  disputes  between  Lithuania  and  any  member  state  of  the  Union, 
although  a  formal  delineation  of  the  maritime  border  with  Sweden  remains  to  be  agreed. 
Neither  does  Lithuania  have  any  major  disputes  with  neighbouring  associated  countries. 
Relations  with Poland  have  improved  significantly  in recent years and  are based  on the  1994 
Treaty  on  Friendly  Relations  and  Good  Neighbourliness  which  forms  part  of  the  Stability 
Pact.  Both countries are in the process of establishing a joint peacekeeping unit.  Negotiations 
concerning the delineation of the maritime border with Latvia are continuing and have reached 
an advanced stage. 

Although  more  than  30  treaties  and  agreements  have  been  signed  between  Lithuania  and 
Russia,  there  remain  disagreements  concerning  the  demarcation  of the  sea  and  land  borders: 
the  Russian  territory  bordering  Lithuania  is the Kaliningrad  oblast.  The  question  of  military 
transit by rail between Russia and Kaliningrad through Lithuania is regulated by an agreement 
renewable on an annual basis. 

Relations  with  Belarus  are  based  on  the  Agreement  on  Good  Neighbourly  Relations  and 
Cooperation  and the Agreement  on the  State Border.  Both Agreements  entered  into  force  on 
26 April  1996.  The precise delineation of the border remains to be agreed. 

Lithuania  has  a new  and  small  diplomatic  service  with  limited  experience  and  resources.  In 
due  course,  it  should  nevertheless  be  able  to  play  a  full  role  as  a  member  of  the  Union.  It 
maintains 38 representations  abroad and employs some 325 diplomatic  staff. 

Lithuania  supports  non-proliferation  of  nuclear,  biological  and  chemical  weapons  and  is  a 
signatory  to  all  relevant  international  arms  control  agreements.  The  small  Lithuanian  armed 
forces,  which  are  being  brought  under  democratic  control,  are  being  reorganised  to  meet 
NATO  requirements. 
Lithuania  is  a  member  of  the  Baltic  peacekeeping  battalion 
(BALTBAT)  and  participated  in a major  PfP  exercise  (Baltic  Challenge)  in  1996.  Lithuania 
has no defence  industrial base. 

In  the  statement  accompanying  its  application  for  membership  of the  Union  on  8  December 
1995 and in its replies to the Commission  in July  1996, the Lithuanian  government  confirmed 
that it was ready and able to participate fully  and actively in the CFSP of the Union. 

The assessment x)f Lithuanian  foreign  and security policy to date leads to the expectation  that 
as a member it could fulfil  its obligations arising under the CFSP. 

86 

3.9.  Financial Questions 

Financial  Control 

The  implementation  of  Community  policies,  especially  for  agriculture  and  the  Structural 
Funds,  requires  efficient  management  and  control  systems  for  public  expenditure,  with 
provisions  to  fight  fraud.  Approximation  of  legislation  is  moreover  needed  to  allow  the 
system of "own resources" to be introduced, with satisfactory  provision for  accounting. 

The  Europe  Agreement  proyides  for  cooperation  in  audit  and  financial  control,  including 
technical  assistance  from  the  Community  as  appropriate.  The  White  Paper  includes  no 
measures in this field. 

Descriptive  Summary 

The State Control  (SC) of the Republic of Lithuania, directly accountable to the Parliament, is 
the  supreme  (external)  audit  institution  similar  in  status  to  the  Court  of  Auditors.  The 
activities of the  SC are regulated  by the  1995 Law on State Control.  The  SC takes  an  active 
part in international bodies of supreme audit institutions. 

The  SC  supervises,  by  a posteriori  control, the  legality  of  holding  and  use  of  State  property 
and  the  application  and  use  of  the  State  Budget.  The  Controller  General  presents  to 
Parliament  a report  and  opinion  on the  annual  account  of the  State  Budget.  The  Parliament 
may also request the SC to carry out special investigations. 

Presently  there  is  no  central  internal  control  body.  Each  minister  is responsible  for  financial 
control  within  his  ministry. 
Internal  control  units  exist  within  12  of  the  18  Ministries, 
however,  they  do  not  entirely  meet  internationally  accepted  standards.  In  the  absence  of  a 
single central authority established especially for fighting  fraud, the Ministry of Finance  fulfils 
this responsibility. 

Internal control within the Ministry of Finance and the customs organisation  is ensured by the 
State Tax Inspection and the Customs Department.  The customs administration is responsible 
for  the  collection  of  import  duties.  Within  this  administration  the  import  duties  are 
administrated  by  the  tax  divisions.  They  are  responsible  for  accounting  for  import  duties, 
securing  recovery  of  unpaid  import  duties  and  dealing  with  investigations  and  appeal 
procedures. 

By  the  time  that  internal  and  external  control  measures  will  function  in  accordance  with 
international  standards,  it  is  envisaged  that  both  national  and  Community  funds  will  be 
controlled and protected against fraud  in the same way. 

Current  and  Prospective  Assessment 

There  seems  to  exist  a  weakness  of  internal  control  institutions  (insufficient  number  of 
qualified  auditors).  However  the  external  control  system  appears  to  respond  to  generally 
accepted standards. 

87 

The  required  instruments  for  a  successful  implementation  of  EU  policies  will  need  to  be 
established.  Special  attention  must  be  given to  the  development  of  efficient  internal  control 
mechanisms. 

The  new  Customs  Code,  which  will  come  into  force  on  1  January  1998,  seems  to  have 
identical provisions on the customs debt as Regulation 2913/92.  Further cooperation  with the 
Commission will be needed on the accounting procedure. 

Conclusion 

The  field  does  not  appear  to  present  major  obstacles  for  accession  in  the  medium  term, 
although  considerable  preparations  will  still  be  necessary  to  establish  the  necessary 
management and control mechanisms. 

Budgetary  Implications 

The  communication  entitled  "Agenda  2000"  sets  out  the  overall  financial  framework  which 
should accommodate  the budget  impact of any future  enlargements  in the medium term.  This 
is to  ensure that  any  enlargement  is  compatible  with proposed  Community  policy  guidelines 
within reasonable budget limits. 

As  things  stand,  it  would  be  difficult,  not  to  say  premature,  to  attempt  precise  country-by-
country  evaluations  of the budgetary  implications  of each of the applicants joining the Union. 
Exactly  what  the  impact  would  be  may  vary  considerably  depending  on  a  whole  series  of 
factors: 

the date on which the applicant country joins; 
developments  in  Community  policies  between  now  and  then,  in  particular  the 
decisions  to  be  taken  on  further  reform  of  the  common  agricultural  policy  and  new 
guidelines for  structural measures; 
the  progress  made  by  the  applicant  countries  in  terms  of  growth,  increasing  their 
competitiveness  and productivity and their ability to absorb the acquis; 
the transitional measures that will come out of the negotiations. 

Only  a few  orders  of  magnitude  for  certain budget  categories  and  an  overall  estimate  can  be 
given purely as a guide. 

Expenditure 

If  the  common  agricultural  policy  were  to  be  reformed  along  the  lines  suggested  by  the 
Commission,  once  the  reforms  were  fully  up  and  running  and  in  terms  only  of  market 
intervention  measures, Lithuania's  accession  would  give  rise to  additional  expenditure  in the 
order of  1  to 2% in relation to likely expenditure on the present fifteen  Member States. 

After  a phasing-in  period, the allocations  for  structural measures  in Lithuania  should total  not 
more than around 4% of Lithuania's GNP. 

Application  of the  other  internal  Community  policies  in the new member  countries  would  be 
likely  to  involve  additional  expenditure  probably  in  excess  of  their  relative  proportion  of 

88 

Union  GNP,  since  for  certain  policies  the  additional  implementing  costs  also  depend  on  the 
target population, the  geographical  area covered or the number of Member  States involved  in 
the  coordination  and  harmonisation  measures.  The  GNP  of  Lithuania 
is  currently 
approximately 0.1 % of total Union GNP. 

By contrast, Lithuania's accession should not involve significant  additional  expenditure as  far 
as Union external action is concerned. 

It should not be forgotten  that when an applicant country joins, the Community budget will no 
longer  have  to  bear  the  costs  of  grants  the  country  was  eligible  for .under  the  various  pre-
accession programmes, such as PHARE. 

In light of the above, the estimated costs in the three areas mentioned arising from  Lithuania's 
accession  should  fall  within  the  range  of,  annually,  ECU  0.7  to  0.9  billion  in  2005-06  (at 
constant  1997 prices). 

Revenue 

Assuming full  application of the own resources system, the new members' contributions to the 
Community  budget  should,  in terms  of total  GNP  and  VAT resources  (taking  account  of  the 
capping rules applying to VAT),  be close to the proportion of the Union's  GNP they  account 
for, which in Lithuania's case is around 0.1%. Lithuania's portion of traditional own resources 
will depend on the structure of its trade flows at the time of accession. 

the  purposes  of  accurately  calculating 

To  ensure that the  own resources  are  established,  monitored  and  made  available  in  line  with 
Community  regulations,  Lithuania  will  have  to  overhaul  its  current  customs  system.  In 
addition,  for 
the  GNP  resource  considerable 
improvements  will  have  to  be  made  to the  national  accqunts  to  ensure  that  they  are  reliable, 
homogeneous  and  complete. Improving the statistics will also be essential  for  drawing  up the 
VAT  own  resources  base, which  will  mean  bringing  Lithuania's  VAT  system  fully  into  line 
with the Community  directives. 

4  Administrative  Capacity  to  Apply  the  Acquis 

The  European  Council  in  Madrid  in  December  1995  concluded  that  the  harmonious 
integration  into  the  EU  of  the  central  and  eastern  European  applicant  states  would,  in 
particular, require the adjustment  of their administrative structures.  This chapter examines the 
current  state  of  the  public  administration  in  Lithuania,  including  relevant  aspects  of  the 
judicial  system,  and  assesses  the  current  and  prospective  ability  to  carry  out  the  functions 
required  of it in a modern, democratic  state, with a particular  focus  on the need to  administer 
matters related to the  acquis. 

4.1  Administrative  Structures 

89 

A  description  of  Lithuanian  constitutional  structures,  their  powers  and  responsibilities, 
including those of regional and local government, is given in Chapter  1. 

At  the  central  level  there  are  17  ministries  and  a  Prime  Minister's  Office.  A  European 
Integration Department is part of the Ministry of Foreign  Affairs. 

A  Civil  Service Law was approved by the Seimas in  1995.  It creates  a two-tier  civil  service: 
Category A, for political  civil servants appointed  by the current government,  and Category  B 
for  permanent  civil  servants.  The  new  Government  has  introduced  in  1997  high  level 
"experts" in each ministry, thus creating a parallel civil service structure. However, in order to 
stabilise  the  system,  an  amended  civil  service  law  is  currently  under  preparation  by  the 
government. 

The  principle  of  political  independence  of  the  civil  service  is  recognised  in  Lithuania, 
although senior positions are not always free of party political  influence. 

18,000 civil servants are employed by central government.  Pay and conditions are well below 
those in the private sector, leading to low morale and motivation. 

The reform  of the  central  administration  has been  a central policy  of the  current  government 
with  comprehensive  changes  made  to  the  organisation  of  ministerial  responsibilities.  The 
amended civil service law will draw on the conclusions of a policy document prepared in  1996 
by  the  Ministry  of  Public  Administration,  a  "Concept  of  Public  Administration  Reform  in 
Lithuania"  which  develops  a  reform  strategy,  indicating  projects,  timetable  and  resources 
while  also  proposing  organisational  structures.  The  Government  of  Lithuania  set  up  a 
Ministry  of  Public  Administration  and  Local  Government  Reform  in  June  1994.  It  submits 
proposals  to  the  government  in  form  of  State  programmes  or  draft  laws  on  administration 
reforms.  It  is  in  the  process  of  elaborating  the  training  criteria  and  the  state  system  of  civil 
service training and  certification. 

Concerning EU matters,  an inter-ministerial  coordinating committee for European  Integration 
affairs  under  the  Prime  Minister's  responsibility  has  been  set  up,  alongside  the  creation  of 
European  Integration  units  in  every 
line  ministry.  The  Lithuanian  Public  Administration 
centre, which trains civil  servants mainly  on implementation  of EU accession  related matters, 
was  established  in  1993. 
(See  also  the  section  of  the  Introduction  concerning  relations 
between the European Union and Lithuania). 

4.2  Administrative  and  Judicial  Capacity 

Lithuania  was  part  of  the  Soviet  Union  until  1991  and  administered  under  central  planning 
until  then.  The  communist  system  rejected  the primacy  of the rule of  law  and  subjugated  the 
law  and  the  administration  to  the  implementation  of  Party  policy.  Against  this  background, 
both the administration  and the rule of law itself increasingly  came to be seen by the public as 
instruments of political control. 

90 

The administrative  structures  are appropriate  for  an effective  administration.  The  framework 
for  a  permanent  civil  service  exists.  Despite  the  important  progress  which  has  been  made, 
however, further  development of the system will be necessary. 

The  Lithuanian  public  administration  is  constrained  by  a  lack  of  experience  and  resources 
and, at the lower levels, a legacy from  the past which tends to hinder the Government's  strong 
efforts  at reform.  Despite  this, the  State Control  Department  and the  Prosecutor  General  are 
able to function  adequately.  An important strength in the system, particularly in the context of 
enlargement,  is  the  Government's  commitment  to  achieving  standards  compatible  with  EU 
membership. 

The  legal  basis  for  the  civil  service  is  adequate.  However,  it  will  take  sometime  for  a 
politically independent civil service fully  to develop. 

The  civil  service  is  over-staffed.  The present  government  has  plans  to  reduce  its  size.  One 
effect  of this  should  be to release  funds  for  higher  civil  service  salaries.  This  in turn  should 
help to prevent high  staff  turnover caused  by a  "brain drain" to the private  sector.  As  in any 
public  administration,  some  staff  are  of  a  high  quality.  It  is  difficult  to  assess  the  overall 
standard, but there are clearly significant  deficiencies  in many parts of the  administration. 

Public  confidence  in  the  civil  service  is  not  assured.  Most  public  contact  is  with  the  more 
junior civil servants in routine administrative jobs; this is not widely  considered to provide an 
attractive advertisement for the Lithuanian publfc administration. Eradicating corruption in the 
public administration is a high priority of the present government.  There have been  dismissals 
and  prosecutions  for  improper  conduct  involving  the  Customs  Department  and  the  Public 
Prosecutors  Office. 

The  present  government's  intentions  in  the  field  of  civil  service  reform  are  positive.  As 
regards  local  government  reform,  Lithuania  has  achieved  good  progress.  The  third  wave  of 
reform  is on the  drawing  board, moving  one  step further  along the road to  decentralisation  at 
municipality  level.  It  remains  unclear,  however,  at  the  level  of  legislation  how  the  local 
governments  should  manage their responsibilities.  In the local  government  area, the  question 
of legislation and policy with regard to the divisions between levels of government  is the most 
difficult.  Recently,  there  has  been  progress  in  formulating  and  enforcing  appropriate 
legislation  for  further  decentralisation,  with special regard to the issues of municipal  property 
and  land  ownership  as well  as to clarify  the respective  spheres  of  fiscal  control  at  local  level 
and of the balance between fiscal incomes and state grants. 

The  administrative  structures  set  up  since  1996  for  European  Integration  have  already 
achieved some good results. 

Key Areas for the Implementation  of the Acquis 

The uniform  application  of EC  law:  The effective  application  of the acquis  presupposes 
that  the  judicial  authorities  of  member  states  are  able  to  apply  the  provisions  of  the 
Treaty  dealing  with  ensuring  the  unity  and  application  of  the  acquis,  and  are  able  to 
ensure  the proper  functioning  of  the  Single  Market  and  Community  policies  in  general. 
A  high  quality  and  well  trained  and  resourced judiciary  is necessary  for  the  application 

91 

by  the  courts  of  EC  law,  including  cases  of  direct  effect,  and  cases  of  referral  to the 
European Court of Justice under the terms of Article  177 EC. 

The judicial  system in Lithuania has important weaknesses, particularly concerning  resources, 
and relevant  expertise.  Given this situation, the Commission has significant  doubts about the 
ability of the system to assure the effective  application of the acquis. 

the  existence  of  highly  developed  and  effective 

Single  market:  The  ability  of  Lithuania  to  ensure  the  correct  application  of  Community 
requirements  in the Single  Market,  particularly  concerning  the free movement  of goods and 
services  presupposes 
regulatory, 
standardisation,  certification  and supervisory  authorities, able to act fully  in accordance  with 
EC rules.  An analysis of these points is made in Chapter 3.1 (under "The Four Freedoms"). 
Concerning the administrative  capacity  in respect of free movement  of goods the situation in 
Lithuania  is not yet satisfactory.  In the field of standardisation,  proposed  legislation  should 
improve  compatibility  with the  EC system.  The Standards  Department  is however  still not 
an  independent  body,  at variance  with  EC principles.  As regards  conformity  assessment 
infrastructure,  no quality  system  certification  body  exists yet.  Concerning  free  movement of 
services  the situation  remains  somewhat  unsatisfactory  as it  is not clear  that  the  Lithuanian 
authorities  have  the  administrative  resources  to  implement  quickly  the  large  legislative 
programme  to which  they  have  committed  themselves.  The Bank  of Lithuania  has 62  staff; 
the State Insurance Supervision Authority has 5 staff. 

In  order  to  meet  EU  requirements  in  this  area  it  will  be  necessary  to  improve  the  overall 
quality of staff. 

Competition:  As explained  in Chapter  3.1  (under  "Competition")  enforcement  of competition 
law  requires  the establishment  of anti-trust  and state  aid monitoring  authorities,  and that the 
judicial  system,  the  public  administration  and  the  relevant  economic  operators  have  a 
sufficient  understanding of competition law and policy. 

In  Lithuania  the central  authority  is the  State  Competition  and Consumer  Protection  Office 
which  has 37 staff  in all; this  is probably  adequate.  The level  of expertise  is not high.  The 
ability effectively  to implement  EC requirements in this field will require further  investment 
in technical and human resources. 

Telecommunications :  In order to formulate  and implement the many liberalisation  regulations 
contained  in the acquis  in this  field  it  is necessary  to  have  a regulatory  and policy  making 
body that is effectively  separated from any operating company. 

The  Commission  has  limited  information  on  the  administrative  situation  in  this  field  in 
Lithuania, however it is to be doubted whether sufficient  administrative capacity exists. 

Indirect  taxation:  The  effective  administration  of  the  indirect  taxation  acquis  presupposes 
structures capable of implementing the EC legislation concerning the harmonisation of Valued 
Added  Tax  and  excise  duties  in  an  environment  in  which 
fiscal  controls  at  internal  EU 
frontiers  have  been  abolished;  and the  excise  system  is  based  on  the tax  warehouses,  duty 
being payable at the local rate in the member  state at the time the goods are consumed.  This 

92 

requires  a  highly  developed  and well  trained  and  resourced  service,  with  a  high  degree  of 
integrity. 

In  Lithuania  the  relevant  authority  is  the  Ministry  of  Finance  (a  central  ministry  and  56 
regional  offices)  with  a  total  of  31,000  staff  (3,000  on  indirect  taxation).  Due  to  a  large 
turnover  of staff,  resulting  partly from  trained  staff  being recruited  by the private  sector,  it is 
to  estimate  the  capacity  of  existing  staff.  In  order  to  ensure  the  effective 
difficult 
administration of the acquis in this area it will be necessary to consolidate and improve overall 
the professional  standards of the staff, including training measures and improvements in pay. 

Agriculture:  The  administrative  requirements  in  the  agricultural  area  primarily  concern 
veterinary and phytosanitary  control, to protect public health and ensure the free  movement of 
agricultural goods; and the ability to administer the mechanisms and requirements of the CAP, 
including high standards of financial control and official  statistics.  These points are dealt with 
in Chapter 3.4 (under  "Agriculture"); general  standards  in the statistical  field are examined in 
Chapter 3.3 (under "Statistics"). 

Concerning  the administrative  capacity  in respect  of veterinary  and phytosanitary  controls in 
Lithuania,  testing  and  diagnostic  facilities  remain  inadequate. 
The  veterinary  and  food 
inspectorate  functions  would  benefit  from  reinforcement.  Concerning  the administration  of 
general  CAP requirements,  substantial  adaptation  of the  current  administrative  structure  will 
be required. 

In order to meet  EC requirements in this area considerable improvements will be required. 
Transport:  The application  of the  EC Internal  Market  and competition  requirements  to the 
transport  sector, the development  of relevant  infrastructure  products, and other  aspects  of the 
transport acquis will present administrative challenges to new member states. 

The  responsible  government  authority  in  Lithuania  is the  Ministry  of  Transport  (86  staff).. 
There  is  a  shortage  of  qualified  staff.  This  raises  particular  concerns  with  regard  to  the 
enforcement  of safety controls. 

Employment  and social policy:  A central  administrative  requirement  in respect  of the  acquis 
in this area is adequate inspection capacity, particularly concerning health and safety at work. 

In Lithuania the State Labour Inspectorate (50 inspectors) requires considerable  reinforcement 
of staff resources and expertise. 

Regional  policy  and  cohesion:  The  main  administrative  requirements  in  this  area  are the 
existence of appropriate and effective  administrative bodies , and in particular a high degree of 
competence and integrity in the administration of Community  funds. 

In  Lithuania,  there  is  no  nationally  established,  regional  policy.  The  situation  concerning 
financial  control  is not yet satisfactory  (see the section,  below,  on  "Financial  control"). The 
effective  administration  of the acquis  in this  area  will  require  the creation  of  administrative 
and budgetary  control  frameworks. 

93 

Environment:  Because  EC  environmental  policy  involves the  integration  of  environmental 
protection  into  EC  sectoral  policies the administrative  requirement  is potentially  very  wide, 
affecting  many bodies not normally  associated  with environmental  protection.  However, the 
main responsibility  lies with environment ministries and various subsidiary bodies. 

In  Lithuania  the  Environment  Ministry  employs  130  staff.  Monitoring  is  carried  out  by  the 
Joint  Research  Centre,  enforcement  by  the  Ministries  and  44  District  Agencies.  These 
arrangements  are  not  yet  adequate  and  enforcement  structures  need  to  be  reinforced.  The 
effective  administration  of  the  acquis  in  this  area  will  require  a  greater  human  resources, 
especially as legislation is progressively  approximated. 

Consumer  protection: 
In  this  area,  the  effective  administration  of  the  acquis  requires  the 
allocation  of  overall  responsibility  to  a  specific  State  body  through  which  the  formulation, 
implementation  and enforcement  of consumer policy  and consumer protection  legislation  can 
be undertaken. 

In Lithuania the main responsibility  lies with the State Competition  and Consumer  Protection 
Office  (7  staff  working  on consumer protection), a competition  authority  which has  extended 
its  scope  to  cover  consumer  issues.  As  regards  non-governmental  consumer  bodies  these 
remain  far  too  weak.  There  remains  confusion  about  the  exact  scope  and  objectives  of 
consumer  policy.  This  in  part  explains  difficulties  in the  effective  enforcement  of  consumer 
laws;  however,  other  factors  which  need  to  be  addressed  include  a  lack  of  expert  staff, 
organisational  deficits, and a lack of sensitivity to consumer questions among the judiciary. 

Justice  and home  affairs:  Oversight  of justice  and home  affairs  questions  falls  to justice  and 
interior  ministries.  The  administrative  structures  need  to  be  able  to  deal  effectively  with 
asylum  and  migration  questions,  border  management,  police  cooperation  and  judicial 
cooperation.  There  is an overriding  need  for  sufficient  and properly  trained  staff  with  a high 
degree of integrity. 

In Lithuania the justice  and  interior ministries  are adequately  staffed.  The  capacity  to  handle 
asylum and migration questions is not yet assured since the processing  of asylum  applications 
began  in May  '97, and  facilities  for  refugee  reception  are being  built up. Border  management 
is inadequate, with  a shortage  of staff  and equipment. The police service is being  restructured 
to  help  tackle  organised  crime.  Regarding  the  judiciary,  reforms  are  being  implemented, 
though currently there is little practical  cooperation with the EU. The effective  administration 
of  the  acquis  in  this  area  will  require  greater  human  and  technical  resources,  and  steps  to 
combat  corruption. 

Customs:  Applying  the  acquis  in  this  area  requires  an  adequate  level  of  infrastructure  and 
equipment, including computerisation and investigation resources, and the establishment  of an 
efficient  customs  organisation  with  a  sufficient  number  of  qualified  and  motivated  staff 
showing a high degree of integrity. 

In  Lithuania  the  customs  service  employs  3,295  staff.  Due  to  a  high  turnover  of  staff,  it  is 
difficult  to  estimate  their  efficiency,  and  therefore  the  adequacy  of  staffing  levels.  The 
effective  administration  of the acquis in this area will require the retention  of experienced  and 

94 

qualified  staff,  and computerisation of the customs administration. In particular, the problem 
of corruption will have to be seen to have been adequately tackled. 

Financial  control:  The  protection  of  the  Community's  financial  interests  requires  the 
development  of  anti-fraud  services, training  of  specialised  staff  (investigators,  magistrates) 
and the reinforcement  of systems of specific cooperation. The implementation of Community 
policies,  especially  for  agriculture  and  the  Structural  Funds, requires  efficient  management 
and control systems for public expenditure, with provisions to fight fraud. Administratively it 
is  essential  to  have  a  clear  separation  between  external  and  internal  control.  Police  and 
judicial authorities need to be able effectively  to handle complex transnational financial crime 
(including  fraud,  corruption  and  money  laundering)  which  could  affect  the  Community's 
financial  interests. 

In  Lithuania  the  main  external  control  body  is the  State  Control  (295  staff).  The  effective 
administration of the acquis in this area will require considerable preparations to establish the 
necessary management and control systems. 

4.3  General  Evaluation 

Lithuania's administrative structures will require a major, reinforced effort  of reform if there is 
to be an adequate capacity in the medium term effectively  to administer the acquis. 

Concerning the judicial capacity effectively  to apply Community law, a definite  evaluation at 
this stage is  difficult. 

95 

C.  SUMMARY AND CONCLUSION 

Lithuania  submitted  its  application  for  membership  of  the  European  Union  on  8  December 
1995. 
Its  request  is  part  of  a  historic  process  of  ending  the  division  of  Europe  and 
consolidating the establishment of democracy across the continent. 

In  accordance  with  the  provisions  of  Article  O  of  the  Treaty,  the  Commission  has,  at  the 
request of the Council, prepared an Opinion on Lithuania's request for membership. 

Lithuania's  preparation  for  membership  is  going  forward  notably  on  the  basis  of  the  Free 
Trade  Agreement  which  entered  into  force  on  1 January  1995.  The  European  Union  and 
Lithuania signed a Europe Agreement on  12 June  1995.  Once the ratification  procedures are 
complete and it enters into force, it will supersede the Free Trade Agreement.- Implementation 
of the White Paper of May  1995 on the Internal Market, another essential element of the pre-
accession  strategy,  is  going  ahead  on  the  basis  of  a  National  Legislation  Harmonisation 
Programme  adopted  in  September  1996.  The  government  has  put  in  place  the  necessary 
mechanisms to coordinate its policies for European integration. 

In  preparing  its  Opinion,  the  Commission  has  applied  the  criteria  established  at  the 
Copenhagen  European  Council  of June  1993.  The Conclusions  of this Council  stated  that 
those  candidate  countries  of  Central  and  Eastern  Europe  who  wish  to  do  so  shall  become 
members of the Union if they meet the following  conditions: 

- stability of institutions guaranteeing democracy, the rule of law, human rights and respect 

for and protection of minorities; 

-  the  existence  of  a  functioning  market  economy,  as  well  as  the  ability  to  cope  with 

competitive pressures and market forces within the Union; 

- the  ability  to take on the obligations  of membership,  including  adherence to the aims  of 

political, economic and monetary union. 

A judgment  on these  three  groups  of criteria  - political,  economic,  and  the  ability  to  take  on 
the  acquis  - depends  also  on the  capacity  of a country's  administrative  and  legal  systems  to 
put  into effect  the principles  of democracy  and the market economy  and to apply  and  enforce 
the acquis in practice. 

The  method  followed  in  preparing  these  Opinions  has  been  to  analyse  the  situation  in  each 
candidate  country,  looking  forward  to  the  medium  term  prospects,  and  taking  into  account 
progress  accomplished  and  reforms  already  under  way.  For  the  political  criteria,  the 
Commission  has  analysed  the  current  situation,  going  beyond  a  formal  account  of  the 
institutions to examine how democracy and the rule of law operate in practice. 

96 

1.  Political  Criteria 

Lithuania's political institutions function  properly and in conditions of stability.  They respect 
the  limits  on their  competences and  cooperate  with  each  other.  Elections  in  1992  and  1996 
were  free  and  fair,  and  in  each  case permitted  an alternation  of  power  in proper  conditions. 
The Opposition plays a normal part in the operation of the institutions.  Efforts  to improve the 
operation  of  the  judicial  system  and  to  intensify  the  fight  against  corruption  need  to  be 
sustained. 

There are no major problems over respect for fundamental  rights. 

Lithuania  demonstrates 
guaranteeing the rule of law, human rights and respect for and protection of minorities. 

the  characteristics  of  a  democracy,  with  stable 

institutions 

2.  Economic Criteria 

In the first three  years  after  independence  there was a very  serious  decline  in  output.  It  was 
halted only by the introduction of a new currency and the establishment of a currency board in 
1993/94.  Since then there have been  increasing rates of positive growth  every  year  (3.6% in 
1996),  despite  the  banking  crisis  in  1995.  Despite  reduced  tax  revenues,  Lithuania  has 
maintained  a  reasonably  tight  fiscal  stance.  Foreign  debt  is  at  modest  levels,  and  the  trade 
deficit  is under control.  Inflation  is down from  very high levels in  1992/93 to 24.6% in  1996. 
GDP  per  head  is  about  24%  of  the  EU  average,  for  a  population  of  3.7  million.  The 
agricultural  sector  employs  24%  of  the  labour  force,  and  accounts  for  9%  of  Gross  Value 
Added.  The EU is Lithuania's largest trading partner, taking 37% of total trade. 

On the basis of its analysis, the Commission's judgment as to Lithuania's  ability to meet the 
economic criteria established at Copenhagen is as follows: 

Lithuania  has  made  considerable  progress  in the  creation  of  a  market  economy.  Trade  and 
prices have been  largely  liberalised,  and considerable  progress has been  achieved  in the  area 
of macroeconomic  stabilisation.  However, further  progress is needed, particularly  in the areas 
of relative price  adjustments,  large-scale privatisation and bankruptcy  proceedings.  The  main 
element still missing is the enforcement  of financial  discipline for  enterprises. 

Lithuania  would  face  serious  difficulties  to  cope  with  competitive  pressure  and  market 
forces  within  the  Union  in  the  medium  term.  The  marked  recent  improvement  in  policy 
would,  if  sustained,  accelerate  the  establishment  of  a  market  economy  and  strengthen 
competitiveness.  But substantial enterprise restructuring is still required.  Agriculture needs to 
be modernised, and the banking sector is still weak. 

3.  Capacity  to take on the obligations  of membership 

Lithuania's ability to take on the acquis has been judged according to several indicators: 

97 

- the obligations set out in the Europe Agreement (even though this has not yet entered into 
force  for  Lithuania),  particularly  those  relating  to  the  right  of  establishment,  national 
treatment, free circulation of goods, intellectual property and public procurement; 

-  implementation  of the measures  set out  in the  White  Paper  as essential  for  establishing 

the single market; 

- progressive transposition of the other parts of the acquis. 

Even  before  the  Europe  Agreement  has  entered  into  force,  Lithuania  has  made  significant 
efforts  to  comply  with  some  of  the  obligations  which  will  come  into  effect  with  it.  It  is 
meeting  its  obligations  under  the  Free  Trade  Agreement,  and  according  to  the  timetable  for 
implementation  set  out  in  it.  No  serious  bilateral  problems  have  arisen.  Lithuania  has  also 
made  some progress towards  compliance  with the essential  single  market  legislation.  It has 
made progress in the areas of company  law, data protection and accounting.  But further  work 
needs  to  be  done  on  intellectual  property  rights,  public  markets,  liberalisation  of  capital 
markets,  financial  services, taxation, competition  and other areas. 

A problem  for  further  progress may be the weakness of the Lithuanian  public  administration, 
which  affects  not  only  the  pace  of  approximation  of  legislation  but  also  the  quality  of  its 
implementation and  enforcement. 

As  for  the  other  parts  of  the  acquis,  Lithuania  should  not  have  significant  difficulty  in 
applying  it from  the  date of accession  in the following  fields:  education,  training  and  youth; 
research  and  technological  development;  audio-visual;  small  and  medium  enterprises;  trade 
and international economic relations;  and development. 

By contrast, substantial efforts  will be needed in the fields of telecommunications; 
fisheries;  and customs. 

statistics; 

Provided  that  currently  positive  trends  towards  industrial  restructuring  and  privatisation 
continue,  most  of  Lithuanian  industry  should  be  able  to  cope  with  integration  within  the 
single market in the medium term. 

For  the  environment,  very  substantial  efforts  will  be  needed,  including  massive  investment 
and  strengthening  of administrative  capacity  to enforce  legislation.  Full  compliance  with  the 
acquis  could  only  be  expected  in the  long term  and  would  require  increased  levels  of  public 
expenditure. 

Lithuania  should  not  have  major  problems  in  applying  the  transport  acquis,  provided  that 
attention is given to maritime  safety  and environmental  standards.  Investment will be needed 
to extend the European transport network so as to ensure that the single market functions  well. 

It should be possible for Lithuania to achieve the employment  and  social affairs  acquis in the 
medium  term,  provided  that  it  makes  substantial  efforts  to  adapt  its  legislation  to  EU 
requirements in fields such as health and safety  and labour law. 

98 

On regional  policy,  Lithuania  will  need  to  make  the  necessary  administrative  reforms,  and 
establish  effective  systems  of  financial  control,  in  order  to  become  able  to  use  the  Union's 
regional and structural funds  for its development  effectively. 

The  agriculture  sector needs restructuring,  and only  a limited  number  of the  mechanisms  of 
the  common  agricultural  policy  currently  exist.  A  substantial  and  sustained  effort  will  be 
required to prepare for accession in the medium term. 

In  the  energy  field,  Lithuania  is  heavily  dependent  on  nuclear  power  generation. 
It  has 
committed  itself  to  closing  the  nuclear  plant  at  Ignalina,  and  must  maintain  the  agreed 
timetable  for  this.  In  the  meantime  it  must  make  the  necessary  short-term  adjustments  to 
bring  safety  procedures  to  internationally  accepted  standards.  No  other  major  problems  are 
foreseen  for  Lithuanian  accession  in  this  sector,  though  there  is  a  need  for  further  work  on 
monopolies, access to networks and energy pricing. 

On the basis of the analysis of Lithuania's capacity to apply the acquis, it is not yet possible to 
be  sure when  it could  become  able to take and  implement  the measures  necessary  to  remove 
the controls at borders between Lithuania and member states of the Union. 

Lithuania's  participation  in the third  stage of economic  and  monetary  union, which  implies 
coordination  of economic policy and complete liberalisation of capital movements,  still  poses 
problems in the medium term.  It is premature to judge whether Lithuania will be in a position, 
by the time  of  its  accession, to participate  in the Euro area.  That will depend  on how  far  the 
success  of  its  structural  transformation  enables  it  to  achieve  and  sustain  permanently  the 
convergence criteria.  These are, however, not a condition for membership. 

In justice  and  home  affairs,  Lithuania  has  made  some  progress,  eg  in  the  field  of  asylum. 
But  a  significant  sustained  effort  will  be needed  if it  is to be ready  to meet  the acquis  in  the 
medium term. 

Lithuania  should  be  able  to  fulfil  its  obligations  in  respect  of  the  common  foreign  and 
security  policy. 

In  addition,  Lithuania  has  no  major  territorial  disputes  with  any  Member  State  or  candidate 
country.  It has attached high priority to improving its relations with Poland. 

4.  Administrative  and legal capacity 

For  Lithuania  to  have  in  the  medium  term  the  administrative  structures  necessary  for  the 
essential  work of applying and enforcing  the acquis effectively,  there will need to be a  major, 
reinforced  effort  of reform. 

It  is  not  yet  possible  to  judge  when  Lithuania's  judicial  system,  which  has  an  equally 
important role to play, will acquire the capacity to play it  effectively. 

99 

CONCLUSION 

In the light of these considerations, the Commission concludes that: 

-  Lithuania  presents  the  characteristics  of  a  democracy,  with  stable  institutions 

guaranteeing the rule of law, human rights and respect for and protection of minorities; 

-  Lithuania has made considerable progress in the creation of a market economy,  but it 
would face serious difficulties  to cope with competitive pressure and market forces within the 
Union in the medium term; 

- Lithuania has made some progress in transposing and implementing the acquis relating 
particularly  to the single market.  With considerable  further  effort  it  should  become  able to 
participate  fully  in  the  single  market  in  the  medium  term.  Particular  efforts,  including 
investment, will be needed to apply the acquis fully  in sectors such as agriculture, energy and 
environment.  Strengthening of the administrative structure is indispensable if Lithuania is to 
have the structures to apply and enforce the acquis effectively. 

In the light of these considerations, the Commission considers that negotiations for accession 
to  the  European  Union  should  be  opened  with  Lithuania  as  soon  as  it  has  made  sufficient 
progress  in  satisfying  the  conditions  of  membership  defined  by  the  European  Council  in 
Copenhagen. 

The reinforced  pre-accession  strategy will help Lithuania to prepare itself better to meet the 
obligations of membership, and to take action to improve the shortcomings identified  in this 
Opinion.  The Commission will present a report no later than the end of  1998 on the progress 
Lithuania has achieved. 

100 

Composition Of Parliament 

ANNEXES 

Results of the most recent Parliamentary elections (1996) 

Political Party 

Number of Seats 

Homeland Union 
Christian Democratic Party 
Centre Union 
Democratic Labour Party 
Social Democratic Party 
Democratic Party 
Christian Democratic Union 
Women's Party 
Liberal Union 
Union of Political Prisoners and Deportees 
Poles' Electoral Action 
National Union 
Young Lithuania 
Farmers' Party 
Independents 

TOTAL 

70 
16 
13 
12 
12 
2 

4 

137* 

4 seats could not be filled because the turnout in the constituencies concerned was too low. 

16 \ 

Single Market: White Paper measures 

30-06-97 
LT 

This table is based on information provided by the Lithuanian authorities and confirmed  by them as correct as at the end of June 1997. It does 
not indicate the Commission's agreement with their analysis.  The table includes directives and regulations cited in the White Paper which total 
899.  These have been listed in accordance with the categorization used in the White Paper and in relation to the policy areas covered.  The table 
shows the number of measures for which the Lithuanian authorities have notified the existence of adopted legislation having some degree of 
compatibility with the corresponding White Paper measures. 

White Paper  chapters 

l.Free  Movement  of Capital 

2.FM  and  Safety  of Industrial  Products 

3.Competition 

4.Social  policy  and  action 

5.Agriculture 

6.Transport 

7.Audi0Visual 

8.Environment 

^Telecommunication 

lO.Direct  Taxation 

1 l.Free  movement  of goods 

H.Public  Procurement 

13.Financial  services 

14.Protection  of personal  data 

15.Company  Law 

16.AcCOUntancy 

1 7 . C i v il  l aw 

18.Mutual  rec. of  prof.  Qual. 

19.1ntellectual  property 

2 0 . E n e r gy 

21.CustOmS law 

22.1ndirect Taxation 

23.Consumer  Protection 

T o t al 

Lithuania 
Number  of White Paper  measures 
Lithuania 
Number of White Paper  measures 
Lithuania 
Number of White Paper  measures 
Lithuania 
Number of White  Paper  measures 
Lithuania 
Number of White Paper  measures 
Lithuania 
Number of White  Paper  measures 
Lithuania 
Number of White Paper  measures 
Lithuania 
Number of White  Paper  measures 
Lithuania 
Number of White Paper  measures 
Lithuania 
Number of White Paper  measures 
Lithuania 
Number of White Paper  measures 
Lithuania 
Number  of White Paper  measures 
Lithuania 
Number of White  Paper  measures 
Lithuania 
Number  of White Paper  measures 
Lithuania 
Number  of White  Paper  measures 
Lithuania 
Number  of White Paper  measures 

Lithuania 

Number of White  Paper rr.«3su»c* 
Lithuania 
Number  of White  Paper  measures 
Lithuania 
Number of White  Paper  measures 

Lithuania 

Number  of White  Paper  measures 
Lithuania 
Number  of White Paper  measures 
Lithuania 
Number of White Paper  measures 
Lithuania 
Number  of White  Paper  measures 

Lithuania 

Number of White  Paper  measures 

Dire 

ctives 

Regul 

ations 

Total 

Stage 
I 

1 
3 
25 
56 
1 
3 
10 
12 
47 
93 
16 
19 
1 
1 
17 
31 
7 
9 
0 
2 
0 
0 
5 
5 
11 
13 
0 
0 
2 
2 
0 
3 
0 
1 
1 
2 
4 
5 
6 
10 
0 
2 
1.0 
15  ' 
0 
8 
164 
295 

Stage 
II/III 
1 
l 
59 
104 
-0 
0 
2 
15 
15 
46 
11 
15 
0 
0 
0 
7 
3 
7 
0 
2 
0 
0 
1 
l 
6 
8 
0 
2 
3 
3 
0 
2 
0 
1 
8 
16 
2 
3 
1 
2 
1 
1 
6 
54 
0 
3 
119 
293 

Stage 
I 

0 
0 
3 
4 
1 
1 
0 
0 
7 
62 
6 
8 
0 
0 
3 
7 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
3 
3 
1 
14 
0 
0 
0 
0 
24 
99 

Stage 
II/III 
0 
0 
0 
l 
0 
0 
2 
2 
0 
2 
4 
13 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
0 
1 
I 
0 
0 
0 
0 
0 
0 
0 
3 
0 
0 
2 
184 
0 
6 
0 
0 
9 
212 

2 
4 
87 
165 
2 
4 
14 
29 
69 
203 
37 
55 
1 
1 
20 
45 
10 
16 
0 
4 
0 
0 
6 
6 
17 
21 
0 
2 
6 
6 
0 
5 
0 
2 
9 
18 
6 
n 
10 
15 
4 
201 
16 
75 
0 
11 
316 
899 

/oi 
Source: TA!EX 

Statistical Data 

If not explicitly  stated otherwise, data contained in this annex are collected from «Lithuanian 
Department  of  Statistics  (STATISTIKOS  DEPARTAMENTAS)"  with  whom  Eurostat  and 
Member States' statistical offices  are co-operating since several years in the framework of the 
Phare  programme.  Regular  data  collection  and  dissemination  are  part  of  this  co-operation 
process with the aim to enable the application of EU laws and practices in statistics. The data 
presented  below  have been compiled  as far  as possible  using  EU definitions  and  standards 
which  in  some  cases  differ  from  national  practices.  This  may  occasionally  give  rise  to 
differences  between the data presented here and those shown elsewhere in the opinion, which 
are generally based on the individual applicant countries' updated replies to the questionnaire 
sent to them in April  1996.  The exact compatibility with EU standards on statistics and thus 
the comparability with EU figures can still not be guaranteed, particularly those statistics that 
have not been  supplied  through  Eurostat, but have been delivered  directly  by the  countries 
concerned.  Wherever  available,  methodological  notes  are  given  describing  content  and 
particularities of statistical data presented in this annex. .  Data correspond to the  information 
available as of May 1997. 

BASIC DATA 

Total  Area 

Population  ( end  of the  period) 

- Total 

- Females 

- Males 

Population  density 

Urban  Population 

Deaths  rate 

Births  rate 

Income and  GDP  per  capita 

-Average monthly wage and salary per employee 

-GDP per capita 

Structure  of production:  share  of branch  GVA 

-agriculture 

-industry 

-construction 

-services 

1990 

1993 

1994 

1995 

1996 

56.8 

68.1 

1000 hectares 

6530. 

6530.1 

6530.1 

6530.1 

3724.0 

1962.8 

1761.2 

in  1000 

3717.7 

1961.1 

1756.6 

per  1  km2 

3711.9 

1959.3 

1752.6 

3707.2 

1952.2 

1749.0 

in % of total population 

per 1000 of population 

12.3 

12.5 

12.5 

11.5 

European Currency Unit 

56.9 

56.8 

68.0 

67.8 

11.6 

10.6 

12.2 

11.1 

70 

932 

in % of Total Gross Value Added 

27.7 

32.8 

10.5 

29.0 

< 

9.3 

29.0 

6.7 

55.0 

) 02 

share of branch GVA in 1990 

share of branch GVA in 1995 

•  0.0 

il 29. 

10.5 

,32.8 

127.7 

g 

g 

Q 

-agriculture 

-industry 

-construction 

{H  -services 

• 

- Others 

.55.0 

•  0.0 

K  19.3 
4 129.0 

16.7 

B 

g 

• 

g 

• 

-agriculture 

-industry 

-construction 

-services 

- Others 

Total Area:  Data presented at the end of the year. 

/01 

NATIONAL ACCOUNTS 

Gross Domestic Product  (Current  Prices) 

12897. 

42282. 

3386. 

11107. 

16980. 

23829. 

1990 

1991 

1992 

v 

1993 

1994 

1995 

in Millions of National Currency 

Gross Domestic Product (Current  Prices)  -

Gross Domestic  Product 

Gross  Domestic  Product 

Final  consumption  expenditure 

-of households and NPISH 

-of general  government 

Gross  fixed  capital  formation 

Exports  of goods and  services 

Imports  of goods  and  services 

Final  consumption  expenditure 

-of households  and NPISH 

-of general  government 

Gross fixed  capital  formation 

Exports  of goods and  services 

Imports  of goods and  services 

in Billions of ECU 

1.2 

2.0 

2.9 

3.5 

in Purchasing Power Standard per capita 

3411. 

3592. 

4128. 

% change over the previous year 

-3.3 

-13.1 

-34.0 

-30.4 

1.0 

3.0 

in % of Gross Domestic Product 

74.9 

54.9 

11.0 

28.8 

54.2 

63.0 

66.5 

55.5 

11.0 

22.0 

29.1 

20.6 

82.1 

69.4 

12.7 

29.2 

31.8 

22.8 

85.5 

69.1 

16.4 

24.2 

86.1 

94.3 

90.6 

72.4 

18.2 

20.6 

55.1 

61.1 

89.2 

69.5 

19.8 

21.4 

53.6 

65.4 

GDP (%  Change  over the previous  year) 

1992 

j ^ i P O; 

l?~' 

. 

s<. 1.1995 

5.0 
0.0 
-5.0 
-10.0 
-15.0 
-20.0 
-25.0 
-30.0 
-35.0 

/of 

MAIN ECONOMIC INDICATORS 

Inflation  rate 

Industrial production volume indices 
Gross agricultural production volume indices 
Unemployment rate (ILO methodology) 

-Total 
- less then 25 years 
- 25 years and more 

Gross Foreign debt 
Balance of payments 

-Exports of goods 
-Imports of goods 
-Trade balance 
-Services, net 
-Income, net 
-Current account balance 
-Capital and fin. acc.(excl. reservesj 
-Reserve assets 

1990 

1991 

1992 

1993 

1994 

1995 

1996 

percentage change over the previous year 

9.1 

216. 

1020. 

410. 
previous year »  100 

72.2 

39.6 

24.6 

103. 
115. 

6.2 
5.1 
6.4 

73.4 
82 

4.5 
4.3 
4.5 

92 

in % labour force 

3.5 
3.5 
3.5 
in Billions of USD 

0.03 

0.32 
in millions of USD 

0.57 

2026 
-218 
-155 
-55 
8 
-86 
401 
-308 

2029 
-223 
-205 
-55 
9 
-94 
321 
-180 

105. 
110 

7.3 
5.9 
7.7 

2706 
-340 
-698 
-13 
-13 
-614 
558 
-231 

Inflation  rate:  Percentage change of yearly average over the previous year - all items index (data are based on national CPIs which are 

not strictly comparable) 

Gross  agricultural  production  volume indices: 

Indices based on evaluation  of all  individual  products of gross agricultural  production. 

Constant prices refer to 1989. 

Unemployment  rate  (by  ILO  methodology):  -Registered  unemployment  from  Labour  Exchange  percentage  of  economically  active 

population. This rate is derived from LFSS (Labor Force Survey) observing the following ILO definitions and recommendations: 
Labor force  employed and unemployed persons in the sense of the ILO definitions stated below. 
The employed  all  persons  aged  15+, who  during  the  reference  period  worked  at  least  one  hour  for  wage  or  salary  or  other 
remuneration  as employees, entrepreneurs, members of cooperatives or contributing family  workers. Members of armed  forces and 
women on child-care leave are included. 
The unemployed  all persons aged  15+, who concurrently meet all three conditions of the ILO definition  for being classified  as the 
unemployed: (i) have no work, (ii) are actively seeking a job and (iii) are ready to take up a job within a fortnight. 

Gross foreign debt:  Debt is extracted form the OECD's External Debt Statistics. 

Balance of payments:  Data is derived from  IMF database, their comparability with respective EU statistics can not be guaranteed, but 
balance of payments is compiled mainly in accordance to IMF standards.  Balance in trade of goods in accordance with balance of 
payments principles. Exports and imports arc both in fob.  values.  Net income includes direct, portfolio  and other  investment 
income, compensation of employees.  Current account balance by definition  of IMF 5th Manual, capital transfers  are excluded. 
Reserve assets: it means changes in reserve assets during the year; (+) signifies an increase, (-) a decrease in reserve assets. 

/d<* 

FOREIGN TRADE 

Imports and exports (current prices) 

-  Imports 
-Exports 
-Balance  of trade 

External  trade volume  indices 

- Imports 

- Exports 

1993 

1994 

1995 

1996 

in millions of USD 

2255. 

2004. 

-251. 

2351.7 

2030.4 

-321.3 

3648.5 

2705 

-943.5 

4404.5 

3279.8 

-1124.8 

previous year "  100 

Structure of Import by SITC (current prices) 

in '/» of total Export 

- (0+1) food  and live animals, beverage and tobacco 

-  2 crude materials, inedible 

-  3 mineral  fuels  and  lubricants 

-  4 animal  and vegetable oils etc. 

-  5 chemicals  and related  products 

-  6 manufactured  goods classified  chiefly  by material 

-  7 machinery  and transport equipment 

-  8 miscellaneous  manufactured  articles 

Structure of export by SITC (current  prices) 

in % of total  Import 

- (0+1) food  and live animals, beverage and tobacco 

-  2 crude materials,  inedible 

-  3 mineral  fuels  and  lubricants 

-  4 animal and vegetable oils etc. 

-  5 chemicals  and related  products 

-  6 manufactured  goods classified  chiefly  by material 

-  7 machinery  and transport  equipment 

-  8 miscellaneous  manufactured  articles 

External  trade  price  indices 

-  Imports 

-  Exports 

previous year ~  100 

/o? 

Imports  and  exports  (current  prices):  Trade data exclude direct re-exports, trade in services and trade with  customs  free  zones  as well  as 
licenses, know-how and patents. The data are based upon the General trade system and are regularly updated.  Trade Classifications: 
Lithuania  is  using  the  commodity  classification  according  to  the  Combined  Nomenclature. 
Imports  are  recorded  on  CIF  basis. 
Exports  are recorded on FOB basis. 

/ôf 

FOREIGN TRAD 

Structure of imports by main countries (current prices) 

1st partner 
2nd partner 
3rd partner 
4th partner  . 
5th partner 
others 

Structure of exports by main countries (current prices) 

1st partner 
2nd partner 
3rd partner 
4th partner 
5th partner 
others 

1993 

1994 

1995 

1996 

R 
D 
U 
B 
D 

R 
U 
B 
L 
P 

53 
9. 
6. 
3. 
2. 
24 

33 
1 
7. 
7. 
7 
3 

R 
D 
U 
P 
B 

R 
D 
L 
B 
U 

in % of total imports 

R 
D 
P 
U 
B 

39 
13 
5 
4 
3. 
34 
in % of total exports 

R 
D 
B 
-  U 
L 

28 
11 
8. 
6. 
6. 
39 

31 
14 
4. 
3. 
3. 
4 

20 
14 
10 
7. 
7. 
39 

R 
D 
P 
G 
D 

R 
D 
B 
L 
U 

2 
15 
"5. 
4 
3. 
45 

23 
1 
10 
9. 
7. 
36 

Structure of export by main partners 
in 1996 

RU 
, . , « - , - ^ ^^  23.8% 

36.1% 

Structure of import by main partners 
in*1996 

45.4% 

PL 

DKGB 
3.8%0%  5 J% 

BY 

DE 

DK 

GB 

Belarus 

Germany 

Denmark 

United  Kingdom 

LV 

PL 

RU 

UA 

Latvia 

Poland 

Russian  Federation 

Ukraine 

t<& 

SOCIAL INDICATORS 

Population  on 1 January 

1991 

1992 

1993 
thousand 

1994 

1995 

3736. 

3746.9 

3736. 

3723.9 

3717 

Proportion of population  by age (1 January  1995) 

in % of total population 

y0_14 
yl5_24 
y25_44 
y45_64 
y65_max 

Live births 
Deaths 
Infant deaths 

- Less than  1 year 
- Still birth 

Marriages 
Divorces 

Crude  marriage  rate 

Crude divorce  rate 

Natural growth  rate 
Net migration  rate 
Total  population  growth  rate 
Total fertility rate 
Infant  mortality  rate 
Late foetal  mortality  rate 
Life  expectancy 

- Males 
- Females 
Life  expectancy 

- Males 
- Females 

56219 
41013 

806 
408 
34241 
15250 

9.2 

4.06 

4.05 
-1.41 
2.64 
1.97 
14.34 
7.21 

42832 
46486 

603 
297 
23337 
11061 

6.3 

3.0 

-1 
-0.7 
-1.7 
1.54 
14.08 
6.89 

53617 
41455 

887 
434 
30112 
13981 

8.02 

3.72 

3.25 
-5.91 
-2.66 
1.89 
16.54 
8.03 

total  number 

46727 
46107 

746 
37Ô" 
23709 
13884 

per  1000 of population 

6.36 

3.72 

0.16 
-3.51 
-3.35 
1.67 
15.97 
7.86 

at birth 

at 65 years 

21.9 
14.6 
29.5 
22.1 
11.8 

6.0 

2.8 

12.5 

63.6 
75.2 

12.9 
16.9 

Marriages  and  Divorces:  The rates were recalculated, using the resident population  as  denominator. 

Net  Migration:  The  migration  totals  were  calculated  as overall  change  minus  the  natural  increase.  However  this  data  do  not  represent 
actual  figures  of  arrivals  from  and  departures  for  the  Republics  of  the  former  USSR  because  of  different  methods  of  migration 
calculations. 

Ko 

LABOUR MARKET 

Economic Activity Rate (ILO  methodology) 

Average  employment 

Unemployment  rate (ILO  methodology) 

-Total 
- less then 25 years 
- 25 years and  more 

Registered  unemployment (end of period) 

Average  paid employment indices  by NACE  classes 

- Agriculture, hunting, forestry  and  fishing 
- Mining and  quarrying 
-  Manufacturing 
- Production  and distribution  of electricity, gas and water 
- Construction 
- Transport, storage and  communication 

Monthly  wages and salaries  indices 

-real 
- nominal 

1993 

65.3 

3.5 
3.5 
3.5 

3.5 

1994 
1995 
in % of population age +15 

61.1 

65.3 

in thousand 

61.4 

65.3 

in % of labour force 

4.5 
4.3 
4.5 

7.3 
5.9 
7.7 

in */» of economically  active population 

4.5 

7.3 

1993 

1994 

1995 

previous year ™  100 

110.2 
66.7 
84.1 
109.5 
74.9 
80.6 

61 
311.2 

97.7 
100 
80 
112.9 
87.5 
92.2 

114.2 
196.6 

100.1 
97.5 
90 
112.2 
103.4 
103.3 

103.2 
144 

1996 

62.3 

65.3 

6.2 
5.1 
6.4 

6.2 

1996 

102.2 
89.7 
95.3 
100 
100.8 
98.8 

104.0 
129.6 

Unemployment  rate  (by  ILO  methodology):  Registered  unemployment  from  Labour  Exchange  percentage  of  economically  active 

population. This rate is derived from LFSS (Labor Force Survey) observing the following ILO definitions  and recommendations: 
Labor force  employed  and unemployed persons in the sense of the ILO definitions  stated below. 
The  employed 
all  persons  aged  15+,  who  during  the  reference  period  worked  at  least  one  hour  for  wage  or  salary  or  other 
remuneration  as  employees,  entrepreneurs,  members  of  cooperatives  or  contributing  family  workers.  Members  of  armed  forces  and 
women on child-care leave are included. 
The unemployed 
unemployed: (i) have no work, (ii) are actively seeking a job and (iii) are ready to take up a job within a fortnight. 

all  persons  aged  15+, who  concurrently  meet  all three conditions  of the  ILO definition  for  being classified  as the 

Registered  unemployment  (end  of  period): 

Registered  unemployment  in  per  cent  -  percentage  of  unemployed  registered  in  civil 
economically  active  population, based  on  Labour force sample survey (LFSS).  Registered unemployment  covers persons  as  looking 
for a job  in Local Labour Exchange in the area in which they are living. 

Monthly wages and  salaries  indices:  Nominal wages refer to net nominal wages. 

Id 

PUBLIC FINANCE 

Government  budget 

-Consolidated central government revenue 
-Grants 
-Consolidated central government expenditure 
-Consolidated general government expenditure 
-Consolidated central government  deficit/surplus 
-General government  deficit/surplus 

1990 

1991 

1992 

1993 

1994 

1995 

in millions of national currency 

133. 
0.5 
120 
139. 
13.8 
17.4 

2688. 
5.5 
2475. 
3253 
218. 
244 

4031. 
2.2 
4292. 
5660. 
-258 
-282. 

25.3 
33.3 
-1.5 
-1.7 

5661. 
0 
6079. 
7860. 
-418 
-384. 

27.4 
35.4 
-1.9 
-1.7 

Government budget 

in 'A of Gross Domestic Product 

-Consolidated central government expenditure 
-Consolidated general government expenditure 
-Consolidated central government  deficit/surplus 
-General government  deficit/surplus 

22.3 
29.3 
2.0 
2.2 

Government  budget:  These data relate to central  and general  government 

Atta 
ched  are working  tables  showing  how series on consolidated  general  government  expenditure  and deficit/surplus  were  calculated 
from  data  published  in  the  IMF's  Government  Finance  Statistics  Yearbook  (1996)  (GFSY);  included  also  is  the  country's 
presentation  in the GFSY. 

Bee 
ause  the  GFSY  does  not  present  statistics  for  general  government,  but  for  individual  levels  of  government  separately,  the 
consolidated  series  presented  here  were  obtained  from  central  and local  government  data  and adjusted  in consolidation  for the 
identified  intergovernmental  transfers. 

Eve 
n though  the statistics  cover the central  and local  government  published  in GFSY, the coverage  may  not be exhaustive  if some 
central  or  local  government  units  are not included  in that  coverage.  A measure  of the  exhaustiveness  of the  coverage  can be 
obtained  by comparing  in the GFSY  the  note  on the coverage  of data  for  individual  countries  with  the list  of central  and local 
government  units  provided. 

It 

should  be noted  that  the deficit/surplus  used  here  is equal  to revenue  and grants  minus  expenditure,  and does  not take  lending 
minus repayments  into account (see further  below). 

The 

netting  of inter-government  transfers  carried-out  in the attached  tables  is limited  to the current  and capital  transfers  consisting of 
the  identified  grants  and current  and capital  subsidies  between  the levels  of government.  Other  types  of transactions  occurring 
between  government  levels,  such  as  the  payments  of  taxes  and  employers'  social  security  contributions,  and  the  reciprocal 
purchases  of  goods  and  services  are not normally  classified  as  inter-governmental  transfers  have  not  been  eliminated  in the 
consolidation  process.  Finally,  whether the absence of data for current and capital  transfers  should  be attributed  to the absence of 
transfer  or to lack of data is unclear; in all cases absence of information  on transfers  have been  deemed to represent  zero-transfers. 

I/V 

Government  expenditure  consists  of  general  government  cash  expenditures  on  current  and  capital  goods  and  services,  interest 
payments and current and capital transfers but excludes non-cash transactions. 

a. 

Deficit/surplus  equals cash revenue and cash grants minus cash expenditure.  This measure of the deficit/surplus differs  from that 
used  in  GFS  which  equals  cash  revenue  and  cash  grants,  minus  cash  expenditure,  minus  net  lending.  This  exclusion  of  net 
lending(consisting,  in  the  GFS  methodology,  of  operations  in  financial  assets  and  liabilities  carried  out  for  specific  policy 
purposes, rather than for liquidity purposes) brings the measure of the deficit/surplus presented here closer to the national  accounts 
concept of net borrowing/net lending.  Also, as a result of this exclusion, receipts from  privatisation  (classified  as repayments  in 
the GFS methodology)  do not enter in the determination of the deficit/surplus  presented in the attached tables (and therefore  do not 
reduce the deficit). 

b. 

1/3 

1990 

1991 

FINANCIAL SECTOR 

Monetary aggregates 

- Monetary aggregate M1 
- Quasi money 

Total reserves ( gold excluded, end of period) 

Average short term interest rates 

- lending rate 
- deposit rate 

Official discount rate (end of period) 
USD exchange rates 

Average of period 

End of period 

ECU exchange rates 

Average of period 

End of period 

1992 

1993 
Billions (10*9) of US Dollars 

1994 

0.45 
0.24 
Millions (10*6) of US Dollars 

0.62 
0.47 

1995 

199 

0.88 
0.55 

0.91 
0.49 

350.3 
% per annum 

525.4 

757.0 

777.2 

91.9 
48.7 

62.3 
27.4 

27.1 
8.4 

J6 
6 

1 USD -  ...LTL 

4.344 
3.9 
1 ECU»...LTL 

5.675 
4.846 

1.773 
3.79 

2.787 
2.147 

3.978 
4 

5.820 
4.893 

6.876 
5.257 

6.36 
50.1 

Monetary aggregates (end of period):  Money (Ml)  Includes demand deposits and currency outside banks.  Quasi money  Include time, 
savings and  foreign  currency deposits.  Time deposits of the national  currency, convertible  currency, or non convertible  foreign 
currency.  Eurostat has converted National Currencies to the US dollar by applying the International  Monetary Fund annual end of 
period exchange rates. 

Average short term  interest  rates:  Data are extracted from the IMF's monthly International Financial Statistics (IFS). Average short-term 

lending and deposit rates relate to period averages. Lending rates generally consist of the average interest rate charged on loans granted 
by reporting banks. Deposit rates relate to average demand and time deposit rates or average time deposit rates. These rates may not be 
strictly comparable across countries to the extent the representative value of the reporting banks and the weighting schemes vary. 

Total reserves (gold excluded, end of period):  The statistics on official  foreign reserves are extracted from the IMF's monthly International 
Financial Statistics (IFS).  Total reserves (gold excluded) are defined as the sum of central bank holdings of foreign  currencies and 
other (gross) claims on non-residents; this definition excludes claims on residents denominated in foreign currency. According to the 
definition;  official  foreign  reserves  are  calculated  at  market  exchange  rates  and  prices  in  force  at  the  end  of  the  period  under 
consideration. Total reserves (gold excluded) published in IFS may differ from the figures published by the national authorities. Some 
factors contributing to possible differences  are the valuation of the reserve position in the Fund, and a different treatment of claims in 
non-convertible currencies. 

IW 

USD  exchange  rates: 
Internationales". 

International  Monetary  Fund  exchange  rates  as  present  in  the  publication:  "Statistiques  Financières 

M 

INFLATION (12 months chang 
Percentage change of the CPIs with the current month compared with the corresponding month of the previous year (t/t-12) 

Ja 
797 

176 

46. 

32. 

Fe 
594 

158 

47. 

30. 

M 
613 

119 

45. 

31. 

Ap 
708 

78. 

.44. 

31. 

M 
753 

68. 

39. 

28. 

Ju 
707 

61. 

37. 

28. 

Ju 
553 

60. 

38. 

24. 

Au 
477 

62. 

36. 

24. 

Se 
364 

59. 

35. 

22. 

Od 

319 

53. 

36. 

18. 

No 
247 

48. 

37. 

15. 

De 
188 

45. 

35. 

13. 

199 

199 

199 

199 

Inflation  (%  change  of CPI) 

1. 

^>  ^ ^ 

y f f,w 

^-•nf^-yns»  fiv^f^r 

Inflation  (12  months changes):  Inflation  rates (12 months changes) are percentage changes of the CPIs with the current  month  compared 
Inflation  rates are based  on  national  CPIs which  are  not  strictly  comparable 

with  the corresponding  month  of the previous  year. 
between candidate  countries or with those based on EU HICPs (different  methods, concepts, practices  in the calculation  of CPIs). 

//O 

INDUSTRY 

Structure  of GDP  by economic  activities (NACE, current  prices) 

- Mining and  quarrying 
-  Manufacturing 

- Production  and distribution  of electricity, gas and water 

Industrial  production  volume  indices  by NACE  classes 

- Total 
- Mining and  quarrying 
-  Manufacturing 
- Production  and distribution  of electricity, gas and water 

1993 

1994 

1995 

1996 

in % of Gross Domestic Product 

24.8 
5.6 

65.3 

23.1 
2.7 

25.9 
3 

previous year»  100 

73.4 

70.2 
88.4 

105.3 

100.9 
121.9 

25.2 
3.1 

— 

103.7 

101.3 
110.8 

INFRASTRUCTURE 

Railway  network 

198 

199 

199 

199 

in Km  per 1000 Km2 

40. 

39. 

Kilometre 

Length  of  motorways 

31 

42 

39 

40 

inhabitants 

Number  of inhabitants  per  passenger  car 

10. 

7. 

5. 

Hi 

AGRICULTURE 

Land  area  by land-use  categories 

- total 
- agricultural  land 
-  forest 
- arable land 
- permanent meadows  and  pastures 

Agricultural  land  by legal  status 

- state enterprise 
- Cooperatives 
- others 

Share  of GDP 

- Agriculture, hunting, forestry  and fishing  (Nace A+B) 

Gross  agricultural  production  volume  indices 

Main  crops  by  area 

- Cereals 
- of which: wheat 
- Potatoes 
- Sugar beet 

- Fodder beet 

Main  crops  by  yield 

- Cereals 
- of which:  wheat 
- Potatoes 
- Sugar  beet 
- Fodder  beet 

Sales or  procurement  of animal  for  slaughter 

-  P'gs 
-  cattle 
-  poultry 

Livestock  breeding  intensity  (end  of  period) 

-  cattle 
-  of which: cows 
-  sheep 

-  P'gs 

199 

199 

199 

199 

199 

653 
352 

300 
459 

in  1000 Hectares 

6530 
351 
1975 
2958 
495. 

6530 
3506 
1990 
2946 
500. 

in V» of agricultural land 

26. 
935. 
255 

25. 
67 
2802 

653 
351 
197 
297 
473 

31. 
131 
217 

6530 
350 
1978 
2567 
500. 

24. 
547. 
2931 

199 

199 

199 

199 

199 

11. 

11 

108 
351. 
12 
32 
54 

in % of Gross Domestic Product 

11. 

7.4 

9.4 

Previous year =  100 

92 

82 

11 

in 1000 Hectares 

126 
375 
12 
35 
54 

21. 
23. 
145 
246 
371 

1194 
27 
11 
27 
55 

1026 
260. 
12 
24 
65 

in  100 kg/Hectares 

17. 
20. 
94. 
173. 
239. 

18. 
24. 
12 
283. 
338. 

113 
283 
11 
33 
56 

19. 
29. 
94. 
190 
251 

199 

199 

199 

199 

199 

in  1000 tons of live weight 

30. 
195 
13. 

23. 
116. 
15. 

32. 
90. 
20. 

heads per 1000 Ha of agricultural land 

42 
20 
14 

38 
20 
13 

31 
17 
10 

heads per 1000 Ha of arable land 

45. 
103. 
20. 

31 
17 
8 

434 

499. 

452. 

400. 

II? 

Lithuania 
1995 

Legend: 

A/  Country boundary 
A/  Region boundary 

COUNTRY NAME 
REGION NAME 
CITYNAME 

Selected major settlements: 
(1 000 inhabitants) 
200- 250 
250-  500 
500-  1000 
>1000 

O 
• 
• 
• 

General information about the country: 
Age groups (in years): 

1 = <15 

Living standard (in 1993): ECU 585 
(aDPparoaplta) 

15-  65 
>65 

POLAND 

BELARUS 

Area: 65 300 km8 
Administrative regions: 10 provinces 
Population: 3 712 500 

Soutottt Uttiuanian Dapartrnaiit of Qlatlatfca 
Cartography and gaographle Information managamant QI800 

25 

75 km  m 

ISSN 0254-1475 

COM(97) 2007 final 

DOCUMENTS 

EN 

11  01  06 

Catalogue number  : CB-CO-97-375-EN-C 

ISBN 92-78-22873-7 

Office  for  Official  Publications of the European  Communities 

L-2985  Luxembourg 

lu>