Adopting The Euro Before 2015 Is Not Viable

Andreea Arăboaei

Representatives of the National Bank of Romania (BNR) and economic analysts do not support the idea that Romania should adopt the European currency faster in order to avoid exchange rate risks. In their opinion, the country is not yet ready to adopt the euro, which means that costs would be much higher if the process is rushed.

The adoption of the euro in 2015 as per the current roadmap is the great test for Romania, considering the present economic difficulties, BNR Vice Governor Cristian Popa told the symposium "Realities and Illusions In The Context of the Economic Crisis" organized by BNR on Friday.

He reminded the audience that, according to the roadmap, Romania should enter the pre-adoption phase (ERM-2) in 2012, receive the go-ahead in 2014 and effectively switch to the euro as of 1 January 2015.

While the premature adoption of the euro would remove the exchange rate risk and stimulate sustainable economic growth, the disadvantages would be much greater, according to Popa. Among them are the premature loss of the autonomy of the monetary policy and exchange rate policy, the lack of synchronization between the business cycles in Romania and the business cycles in the Euro Zone (which would increase the risk of asymmetric shockwaves, hard to counteract in the absence of an independent monetary policy and exchange rate policy) or the limitation of the time for perfecting the efficiency of the inflation targeting effort as a monetary policy function.

The midway solution would be to adopt the euro in 2015 and thus allow the necessary time for finalizing most of the structural reforms and improving the flexibility of the labour market. Such timeframe would also allow the sustainable alignment of the annual inflation rates to the Maastricht criterion and the policy of the European Central Bank. The current roadmap would also allow the synchronization of the business cycles in the national economy to the Euro Zone and the achievement of substantial progress towards real convergence.

Dorin Mantescu, Director General of the General Directorate for Macro-Economic Analysis and Financial Policies of the Finance Ministry, told participants that, in 2008, Romania had met two of the five nominal convergence criteria set in Maastricht, compared to three criteria in 2005: a public debt below 60% of the GDP and exchange rate fluctuations within +/- 15%. Despite large fluctuations between +8 and -10%, the exchange rate did remain compliant with the Maastricht limits. Mantescu added that the public debt was low, that is, 13.6% of the GDP in 2008, but would increase along with the increase of various deficits of the social security budgets caused by the unfavourable performance of the pension system and the unemployment hike as well as negative demographics such as a general population aging and a low fertility rate.

The other nominal convergence criteria are: an inflation rate by up to 1.5% more than the average rate in the three lowest inflation EU countries (4.1% in 2008), long-term (governmental bonds) interest rates by up to 2% above the average of those in the three lowest rate countries (7.1% in 2008) and a maximum budget deficit of 3% of GDP per year. In 2008, Romania reported an average annual inflation rate of 7.9%, a long-term interest rate of 7.7% and a budget deficit of 5.4% of the GDP.

Raiffeisen Bank Chief Economist Ionut Dumitru believes that the existing roadmap for the adoption of the euro should be maintained. In his opinion, real convergence, which is more important than nominal convergence, is not one of Romania"s strengths. The Romanian labour market is the most rigid in the European Union, as Romanians are very attached to their homes and hardly mobile, Dumitru added. As for the need to synchronize economic cycles, Dumitru explained that Romania"s level of correlation was one of the lowest in the European Union. Additionally, Romania"s economic structure is different from the structure of the Euro Zone, as agriculture accounts for much more of the overall economy than in the other Members. As far as commercial convergence is concerned, Romania"s economy has a low degree of openness, which offers a additional protection from international shockwaves. However, it is well below the European average. The GDP per capita - one of the most frequently used real convergence indicator - is also not in Romania"s favour as "we are far away from what the Euro Zone means" and the gap is quite deep.

Arguments to adopt the euro soonerArguments to adopt the euro later

-The Romanian economy has a high degree of euroization -A high exchange rate risk derived from the high level of forex-denominated debt (the exchange rate is more likely to propagate shockwaves rather than mitigate them) -Commercial ties to the Euro Zone - Postponement could reduce the motivation to make structural reforms-A low level of real convergence (GDP per capita) -Still high price convergence potential - high inflationary pressure -Highly rigid labour market -Low correlation of economic cycles with the Euro Zone -Different economic structure -Major economic imbalances (the current account deficit) -Public finance sustainability - substantial spending pressure, very low revenue -Belated structural reform

Source: Raiffeisen Bank

Cristian Popa, BNR: "The disinflationary trend will continue"

The disinflationary trend Romania has embarked upon will continue, despite the slow progress recorded until now. Managed costs and the exchange rate continue to put pressure on the inflation rate, according to BNR Vice Governor Cristian Popa.

The impact of the exchange rate on the inflation rate, which is materialized through imported products, is increasingly weaker as demand is decreasing. "The economic slowdown has borne a hardly visible effect on the inflation rate, but the disinflation will continue," Popa added.

He explained that, considering the planned adoption of the European currency, a high inflation rate would entail much larger financing costs. "In the Euro Zone, a high inflation rate would reflect on the risk premium and lead to costly public debt financing," Cristian Popa added.