ANALYST ESTIMATES Eight years until the leu gets replaced with the Euro

The health crisis we are going through has not only driven us apart, as individuals, but has moved us, as a country, away from the Eurozone. Experts point out that if before the Covid-19 pandemic, we were already far from meeting the accession criteria, we are now even farther away. CFA analysts anticipate that we could move on to the adoption of the Euro in about eight years. Most experts in the field consider that delay to be realistic, as we will need about four years to meet the requirements of the EU and another two years to spend in the so-called antechamber, respectively in the Exchange Rate Mechanism. However, there are also specialists who think that eight years is a rather long time for joining the Eurozone.

According to Adrian Codirlaşu, vice-president of CFA Romania, escaping the crisis requires additional funds from the budget, given that we are already in the excessive deficit procedure: "It will be difficult to lower the deficit, because over 90% of tax receipts go to pensions and salaries. We need to increase revenues and watch spending closely".

In order to reach a sustainable deficit, of less than 3% of the GDP, we must have healthy public finances, a solid budget, which means having reserves, i.e. higher incomes, is the opinion of academician Daniel Dăianu, president of the Fiscal Council. In his opinion, 2028-2029 is a reasonable timeframe for the adoption of the Euro, but it requires a lot of zeal, seriousness, discipline, reforms in the public sector, in state-owned enterprises, as well as in the economy as a whole.

Adrian Vasilescu, strategy consultant at the National Bank of Romania (BNR), is of the opinion that it is inappropriate to make forecasts before meeting the convergence criteria. He told us, speaking on his own behalf: "My opinion is that a lot of analysis will be done, given that this crisis has made the world very vulnerable. Until a month ago, looking back to the summer of 2020, we had the best position in the entire European Union in terms of the inflation rate, after we had gone through an inflationary cycle from 2017 to 2020".

"Now an inflationary wave is starting again, which will reach, as specified by the NBR Council on March 15, 3.5%, by the end of the year. Then new declines are predicted. It is very complicated to make a forecast now".

If Bulgaria, which is already in the Exchange Rate Mechanism, adopts the Euro before Romania does, then it will gain a competitive advantage in the tourism sector, much greater than the one it has now, says former Prime Minister and MEP Theodor Stolojan, who explained: "Already in tourism they have a competitive advantage over us, through the quality of services offered, through the price / quality ratio, and the transition to the Eurozone will create a competitive advantage in addition to Romania in everything that means tourism and services, in particular".

Eurozone accession is optimal for the consumer, as we will have extremely strict rules regarding public finances, and the ECB will be watching inflation very closely, concludes Adrian Codirlaşu.

Anca Dragu, the president of the Senate and former finance minister, recently said at an event that "the benefits of adopting the Euro are huge".

There are also discussions in the governing program about the adoption of the Euro: "It is important to have a standard of living much closer to the European average and we estimate that by 2024 this will be possible and that Romania's GDP will reach 85% of the EU average, an absolutely decent level for the adoption of the Euro. In terms of resources, economic standards and flexibility, I believe that Romania will be ready in four years".

Along with six other countries, Romania is among the member states of the European Union that have the obligation to adopt the Euro, which means, in practice, full participation in the Economic and Monetary Union, once all the necessary conditions, respectively the criteria of nominal, legal and real convergence are met. The latter are not explicitly mentioned in the relevant legislation of the European Union, but are becoming increasingly important in assessing a country's degree of readiness to adopt the single currency, according to information on the NBR website. At the time of drafting the Convergence Report of the European Central Bank in 2018, Romania only met some of the nominal convergence and legal convergence criteria. The Report states that our country maintains its commitment to join the Eurozone, setting 2024 as the deadline.

At the national level, the preparations for the adoption of the Euro are coordinated by the Inter-Ministry Committee for the switch to the Euro, chaired by the Prime Minister, which includes the Minister of Public Finance, the NBR Governor, heads of other public authorities and institutions or their appointees, as well as representatives of employers 'and trade unions associations. Also, since February 2010, within the NBR there has been operational within the a committee for the preparation of the switch to the Euro, which is a forum for debating the issues related to nominal and real convergence, meant to support the central bank's efforts regarding Romania's participation, with full rights, in the Economic and Monetary Union.

Emilia Olescu

CASETA

The CFA anticipates a deficit of the state budget for this year of 7.4% in 2021 and a GDP evolution, in real terms, of + 4.1%. The public debt will reach over 52% of the GDP, over a 12 month period, according to CFA estimates.

• Theodor Stolojan, former PM and MEP: "We no longer meet the Eurozone convergence criteria in any way"

"Romania had a deficit of over 3% before the pandemic and we practically did not meet the criteria for joining the Eurozone even before the crisis, Theodor Stolojan, former prime minister and MEP warns. He points out that, nowadays, "we no longer meet them in any way": "We are approaching a public debt level of about 50% of the GDP, whereas the limit is 60%. It is the only requirement for joining the Eurozone that we still comply with".

Anyway, the eight years timeframe seems very long to me, because we set out to have a deficit of less than 3% at the end of 2024, so that we can meet the accession criteria. Meanwhile, the demand of economists who say we cannot join the Eurozone until GDP per capita at purchasing power parity reaches about 70-75% of the EU average will also be met. At the end of 2019, we were close to 68-69%. In 2024, if these economic growth ratios are achieved, we will exceed 70% of the EU average. In Romania we have always had this discussion - there are some criteria that must be met, called nominal criteria, and there are economists, especially in the banking system, who say that those are not enough, but that we need to get closer to the EU average development indicator, one such indicator being the of GDP per capita at purchasing power parity. We also meet this indicator, we will exceed it by 2024, but it is not required by the EU".

Mr Stolojan gave the example of Croatia and Bulgaria, which were accepted in the Exchange Rate Mechanism, considered a kind of antechamber of the Eurozone, where we are supposed to stay for at least two years: "If Bulgaria adopts the euro before Romania, then it gains a much greater competitive advantage over us than it has now. They already have a competitive advantage over Romania when it comes to tourism, through the quality of services offered, through the price / quality ratio, and the transition to the Eurozone will create a competitive advantage for them over Romania, especially where everything that means tourism and services is concerned".

• Adrian Codirlaşu, vice-president of CFA România: "We will have one of the biggest budget deficits in the EU"

Our budget deficit will be, this year, one of the largest in the European Union (EU), in the opinion of Adrian Codirlaşu, vice president of CFA Romania. The financial analyst told us: "In order to join the Eurozone, some criteria must be met, which we currently do not meet. We will have one of the largest budget deficits in the EU this year. We should cut the deficit to less than 3% so that we can apply to join the Eurozone. That reduction will be very difficult, given the crisis conditions and the fact that when the crisis began we had the largest budget deficit in the EU.

We will get there in about four years and then we will have to start accession negotiations, and the EU will come up with all sorts of reforms, which we will need more years to comply with. It also takes two years to meet the exchange rate requirement - we need to enter the Exchange Rate Mechanism and stay in it for two years to join the Eurozone. And, the end of this decades, it is a reasonable time frame for joining the Eurozone".

Getting out of the crisis requires additional funds from the budget and we are already in the excessive deficit procedure: "It will be difficult to reduce the deficit, because over 90% of tax revenues go towards pensions and salaries. We need to increase revenue and pay close attention to spending. We must also watch what agencies the Government supports. Some agencies have already been closed, cutting some of their spending, in addition to the savings made by capping pensions and salaries. This would be the Government's room for maneuver to reduce spending. Concurrently, we need to increase revenues and improve tax collection, which can be achieved by computerizing ANAF. So the main point is managing the budget deficit. Public debt to GDP ratio is also a requirement. It needs to be kept below 60% of GDP, and it is currently somewhere around 50%, but it is rising. However, I believe that keeping it at the required level is achievable".

Romania joining the Eurozone is optimal for the consumer, because it comes with extremely strict rules regarding public finances, and the ECB is very careful when it comes to inflation, says Adrian Codirlaşu: "The consumer will know that their savings are stable and they do not devalue over time, because the rules will be very strict from a fiscal point of view".

• Adrian Vasilescu, strategy consultant at the NBR: "It is inappropriate to make forecasts on joining the Eurozone until we meet the convergence criteria"

It is inappropriate to make forecasts for joining the Eurozone until we meet the convergence criteria, says Adrian Vasilescu, strategy consultant at the National Bank of Romania (BNR). "We must first meet the criteria and then, when the time comes, we will join the Eurozone", said Adrian Vasilescu, who told us, speaking in his name: "There is a rule in the EU member states will also become members of the Eurozone, but entry into the Eurozone is linked to meeting certain performance criteria.

Five criteria are nominal: inflation rate, budget deficit, public debt, long-term interest rate and exchange rate stability.

We also have real convergence criteria - the level of GDP per capita at standard purchasing power parity, legal convergence and concerns for the development of economic culture.

There is a national committee that sets the time of accession, there is also a document that sets forth a date of accession - 2024. But when that document was made the crisis that is now hitting the entire planet did not exist. My view is that there will be a lot of analysis on the matter, given that this crisis has made the world very vulnerable. Up until a month ago, looking back at the summer of 2020, we had the best position in all of the EU in terms of inflation, after going through an inflationary cycle between 2017 and 2020. Now begins another inflationary wave that will reach 3.5% by the end of the year, as specified by the NBR Council on March 15. Then new drops are expected. It is very complicated to make a forecast now".

Adrian Vasilescu is of the opinion that other changes will take place, because the EU is currently engaged in the realization of a new product of the ECB, namely the digital currency: "It is a very important product. The president of the ECB, Christine Lagarde, made very clear statements in this regard, and the information coming from the ECB is very important - it is a long process, probably about five years, which means a stage of research, design, concrete realization of that product which will be called the digital Euro. That digital Euro is not the same as the so-called "cryptocurrency" we are talking about nowadays. Experts have made it clear that there are no cryptocurrencies. Bitcoin and its brethren are not cryptocurrencies, just cryptoassets. A currency has some firm principles and criteria in this world. It must be issued by a central bank, have laws, regulations, whereas bitcoin has none of that. The digital Euro, therefore, will not be a cryptocurrency, it will be a virtual currency, used to facilitate economic activities and the payments of the population".

Adrian Vasilescu pointed out that we are currently in very uncertain times.

• Daniel Dăianu, president of the Fiscal Council: "2028-2029 is a reasonable timeframe for joining the Eurozone"

In order to reach a sustainable budget deficit, below 3% of GDP, we must have healthy public finances, a solid budget, which means having reserves, i.e. higher revenues, warns academician Daniel Dăianu, president of the Fiscal Council. "One cannot even imagine entering the Exchange Rate Mechanism until we have achieved the budgetary consolidation, which will take us four years anyway. Normally, we should have an increase in our own budget revenues of 3-4% of GDP, once achieving budget consolidation. So the first milestone would be four years".

We will be sitting in the Exchange Rate Mechanism for at least two years. We need to have the AQR (Asset Quality Review) done, which would confirm that the banking system is solid. All in all, it would take 6-7 years if things go smoothly. The eight-year estimate made by the CFA also takes into account what we call the unpredictable. Thus, 2028-2029 is a reasonable timeframe, but it requires a lot of zeal, seriousness, discipline, reforms in the public sector, in state-owned enterprises, as well as in the economy as a whole. This European Resilience and Restructuring Plan, which means industrial policy at EU level, also requires Romania to implement an industrial policy, because Romania's "greening", computerization, economic and ecological sustainability, inclusiveness, all of those show the need for active public policies".

The Covid-19 pandemic highlighted the fact that, everywhere in Europe, there are medical systems that are not as robust as they should be, and Romania has bigger problems than most EU states in that area, Daniel Dăianu points out. That is why we have to allocate more from the public budget for healthcare, because we allocate, on average for health and education, 3-3.5% of GDP less than other European countries, he explained. Among other things, the president of the Fiscal Council also told us: "Some people mistakenly look at how much of the public budget is allocated. That is not how the calculation is done, because the public budget has very low revenues, instead one needs to look at how of the GDP is allocated to healthcare and education. These are not expenses, but investments. The PNRR is an industrial policy, and Romania needs industrial policies. Looking at all this as a whole, we realize that that 8-9 year period will help us to have a budget consolidation, to have a more robust public budget, to develop where basic factors such as public health, education, infrastructure, are concerned, and then we will be able to stay in the Exchange Rate Mechanism for at least two years. Our leu will remain in the market until the adoption of the joint currency, being an image of the power of the Romanian economy, and eight years is a timeframe that denotes the lucidity of those who issued this estimate".

Budget consolidation means having low budget deficits and low foreign deficits and keeping public debt under control. Daniel Dăianu added that the banking system is relatively solid, with its current indicators.

Daniel Dăianu told us: "If we think about the impact of climate change, we can say that no banking system in Europe is that solid. There is a recent ECB assessment which shows that banks will endure these changes very differently. They need to change their practices as well, get rid of industries as much as possible, focus their funding on what the green economy means. It is not just a challenge for us, the ECB also needs to change its practices. We have a peculiarity that does not necessarily have to do with the shock of the pandemic and the impact of climate change. It concerns the very low level of financial intermediation, whether it is about the banking or stock market sector".