Romania, from adhesion to Euro adoption

While waiting for the country report confirming 1 January 2007 as the date when Romania adheres to the European Union, people working in the economic field and at the National Bank of Romania discuss the future calendar of integration into the eurozone. The more necessary the discussion becomes, the harder it is to predict the adhesion shocks in an economy undergoing a fragile balance.

Even if the most macroeconomic indicators look good, no one can afford ignoring the structural weaknesses of the Romanian economy and the constraints arising after accession.

Since the end of 2000 Romania has entered a cycle of economic growth at a brisk pace, which peaked at 8.2% of the GNP in 2004. A growth of at least 6% of the GNP is expected this year. At least two of the criteria of nominal convergence – the Maastricht criteria – have already been met. I am here referring to a public debt of only 16.7% of GNP as at 1 June 2006, and a deficit of the consolidated budget that reached about 2.5% of GNP after the last budgetary rectification at the end of August.

The disinflation process and the current account deficit are still the most delicate issues when it comes to adopting the single currency. An inflation of about 6.5%–7%, far above the limits of the convergence criteria, is predicted this year. An inflation of 2.5% (December to December) is predicted for 2010 when the national currency – the ron – will probably get integrated into the Exchange Rate Mechanism, ERM II. The National Bank has created a scenario according to which the integration into the ERM II could take place in 2012, instead of 2010; in both cases the period of participation in this mechanism will be of two years.

As far as the current account deficit is concerned, it is expected to rise from 9.8% of GNP in 2005 to about 12% in 2010. The issue of its financing will arise even if the transfers from the EU to Romania increase within the solidarity mechanisms and even if there is a higher volume of foreign investments. As the de-etatization process has ended as a whole, the state’s receipts from privatization will be insignificant the moment Romania enters the ERM II.

The adoption of the euro will have the following positive effects in Romania: lowering the macroeconomic risk, raising financial discipline, eliminating some costs, eliminating the currency risk; which should lead to reducing interest rates and raising investments.

In any case, the euro is already a ‘national’ currency for a lot of Romanian citizens, especially for those working in West European countries and their relatives. Last decade’s extremely high inflation, the problems of the bank system and a series of scandals related to the bankruptcy of some investment funds have weakened the belief in the ron and have turned the dollar, and now the euro, into alternative currencies and a means for the population to keep their savings. This is why giving up the national currency will not be traumatic for the citizens. Furthermore, after the ron’s denomination of 1 July 2005, the new notes have dimensions and colour schemes quasi-identical to those of the euro.

The introduction of the euro will have a series of negative effects, both on companies and on citizens, at least in the short term. The prices of a series of goods and services are very likely to increase, which will result in pay-rise requests. Romania will no longer be able to apply currency devaluation to stimulate exports and reduce home consumption in order to decrease the current account deficit.

The successful transfer to the euro depends essentially on the way the public power will be able to generate and apply public politics in the industrial, agricultural, financial- banking, fiscal and monetary fields, which would accelerate the processes of reducing the development gaps and straighten a series of structural weaknesses in the economy – especially those weaknesses related to competitiveness and productivity, which will suffer a deficit in the average and high-quality workforce after the EU labour market opens for Romanian citizens.

To sum up, Romania must accelerate economic reforms in order to meet the nominal convergence criteria, which will decrease the period of participation in the ERM II and push for progress in reducing the gaps in the real economy so that it can enter the euro zone between 2012 and 2014.