NBR Governor: Romania does not rush with the of euro adoption

By Edwig Ban
In its somewhat encrypted style, the Governor of the National Bank of Romania today stressed that our country will not enter the EuroZone in the near future.
Although the inter-institutional committee, whose chairman is the PM of the Government, gave the possible term in 2024 for the adoption of the single currency, Governor Mugur Isarescu, the longest surviving head of a central bank in Europe, says that Romania has chosen the middle way in regarding the adoption of the single currency. Isarescu considers that a real convergence level of 70-75% is appropriate / critical before adopting the euro. Currently, Romania’s convergence level is 61%.
Romania joins, through this position of the Governor of the Central Bank, Poland and Czechia, countries that also do not rush to enter the very tumultuous of the EuroZone.
Mugur Isarescu added that the shocks would be quite high if Romania now adopts the euro.
In the characteristic style, Isarescu made little history regarding the evolution of Eastern European countries.
‘The first lesson I would like to mention refers precisely to real convergence. In almost two decades, all CEE economies have made significant progress – at various paces – in terms of real convergence, with the catching-up process benefiting substantially from their EU accession. In Romania’s case, GDP per capita as a percentage of euro area average (based on PPS) expanded almost threefold compared to the year 2000, reaching 61 percent in 2018. Poland and Hungary stand at around 67 percent (both posting values of no more than 45 percent in 2000), Czechia at 86 percent (from 61 percent in 2000) and Bulgaria at 47 percent (against 24 percent in 2000).’
‘The second lesson derives from the answer to the following question: did the strategic decisions on the exchange rate regime and monetary policy framework matter? It is known that some countries in the region (Romania, Poland, Czechia, Hungary) opted for flexible exchange rate arrangements and adopted inflation targeting, while others (Bulgaria and the Baltic states) resorted to a fixed exchange rate regime under a currency board. At first sight, it seems that the latter group of countries are better prepared in terms of euro adoption (the Baltic states have already taken this step but they, being much smaller and more open economies, are a special case), given the fiscal discipline pursued and the nominal convergence stage in those economies. This has helped keep macroeconomic imbalances under control, yet the flipside of the coin is that the pace of real convergence was slowed by these powerful constraints, at least in the aforementioned case of Bulgaria.
’Consequently, it can be said that both approaches have benefits and drawbacks and that the story of these economies on their catching-up journey is still far from over. I would point out that there are resources for all these economies to continue to grow relatively fast. While convergence will go on, it is unsure at what pace, how linear and how sustainable it will be, and the surprises that the future has in store for us are difficult to foresee, just like the recent past differed from what we could have forecasted two decades earlier, for instance.’
’The third lesson concerns the manner in which the global economic and financial crisis was weathered. With only one exception (Poland, which has not seen a single year of recession precisely because it managed to adequately combine exchange rate flexibility and fiscal discipline), all CEE economies witnessed periods of economic decline – more or less severe, shorter or longer – owing to the crisis, irrespective of their exchange rate or monetary policy regimes. The steepest decline was in Romania, which had to undergo the most painful fiscal adjustment. This occurred because the fiscal policy during the pre-crisis boom had been strongly procyclical, so that the economic advance of over 9 percent in 2008 was followed by sharp falls in the next two years: -5.5 percent in 2009 and -3.9 percent in 2010. The lesson learned here is that there is no viable alternative to a predictable and coherent mix of economic policies and structural reforms. Let me stress that this mix should remain in place even when facing the challenges of election years, and there are several election rounds in Romania in 2019 and 2020.’
’The fourth lesson could deal with the issue of whether joining the euro area ensures faster growth or not. I attended the celebrations marking the 10th anniversary of euro adoption in Slovenia and Slovakia. While in the latter country euro area membership is considered a success story, in Slovenia it is viewed as a necessary, yet painful, step. During my conversation with a Slovenian expert, I argued that the difficulties faced after euro adoption were the consequence of not cleaning up banks’ balance sheets before euro area entry. He replied that the people were not interested in these details, as what they cared about most was the standard of living, which declined after the euro changeover.
As a matter of fact, Romania boasts the fastest growth rate in the group of peer countries with similar trends. Can we, therefore, say that this is proof of a successful catching-up in real terms? Furthermore, can we claim that having a flexible policy framework (including a managed floating exchange rate) helped us in this respect? Allow me to assert that more time is needed in order for these questions to be appropriately answered. However, a general remark can be made: the EU and NATO anchors helped us all make progress as concerns real convergence.’
‘Romania has chosen the middle way in terms of adopting the single currency, considering a real convergence level of at least 70 – 75%% as critical before adoption. We are now at a real convergence level of 61%. At this level we would be severely affected by the asymmetrical shocks and thus we could not synchronize the business cycles with the other European economies in the Euro Zone, ‘said Mugur Isarescu, at the 4th edition of the Bucharest Security Conference.
The NBR Governor said that regarding the Maastricht criteria, from 2015 to 2017, Romania met all the convergence criteria, but did not participate in the exchange mechanisms. The fact that at this moment the long-term interest rates and the inflation are no longer in line with the established ones indicates that we should aim for a nominal convergence of duration, not accidental or temporary, says Isarescu.
According to Isarescu, in Romania, as in the other countries, the approach is different because the adoption of the euro is considered much more complex, but this does not mean that Romania does not consider adopting the euro as soon as possible. “This means that there has to be a serious, thorough preparation to deal with the inherent challenges,” Isarescu said, adding that the Latin saying “Festina lente” is most appropriate when talking about adopting the single currency.
The BNR governor mentioned that it is better to carefully build ‘the alley to the euro and not rush to get the first ones there’.
Speaking about risks, Isarescu said that the fiscal deficit and the current account deficit can greatly erode the national economy, so it is better to make adjustments in a gradual manner than to make them the market.
At the end of January, Prime Minister Viorica Dăncilă declared that the Government is assuming the objective of adopting the euro by Romania in 2024.
Today’s statements of Governor Mugur Isarescu do not agree with those of the Government, the National Bank of Romania being much more cautious and conservative in this area of national politics.