Should Romania join the Euro zone? Essay

Custom Student Mr. Teacher ENG 1001-04 3 January 2017

Should Romania join the Euro zone?

I. Introduction

Normally, according to the commitments and timetable agreed with the European Union and the European Central Bank, Romania has scheduled to join the single European currency (Euro) in 2010-2013. As can be clearly seen the term it is not available anymore, due to the global and national economic developments. Therefore the Romanian Government and the National Bank of Romania (NBR) has set a new deadline to adopt Euro as national currency in 2015. Romanian Government showed no sign of freezing plans to join the euro area. However, given the instability of European economic situation, neighbors to the south, Bulgarians, announced plans to freeze membership.

Romania maintains its target of joining the euro zone in 2015. Two years in ERM II – exchange rate mechanism, called Euro zone waiting area – will help officials to ascertain whether Romania has the ability to effectively convert to the euro and could withstand the impact of such change. NBR officials found 2015 to be a realistic time frame although some advised voices fairly warned that Romania again will not be able to achieve the minimums requirements that the European Central Bank impose to a country for the euro adoption. But NBR continued to march on the 2015 term, citing (actually right seen from a point of view) that keeping a relatively close period of time will lead to the mobilization of all factors involved in achieving this goal and finally achieving this objective of national interest.

II. The importance of Euro adoption for Romania

Euro Currency in Romania: Why is a unique currency necessary? Using a single currency has the following results:

* Cutting out conversion charges from a national currency to another * Dropping out the exchange risk on commercial trades with other euro zone members * Increasing the efficiency of financial and monetary markets * Transparency of prices of goods and services within the euro area, which causes an increased market competition * A better distribution system of resources and a better economic integration between European partners Adoption of Euro currency brings a series of advantages that can be grouped as direct and indirect benefits. Reduction of costs for euro transactions will be obvious for companies and people. Also, the companies will reduce the administrative costs for managing foreign exchange transactions.

The elimination of exchange risk rate against euro and substantial reduction of currency risk against other currencies is perhaps the most important advantage, with benefic effects on foreign trade. Euro adoption will allow comparability and transparency of local prices with those in other euro zone countries. Also, the euro brings a lower cost of capital by lower interest rates, with positive effects on the investment process and the long term economic growth. Disadvantages and costs related to the euro adoption are related first of all with losing the independence of monetary policy and euro conversion costs. If euro conversion costs are only short term costs, the loss of monetary policy independence is the most important long term disadvantage.

The monetary policy allows the economic policy to answer the shocks (both internal and external) occurring in the economy. Dropping off the national currency assumes a unique monetary policy and currency exchange policy. If such a country is in recession and needs an incentive monetary policy, but at the same time the remaining euro area countries are in the ascending phase of the economic cycle, requiring a restrictive monetary policy, there is a dilemma related to this lack of synchronization of business cycles. Before entering the euro area and abandon its own monetary policy, a country must ensure that the business cycle is synchronized with the euro area and it will remain synchronized in the future.

III. Conditions for Euro adoption in Romania
A. Maastricht Treaty criteria:

1. Inflation rate

One of the nominal criteria that Romania must meet to join the euro area is a target inflation rate that must not exceed by 1.5% the average of the three best performing EU members. If in 2011 Romania has not met this criterion, at the end of May 2012 the average inflation dropped to 3.5%, which means that this condition which aims the nominal convergence was accomplished.

2. Budget Deficit

In terms of government deficit, Romania stood poorly in 2011, with a level of 5.2% of GDP, given that the Maastricht treaty requires states that want to adopt the euro to limit their deficit to 3%. However, according to the targets made ​​with the International Monetary Fund (IMF), Romania should have in 2012 a deficit of 3.2% on ESA (European System of Accounts) standards. Assuming the Romania meet the IMF requirements, it could mark at the end of the year another goal on the road to Euro. The share of consolidated general government deficit to GDP exceeded, since 2008, the limit imposed by the Maastricht Treaty.

Recommendations under the excessive deficit procedure for Romania (initiated in 2009) and the commitments undertaken in the framework of financing external concluded by Romania with international financial institutions have been implemented in fiscal consolidation measures for decreasing until the end of 2011, the share of state general government deficit to 5.2 percent of GDP. This development contributes to shaping the premises to close the excessive deficit procedure in 2012, in line with the provisions of the Convergence Program 2011-2014, according to the annual report of the central bank.

3. Public Debt

On this chapter, Romania does not have problems to fit the Maastricht criteria. At the end of the first quarter of 2012, Romania had the fourth lowest government debt as a share of GDP, from 36.3% (or 211 billion) an increase of 5.4% compared to the same quarter of the last year (when the debt was 164 billion) and higher by 2.9% compared with end of 2011.

4. The exchange rate

The exchange rate Maastricht Treaty provides the Romanian Leu (RON) can sit for two years in a variation of + / – 15%. If from the mid-2007 until early 2009, the RON has depreciated significantly against the euro, on the background of deteriorating investors’ sentiment towards the region. The agreement with the IMF and the implementation of fiscal consolidation measures has brought a relatively stable evolution of RON. Therefore, from the perspective of the course, its fluctuation is within the band of ± 15 percent from the baseline level. Romania can say that has ticked an important point on the route of adopting the euro.

5. Long- term interest

Long-term interest rates are an important part of the process of convergence, and on this chapter Romania has a lot to catch up. The Maastricht Treaty stipulates that long-term interest rates in the euro zone candidate countries must not exceed by more than 2 percentage points the average of the three best performing EU members in terms of price stability. Amid the economic downturn adjustment signals in the same time with improving the risk perception for investments in Romania, the gap was reduced from a maximum of 3.7 percentage points recorded in 2009 to 1.5 percentage points in December 2011, according to the annual report of National Bank of Romania. However, currently long-term interest rates continued their downward trend, but the gap has increased from 3.1% in May 2012, which means that Romania it is not respecting this nominal criterion.

B. The real and nominal convergence criteria

To be able to adopt euro, it is absolutely clear that further progress is still needed in terms of nominal convergence, but especially in terms of real convergence, to prepare the economy to successfully face a single currency area. Weighing pros and cons, maintaining the current calendar joining the euro zone is not the best solution and accelerate the accession to the euro area would have major drawbacks. On one hand, the arguments for a faster adoption of the euro are primarily related to the high degree of “euroisation” of the economy and to the high currency risk for foreign currency debt to the people and companies. The important trade links with the euro area are a significant factor to accelerate the adoption process. In addition, delaying euro adoption could reduce the motivation of structural reforms absolutely necessary in the economy. On the other hand, there are many arguments for not speeding up the euro adoption.

They are primarily linked to the relatively low level of real convergence of the economy but also to the need of fulfilling the nominal convergence criteria. The price level relatively low in comparison with the euro area shows a still high potential for prices convergence in Romania, which means that inflation will remain a significant challenge for monetary policy. In terms of real convergence, the correlation is still low in Romania with the business cycle in the euro area and relatively different economic structures are important reasons not to speed up the membership of the euro. In this context, the risk of asymmetric shocks would be high and the labor market in Romania is characterized by high rigidity, could not help accommodate such shock. The existence of major imbalances in the economy and higher inflation pressures yet still require monetary policy and exchange rate independent

C. Ingredients for a sustainable nominal and real convergence It is absolutely clear that Romania still has a long way to cross towards convergence, especially real convergence but regarding the nominal convergence too. What must be ensured is the sustainability of the convergence process. Romania cannot have a sustainable convergence without adjusting the imbalances in the economy, which requires a mix of appropriate economic policy, balanced and consistent. Budgetary and fiscal policies and wages must be geared to economic realities. Wage-productivity correlation must be recalculated and productivity must be stimulated through an investment policy in areas that create blockings in the economy, such as infrastructure, or in sectors as agriculture which is very poor in terms of efficiency.

Is therefore a good idea or not to join the euro zone at the moment of 2015? Romania is scheduled to replace the current national currency, the Romanian Leu, with the euro once Romania fulfils the euro convergence criteria. According to the Romanian government, it will strive to comply with the first four convergence criteria by 2013, but will not be ready to join the European Exchange Rate Mechanism (ERM-II) before 2013–2014. The fifth euro adoption criteria are that the country has been an ERM-II member for a minimum of two years, making the earliest possible year for Romania to qualify for euro adoption is 2015, with the earliest date for adoption on 1 January 2016. However, the euro zone crisis could delay adoption.

IV.Arguments regarding the Euro adoption

Pros:
The alignment of currency;

Once Romania will use the euro the conversion rate will disappear, facilitate the everyday life, when many invoices are paid in euro. In addition, companies that have import-export operations will perform their work easier.

Improving relations between Romania and the EU;

The relationship between Romania and the EU is quite bad at the moment, largely because of the political instability in the country, but not only. Justice sector problems and corruption are just some items raised by European leaders in discussions about Romania’s accession to the euro area. Indirect advantages for Romania after adopting the Euro:

* Increased foreign trade
* GDP per capita growth due to increased foreign trade and FDI
* FDI growth
* Increased competition and price transparency
* Increasing living standards in the long term

Against:

Advantages of RON and Euro zone crisis;

Maintaining a national currency brings a number of benefits presently to Romania, including, most importantly, the control of monetary policy: In recent years, NBR succeed by its monetary policy to maintain a balance more important than the decision-making power did through structural policies. A national currency devalued against the euro offers Romanian exporters more competitiveness. In addition, the euro would significantly reduce living standards, however, affected by the economic crisis. It has been said many times, that countries that have their own currency, as Romania, were protected, to some extent, precisely because of its ability to act on the exchange rate for to help their economies when needed.

Joining the euro area before the end of the crisis will endanger both the economy and the adjustment to the new conditions. Adopting the euro in 2015 would put the Romanian economy in a competition with other countries in the euro area starting from a much worse position than PIIGS countries were. In this case Romania will be forced to restructure itself very quickly, which will mean unemployment and low economic growth, or to accumulate imbalances such as those seen in PIIGS countries: increasing external deficits and public debt. Even if the accumulation of deficits and public debt, as saw in the case of PIIGS, at some point a real restructuring of the economy is still needed to increase the competitiveness.

PIIGS countries experience has shown that the actual restructuring within the euro area economy is sharp and high costly – unemployment, low production. At the same time, all their experience, especially in Greece case, shows that recovery after such a restructuring process is slow, much slower than if the country would be covered this time outside the euro area. After the recent bankruptcy most optimistic scenarios have doubts about Greece’s return to average growth for the period 1980-2007 (2.1%) before 2020. Romania is not ready for membership;

Romania is still not ready to join the European Monetary Union, both in terms of economic indicators, and in terms of absorption of EU funds. An earlier membership is contraindicated, Romania could be the next bad example given by European leaders as Greece. The major differences between the local economy and European To join the euro area, Romania must meet the criteria so-called “nominal convergence plan”. This is the fulfillment of the minimum measures joining the euro zone, not the economic power equivalence between Romania and the major European powers. Same treaty mention also a second set of requirements, tougher, pieced together in “real convergence plan”. This second plan outlines the true level of economic power and highlights the major European countries, and marks out sharp differences between economies, such as, for example, that of Romania and Germany.

V.Conclusion

Returning to the date set for the euro – generally 2015 and not a day itself, it is also an interesting feature. Latest states that have adopted the euro – Slovenia (2007), Slovakia (2009) and Estonia (2011) had a transition period of 16 days. For those who have joined the euro in 2002, two months on parallel movement. Romania is a major leap in this regard, proposing a margin of 16 months while the Romanian Leu can circulate in parallel with the euro, during which the government could reach convergence macroeconomic indicators. Romania has firmly hired that at a time will adopt the single currency and regarding this aspect now it has no other choice. But still can choose the best time to join the euro area. In terms of nominal parameters it appears to be 2015. EIU analysts suggested in May 2012, that 2016-2017 would be the earliest realistic dates for Romania’s adoption of the euro. The governor of the National Bank of Romania confirmed in November 2012, that Romania will not meet its previous target of joining the euro zone on 1 January 2015.

He mentioned it had been to great financial benefit for Romania not to be a part of the euro during the ongoing European debt-crisis, but that the country in the years ahead would strive to comply with all the convergence criteria for euro adoption. Selection of a new specific target year for euro adoption (or opting for a wait and see approach), will be something the Romanian politicians should now discuss with the European Commission, and the result of this discussion is likely to be reported by Romania’s next convergence report in April 2013. In May 2006, it was announced that the Romanian government planned to join ERM II, only after 2012.

The president of the European Central Bank said in June 2007, that “Romania has a lot of homework to do … over a number of years” before joining ERM II. The Romanian government announced in December 2009, that they now officially planned to join the euro zone by 1 January 2015. However, in October 2012, Valentin Lazea, the NBR chief economist, said that “the adherence of Romania to euro currency in 2015 is difficult for Romania”. Financial market sources say that, presumably, the new objective of currency changeover will be the year 2019. In terms of real convergence and its cost, a more realistic date would be after 2020. In this way, we have a chance to benefit fully from the following period of economic growth outside euro area and at the same time, to restructure the economy.

VI.Bibliography

National Bank of Romania – Annual Report 2011
Finance Ministry of Romania – Report on Public Debt, February 2012 European Central Bank – Convergence Report, May 2012
Ovidius University of Constanta, Romania – “Euro Adoption – The Illusion of the Monetary Integration of Romania” Academic Society of Romania (SAR) – “Euro, sooner or later?” www.zf.ro
www.business24.ro
www.ecb.int
www.bitpress.ro
www.eiumedia.com
economie.hotnews.ro
www.euroactiv.ro

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[ 1 ]. http://www.bnro.ro/PublicationDocuments.aspx?icid=3922 [ 2 ]. http://www.ecb.int/pub/pdf/conrep/cr201205ro.pdf
[ 3 ]. http://www.zf.ro/eveniment/brd-estimeaza-un-deficit-bugetar-pe-esa-de-3-2-10237076 [ 4 ]. http://discutii.mfinante.ro/static/10/Mfp/buletin/executii/Rap_privind_dat_pub_29feb2012_ESA.pdf [ 5 ]. http://www.bnro.ro/PublicationDocuments.aspx?icid=3043 [ 6 ]. http://www.ecb.int/pub/pdf/conrep/cr201205ro.pdf

[ 7 ]. http://sar.org.ro/wp-content/uploads/2012/04/SAR-13-24.pdf [ 8 ]. http://www.eiumedia.com/index.php/component/k2/item/546 [ 9 ]. http://www.business24.ro/macroeconomie/analiza-economica/lazea-bnr-nu-putem-adera-la-euro-in-2015-in-conditiile-actuale-1520889

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