c


 
 

Romania entered the European Union in 2007. As a member of E.U, one of the Romania¶s

aspirations is to adopt euro in order to become an active participant in the European Monetary

Union. Just like the other member states, Romania must fulfill some convergence criteria in order to

become member of the Eurozone. These criteria were established in an arbitrary way when the

Maastricht Treaty was signed. As we already know these criteria are the next ones: budget deficit

less than 3% of GDP; national debt less than 60% of GDP; no devaluations for 2 years; long-term

interest rates must be within 2.0% of the 3 best E.U countries; inflation must be within 1.5% of the

3 best E.U countries.

Nowadays Romania has an excessive deficit. One year ago, in 2009 the budget deficit was

8.3% of GDP. This was significantly above the 3% reference value. In 2010 the deficit ratio is

predicted by the European Commission to decline to 8.0% of GDP. ³Looking at developments in

Romania¶s budgetary position over the period 2000 to 2009, after declining until 2005, the deficit -

to-GDP ratio started to rise thereafter and recorded sharp increases in 2008 and 2009. Despite still

very high economic growth, the budget deficit rose from 2.5% of GDP in 2007 to 5.4% of GDP in

2008. In 2009, given a larger than expected deterioration in the macroeconomic environment, the

budget deficit increased to 8.3% of GDP.´ That¶s why in July 2009 ECOFIN Council decided to

give as deadline for solving the problem the end of 2011, but this deadline was extended to year

2012. In order to correct the budget deficit and to solve this problem, Romanian government

implemented some fiscal consolidation measures required by the IMF and European Commission.

However, ³it seems surprising the Romanian case, fulfilling the deficit criterion, the one being a

problem for most of the E.U countries, both old and new members. It is clear that a reduced

budgetary deficit helps in fighting inflation. Price stability and <<excessive>> budgetary deficit are

not compatible (being the reason of the Stability and Growth Pact) and if generally for the Central

and Eastern European countries the inflation is not anymore a menace, for Romania it is. As
consequence, the reduced budgetary deficit must be kept now not for fulfilling the convergence

criteria, but for continuing the disinflation process.´

Taking into consideration the long-term interest rates for the 10 years state bonds, the

Romanian situation it¶s not comparable with the EU standard or the one in the neighborhood

countries because of the relative high inflation. From 2005 until the end of 2006 the long-term

interest rates increased. After this period, in 2007 they started to move somehow downward. From

November 2007 the long-term interest rates were in a moderate upward trend, reaching 7.8% in July

2008. In 2009 summer, long-term interest rates reached 11.5% and in addition to this, the political

crisis in autumn 2009 contributed to a rise in the country risk premium. In March 2010 the level

was 7.1% .´Between 2005 and 2007 the spread between long-term interest rates in Romania and

average bond yields in the euro area Àuctuated in a range between 4% and 2.2%, reaching the

historical low of 2.2% in July 2007.´ However, Romania should be very careful because the

market for Romanian bonds is rather illiquid and characterized by a limited number of transactions.

Moving forward to the public debt criteria, we can tell that Romania still has a good position

and a good percentage. Now, its public debt is 21.1% of GDP. Unfortunately public debt has

increased since 2006 from 12.4%, 2007-13%, 2008- 13.6 until now. This shows an

increase of 8.7% in 4 years. However, there is still no chance for the public debt to increase so

much that it could reach 60% in the next few years.

Looking back to the price inflation we can see a clear decrease between years 2000- 2009: from

45.7% in 2000 to 5.6% in 2009. The most favorable period for this decrease was the period between

2000-2004 because in those years the government had applied some comprehensive structural

reforms, preparing for the E.U and also sustained a strong deceleration process. However, inflation

had grown in the year 2007 from 4.0% to 9.0% . Another reason for increased inflation were the

increased import prices from the mid-2007. In 2009 the inflation went from 6.8% from January

2009 to 4.3% in October 2009. Nowadays, The National Bank of Romania announced a level of

inflation situated at 7.73%. They set the inflation target for this year at 3.5%, but taking into
consideration the actual level and the fact that is already the end of the year, we can already say that

they failed to reach the target. For the next years they would like a progressive decrease to 3.0% in

years 2011-12, until 2.5% in 2013. And if we analyze the current conditions in Romania we can

definitely say that till the end of the year the inflation will grow with some other few percent points

to the approximate value of 8.2%. ³Nevertheless, the gap between the 12 moth average of the HICP

in Romania and the corresponding Maastricht criterion continued to be significant´Ö in the past 3

years and for sure will also continue in the future.

³The last but not the least is the exchange rate stability criterion. For now, the national currency

of Romania is not participating in the Exchange Rate Mechanism II (ERM II), anticipating that

entry will not occur until 2012. Consequently, it has not yet been defined a central rate against

which the framing of the exchange rate fluctuations can be appreciated within a band of ± 15%.

Timing of ERM2 entry is planned for 2012 in order to:

í provide some monetary and exchange rate flexibility (for a limited time period) in order to further

necessary and substantial structural adjustment;

í maintain motivation to carry out reforms in a timely manner and consolidate macro discipline

(need for significant fiscal consolidation in 2010 ±2012);

í provide the possibility of setting the central parity based on a more accurate estimate of the

equilibrium exchange rate after overcoming both the peak in capital inflows (which remained high

even subsequent to EU accession), as well as the substantial and abrupt reduction in flows to EM

after the onset of the global financial crisis;

í meet ex ante most of the convergence criteria and establish sustainability´.5

But when we¶re speaking about Romania, we can say that the evolution of the national currency

was affected by devaluation which was 16.7% in 2002, but in 2004 for the first time took place a

considerable appreciation comparing to euro. ³ In fact, the National¶s Bank of Romania policy

targeting a light appreciation of the national currency against the euro and dollar( a depreciation

lower than the annual inflation rate) is necessary for accentuating the disinflation process, but it is
the only way to increase the purchase power of the national currency, in the context of EMU

integration´6. Nowadays the average exchange rate is 4,2929 RON per euro which shows a current

depreciation of the national currency. The timing of ERM II entry is planned for 2012, and the

Eurozone entry is planned for January 1, 2015 (euro adoption decision expected in 2014). But as far

as I am concerned, and being more pessimistic than optimistic, this dead line is not relevant and is

more unachievable than achievable. Making an analysis of all the criteria that should be achieved,

we conclude that 3 out of 4 criteria are not achieved, and as some forecasts show, there is a need of

a longer period, bigger than 4 years, to fulfill all 4 criteria.

In order to make the situation a little bit optimistic, the National Bank of Romania made a list

with some pro¶s and con¶s of an early adoption of euro and a late adoption of it. The early euro

adoption should facilitate:

- More rapid expected reduction in transaction costs, exchange rate risk

- Improved time consistency of macroeconomic policy mix (esp. avoidance of fiscal, wage

policy relaxation)

- Better incentives for timely implementation of structural reforms

On the other hand, the contrary arguments for early adoption are the following ones:

- Low business cycle synchronization leaves economy prone to asymmetric shocks

- Loss of monetary/exchange rate flexibility leads to possibly significant macro adjustment

being borne by output/employment

- Significant disparities in real convergence indicators make catching-up process difficult to

manage sustainably (ex. magnitude of B-S effects raising equilibrium inflation rates,

uncertainties over potential GDP levels and their changes over time)

- Difficulty of a
a
pinpointing (unmodified) central parity while equilibrium exchange

rate may undergo substantial shifts

The pro¶s of a late euro adoption are also interesting:

- More progress in achieving nominal and real convergence

 - Longer time span available for tackling necessary structural adjustments

- Further business cycle synchronization

- Preserving monetary policy autonomy for longer

But the con¶s are more proeminent:

- Persistence of higher transaction costs limits further financial, trade integration

- Higher incentives for fiscal relaxation, delayed implementation of structural reforms

- Delayed euro adoption sends unclear message to investors (domestic structural weaknesses

or deliberate decision?)

- As corollary of above, limits on exchange rate variations against background of full capital

mobility may lead to periods of pronounced volatility in financial flows.

All in all, we can say that Romania as any other country that is a member of the European

Union, will face a number of challenges and obstacles in the way of adopting euro and becoming a

full participant of the European Monetary Union. All this challenges and obstacles will not make

the process an easy one and that¶s why it must find the proper instruments for passing through this

period and fulfilling all the Maastricht criteria. But we also should not forget that ³ euro as a

national currency brings competition and transparency, which is advantageous for and stimulates

the strong economies; for weak economies and weak companies, the free competition and

transparency could be dangerous´7.

1
European Central Bank, ͞ ±

 
 ͟, Page 187.
http://wcww.ecb.int/pub/pdf/conrep/cr201005en.pdf

2
Stoica, Ovidiu, PhD, ͞  


 
 , Alexandru Ioan Cuza University of Iasi.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952412

3
European Central Bank, ͞ ±

 
 ͟,Page 191.
http://wcww.ecb.int/pub/pdf/conrep/cr201005en.pdf

4
Apostoaie, Maius-Constantin, ͞





 


  
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"



, Faculty of Economics and Business Administration, ͞Alexandru Ioan Cuza͟ University of Iasi
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1685550

5
Apostoaie, Maius-Constantin, ͞





 


  
 ! 


"



, Faculty of Economics and Business Administration, ͞Alexandru Ioan Cuza͟ University of Iasi
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1685550
6
Stoica, Ovidiu, PhD, ͞  


 
 , Alexandru Ioan Cuza University of Iasi.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952412

7
Stoica, Ovidiu, PhD, ͞  


 
 , Alexandru Ioan Cuza University of Iasi.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952412

m
 


- European Central Bank, ͞ ±

 

 ͟,

http://wcww.ecb.int/pub/pdf/conrep/cr201005en.pdf

- Stoica, Ovidiu, PhD, ͞  



 
 , Alexandru Ioan Cuza University of Iasi.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=952412

- Apostoaie, Maius-Constantin, ͞






 


  
 ! 


"




, Faculty of Economics and Business Administration, ͞Alexandru Ioan Cuza͟ University of Iasi

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1685550

- he National Bank of Romania

http://www.bnro.ro/home.aspx

- šallace, Hellen, Pollack, Young, ͞  #$



 
%

&Oxford University Press, 2010

edition