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de Marin Pana , 4.12.2017

Keeping the national currency under a controlled float exchange is a way to optimize the sustainable economic growth towards getting closer to the West but not a guarantee in that regard.

Potential benefits in terms of mitigating economic shocks and using our own monetary policy (obviously better calibrated for the national context) can be overcome by measures that are questionable from the economic theory perspective and will inexorably prove to be wrong in time.

The opportunity to adopt the euro in 2019, after the attainment of the five Maastricht criteria, as a prior condition for joining the select club of the 19 single currency countries, has been strengthened, has been abandoned on the Czech-Polish-Hungarian model and the closest date put forward now is 2023. Of course, the only question is not IF we adopt the euro but WHEN, as the treaty is clear in this regard.

After having easily ticked in 2015 (see especially the public deficit of only -0.8% of GDP) the criteria required for the adoption of the euro and chose not to speed up the adoption of the single currency (especially because of the still low GDP per capita, below 60% of the EU average – a threshold unanimously considered as minimal for the success of this operation – as well as the pronounced inequality of this indicator at the regional level), our country seems to have rest on its laurels.

In the absence of a clear objective on a mid-time horizon, reasonably significant in collective terms, the mix of politics and social needs has created a complicity that threatens to erode precisely the temporarily strengthened base.

Liquefied later by expanding the budget deficit, against the background of the implementation of a utopia materialized in the mix between the fiscal ease and the increase in social benefits, with the bizarre specificity of the investment braking. The European Central Bank’s 2018 report for the seven countries that lagged in adopting the euro will mark this reality for Romania.

As an indication, we present you a key excerpt from the 2016 report (these reports are issued once at every two years or whenever it is necessary for countries asking for the euro adoption):

European Central Bank – Excerpt from 2016 Convergence Report :

Fulfilment of the numerical convergence criteria at a point in time is, by itself, not a guarantee of favourable developments once the country becomes a member of the euro area. Countries joining the euro area should thus demonstrate the sustainability of their convergence processes. To this end, in many of the countries under consideration, sustainable policy adjustments are needed. Especially the improvements achieved in tax criteria should be strengthened in the longer term. Appropriate fiscal and macroprudential policies should be implemented to avoid the accumulation of imbalances, along with an appropriate framework for the supervision of financial institutions. Structural reforms must aim at ensuring the soundness of institutions and economic governance, thus creating, among other things, favourable conditions for the efficient use of capital and workforce, as well as for goods and services markets and flexible workforce markets. “

While it is unlikely that we shall have a public debt increase above 60% or an exchange rate increase by 15% (that is about 70 euros per euro at the current exchange rate), the criteria related to the public deficit of maximum 3% of GDP, the long-term interest rates criterium (a spacing of 2% above the European benchmark) and even the inflation criterium (+1.5% above the average of member states’ best levels) are at risk.

Moreover, apart from the five well-known economic criteria that should be met to join the Eurozone, which we STILL meet now, there is also a less-known one, the legal criterium. Domestic legislation must be aligned with the one in the EU and the most important aspect is to ensure the independence of the central bank and prevent pressures or interferences from other state institutions.

There are some provisions that need to be amended in the sense of strengthening the central bank’s independence to bring domestic legislation in line with Article 123 of the Treaty on the Functioning of the European Union. Incompatibilities will have to be reconciled. Their intrinsic nature makes them harder to approach by the general public, but it should be noted that they involve a law-making process that cannot be delivered “overnight” and all these legislative changes will have to be passed in due time in the Parliament.

Obviously, any friction between BNR which is bound to work with any democratically elected government but also independent by default as an express requirement at the EU level, and those in power, cannot help the transition through this rather complicated process. Especially trivializing the public discourse does not help smooth the process which is difficult enough.

Once we agreed to move to the full liberalization of the capital account (the last measure before the accession, taken in September 2006), we agreed, according to the economic theory, that we cannot have a fixed exchange rate and an independent monetary policy in the same time. Over the last four years, BNR has achieved a remarkable balance in this respect, with a robust economic growth in a context of a quasi-constant exchange rate.

But that was only as long as the repeated economic specialists’ warnings on maintaining acceptable limits in the economic policy decisions have been largely accepted and there was no pressure towards the limit of exceeding the framework of Maastricht indicators. In this context, we remind our decision makers that Romania has been a member of the Euro Plus Pact since 2011 and not exactly outside the Eurozone requirements.

Basically, we have come to a crossroads. In which we must decide where to go, preferably towards adopting the euro in the mid-term, let’s say the objective of January 1, 2023. Therefore, we should strengthen the Maastricht indicators and get back to the recommendations of adjusting the budget deficit towards 1% (the famous MTO). Calming the inflation and interest rates could come a little easier unless we persist with the risky financial adventures in the 2018 budget.

The sustainability of public budgets, financial stability and harmonising positions in the taxation policy are not empty concepts from a stilted language but pre-conditions for euro pockets. That is if we want to manage to retire and benefit from a fixed leu/euro exchange rate that would still mean something.

The question is not whether we want or not to adopt the euro, depending on how much we like it. The real question is who we are, Westerners (even with a Balkan scent) or Easterners (with an Asian scent) and what we really wanted from the EU accession. Because prosperity without rules is not possible and an achievement without a goal to be achieved, even much less.

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