Romania’s road to the eurozone: Objectives, scenarios and obstacles

Anca Alexe 04/02/2019 | 09:35

Romanian authorities have published the Explanatory report for the national plan to adopt the euro currency, after a delay of over a month. The 45 decision-makers from all the socio-economic layers who are part of the Euro commission claim that, depending on Romania’s economic development, the country could enter the exchange rates mechanism (ERM), a phase that precedes the switch to the European currency, within a period between 4 and 11 years. The ERM will take at least another two years and then the country could start using the euro.

If Romania aims to enter the ERM with a GDP/capita at 70 percent of the eurozone average, it would take six years if the average economic growth reaches 4 percent per year or 4 years if the growth reaches 5 percent. However, if Romania wants to adopt the euro when its GDP/capita reaches 70 percent of the eurozone average, it would have to enter the ERM in 2022, correct its budgetary issues and make its economy more robust.

A scenario where Romania wants to reach 75 percent GDP/capita compared to the eurozone average could happen in a nine-year interval (with an average growth of 4 percent per year) or in six years if the growth reaches 5 percent per year on average. In the case of an 80 percent GDP/capita target, the period extends to about 11 years with 4 percent average yearly growth or 8 years with 5 percent growth.

The Commission identified five main objectives Romania should achieve to adopt the euro and made 18 recommendations.

OBJECTIVES

  1. Reducing the real convergence gap and correct macroeconomic imbalances
  2. Meeting a series of structural criteria

These include increasing fiscal revenues to grow the “fiscal space” and consolidating public finances in a sustainable way; developing infrastructure; increasing the economy’s competitiveness rate through a better structure of high-value added production.

  1. Entering the ERM (prior to the eurozone) for at least two years

The ERM is a testing period for the economy before making the final step towards the euro, when the level of fluctuation of the RON-EUR exchange rate will be limited.

While in the ERM, countries need to be able to maintain the nominal criteria it has previously met – which means that they should be met in a sustainable way – and increase real convergence.

After entering the ERM, the minimum testing period is two years, but the period can extend if the economy can’t prove its ability to adjust without using the exchange rates. A delay is preferable to a premature entry into the ERM.

  1. Entering the Banking Union

Will take place once Romania enters the ERM, involves an asset quality review (an evaluation of the banking system)

  1. Adopting the euro

Throughout this period, technical analyses must be carried out at every step/phase/deadline and periodic reports must be published on the implementation of the steps, based on objective evaluation indicators. A special council that will include government officials, BNR’s euro adoption commission, parliamentary experts, academics, and business representatives can conduct this research.

RECOMMENDATIONS

  • Correcting economic imbalances: bringing structural budget deficit to a level that complies with the MTO and increase fiscal revenues by at least 3 percent of GDP by 2022-2023.
  • A much better collection of fiscal revenues to increase the fiscal space and consolidate public finances.
  • A firm opposition to rent-seeking that frees up resources necessary to the production of public goods.
  • A better financing of education and healthcare, which are investments in human capital.
  • Developing transport infrastructure to organically link the country’s regions and connect the country to the main European transport routes.
  • Finalising cadastre works and refurbishing the irrigation infrastructure.
  • Industrial economic policies that facilitate the move towards a new economic growth model (and leaving behind the middle income trap).
  • Supporting activities that can have increased returns.
  • Supporting activities that generate positive externalities (e.g. research and development, IT, energy efficiency).
  • Promoting development poles as seen in major urban centres – besides Bucharest, cities like Cluj-Napoca, Timisoara-Arad, the Bacau-Iasi axis, Craiova, Brasov, Iasi, Constanta.
  • Taxing activities that lead to negative externalities (e.g. activities that create pollution).
  • Developing mechanisms to stimulate and implement innovation (patents).
  • Improving absorption of European funds (quantitatively and qualitatively).
  • Developing the Bucharest Stock Exchange and taking it from a frontier market to an emerging market, which will multiply the economy’s financing sources.
  • Policies that lead to an increase in birth rates.
  • Retaining qualified workforce by: developing technological and industrial parks; stimulating partnerships between educational institutions and business incubators; fiscal stimuli to companies in high tech; higher salaries.
  • Developing policies to attract highly qualified immigrant workforce considering the internal demographic decline.
  • Encouraging work beyond the retirement age for people who want and are able to continue to work.

 

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