The road towards the Euro. An analysis of the convergence criteria.
Paun, Dragos
Introduction
Romania has successful concluded the accession process to the
European Union in 2007 after a period of economic growth that was one of
the highest in Europe which was also supported by the massive inflow of
Foreign Direct Investments. Having the second largest market in Central
and Eastern Europe and an economy with growth potential Romania was
eager to embark on the long road towards the adoption of the Single
European Currency, one that was compulsory with the signing of the
Accession Treaty. Given the economic situation of that time, Romania has
set the target for joining the Economic and Monetary Union for 2013, and
was fulfilling three of the Maastricht criteria. In 2009 when the
economic and financial crisis was at its peak in Romania, the situation
changed dramatically. In this paper we want to see if Romania has any
perspectives of joining the Economic and Monetary Union and if Romania
is fulfilling the Copenhagen Criteria. To accomplish our goal we have
used data from the National Bank of Romania and Eurostat. The empirical
data was analyzed and compared to the benchmarks that are required by
the European Commission. The focus of the paper are the nominal
Convergence Criteria, although in the opinion of a lot of Romanian
scholars, the biggest fear is that Romania will not be able to converge
in the sense of the real convergence criteria if it fulfills the nominal
ones. The discussion about what should the focus be on, nominal
convergence or real convergence will be the subject of another paper. In
our opinion one must have a macroeconomic stability in order to hope for
growth on the microeconomic level,
Price stability
One of the key functions of the Economic and Monetary Union but
also the European Central Bank is price stability. The Euro was created
to be a strong and reliable currency and because of that it has also
gained the trust of non European Union countries that have started to
use it. In the European Union the statistical concept of inflation is
defined by the consumer price index.
Inflation is the main challenge for any economy that wants to
attract investments. It is important for the central bank and the
government of the country but also for the whole economy. To see the
situation in Romania we analyzed the inflation rate in Romania in the
last 2 years.
If we compare the inflation rate in Romania to the inflation rate
in the Eurozone and in the three best performing countries we see that
Romania has improved its position and with exception of two months the
trend is to narrow the gap.
[FIGURE 2 OMITTED]
[FIGURE 3 OMITTED]
Figure 2 and Figure 3 show that Romania has improved the stability
of its currency. Inflation is a key factor in atracting investors and
thus a trigger for covergence in the real criteria. A currency that
loses its value over time will not be attractive for investors and thus
the economy will fail to provide capital for investments.
Exchange rate stability
Exchange rate stability is itself a condition for successful
implementation of a sound monetary policy, the achievement of financial
and fiscal long-term forecasts and a condition of ensuring economic
stability.
In this paper we applied the principle of drag-and-drop. Table 2
provides an overview of the period 1999-2010. In this table we have
analyzed the evolution of the exchange rates in the Central and Eastern
European Countries in relation with the Euro.
Over the years Romania has suffered from a flotation in exchange
rate thus creating a sense of uncertainty for the economy. Countries
that have proved to have a more stable currency have attracted investors
but also help local economies forecast the business.
Romania has started in 2000 at a rate of 1,99 lei for each euro and
in 2010 the exchange rate of 4,21 lei/euro. The Romanian Leu has
suffered this loss of value mainly because of the lack of trust in it.
In the latest years the National Bank of Romania has struggled to
exchange rate under control with the help of the minimum compulsory
reserve.
If we want to take a closer look and have a much more detailed
insight on the degree of fulfillment of this criterion we have to look
at the monthly average values. Thus in Figure 4 we have selected the
monthly average values in the last 2 years.
The Treaty requirements are very clear for this criterion at least
two years before the examination period, the exchange rate (both monthly
average and at the end of the month) can't vary more than +/- 15%.
To summarize the conclusion of screening with the limits set by the
European Union, we have developed the trend line of the exchange rate
evolution: a mid-term of decline followed by a return to trend growth.
Beginning with January 2011 a downward trend of the exchange rate is
registered, reaching a years minimum, which creates a premise that we
could experience a recovery rate but it is premature to assure that
without taking into consideration other factors.
[FIGURE 4 OMITTED]
The low rate of long-term interest
In regard to interest rate fluctuations the Treaty has established
desirable screening interest rates within national markets which must
not be above 2 percent of the best performing three Member States with
the lowest interest rates. The study of this criterion is considering
the long term interest rates expressed as annual rates for assets.
(Figure 5). At present there is large discrepancy in the level of the
interest rate (compared to Germany, Spain and the Netherlands). The
trend is to diminish and in time we witnessed efforts by Romanian
authorities to converge the interest rate in order to fulfill this
current criterion.
[FIGURE 5 OMITTED]
For a better understanding we have calculated and graphically
represented the deviation in relation to the reference level. The
inconsistency with the requirement of deviation of 2% regardless of
whether we take as a reference the average level of interest in the euro
area, the minimum level of interest in the euro area or the average of
three countries that have experienced the lowest levels (according to EU
requirements) can be observed.
[FIGURE 6 OMITTED]
The chart above only confirms what we have mentioned already, that
Romania has failed to comply with the margin set by the European Union
during our observation period. But, it is important that there is a
trend towards the fulfillment of the interest rate criterion and by the
time Romania will enter in to the ERM II achieving and committing to
criterion won't be a problem. In fact the National Bank of Romania
is one of the few that have continuously lowered the long-term interest
rate. This criterion is strongly connected to the inflation and thus
making it harder to control.
Sustainable fiscal position
According to the Protocol on the nominal convergence criteria, the
budget deficit has to be below 3% of GDP and the public debt should not
exceed 60% of GDP (1). Fortunately being a former Communist country
Romania did not have any public debt at the beginning of the '90s.
The public debt, a very useful mean to finance public sector
investments, has slightly accumulated over the years and reached 20%
prior to the economic and financial crisis of 2007. In 2009
Romania's solution for the economic and financial crisis in was to
accept a loan from the International Monetary Fund, World Bank and the
European Union that has doubled the public debt to 40%. Still the
criterion is reached, but a concern is the fact that Romania has no
clear solution for stopping this vicious cycle of gathering debt. One of
the solutions is to lower the budget deficit. Unfortunately because of
the economic and financial crisis the budget deficit has increased --see
figure 8.
One of the solutions for gathering money to the budget could be the
selling of state shares to major Romanian companies. In the summer 2011
the Romanian government tried to sell Petrom2 shares through the
Bucharest Stock Exchange. Unfortunately for the Romanian government the
sell was not successful, one of the reasons mentioned was the bad timing
chosen, a holiday period. If this process continues and the Romanian
authorities manage to find different sources to finance their
investments and pay off their debts, the outlook could be successful and
Romania could fulfill this criterion prior to the date set for entry in
the ERM II.
Conclusion
The road towards the Euro is complicated but it is a necessary step
in Romania's future. The European Union was created as an economic
area and it developed to a political union and now a monetary union. It
is clear that for a country such as Romania the only road is the one
alongside the Eurozone members. The steps that have to be taken in order
to assure the accomplishment of the convergence criteria will come with
a lot of sacrifices (see the case of Greece) but at present the joining
of the Eurozone presents much more opportunities and long term benefits.
Nevertheless, Romania must not be in a rush and join the Euro Zone
sooner that it has complied with the nominal convergence criteria but
also once it improves its real convergence criteria. Although the real
convergence criteria are not taken into consideration by the European
Union these will make the process easier for the Romanian people and
economy.
Bibliography:
1. Baldwin, Richard, Charles Wyplosz, (2006), The Economics of
European Integration, McGraw Hill.
2. Brezeanu, Petre, (2007), Finante Europene, Bucuresti: C.H. Beck.
3. Levi, Maurice D., (2009), International Finance, London:
Routledge.
4. Toader, Valentin, (2009), Analiza evolutiei inflatiei in Romania
in perspectiva aaoptarii EURO, Cluj-Napoca: Risoprint.
(1) See Richard Baldwin, Charles Wyplosz, The Economics of European
Integration, McGraw Hill, 2006, p. 382.
(2) Petrom is the largest company active in the energy sector. In
2004 The Romanian government sold the majority of the shares to the
Austrian OMV Group.
Dragos Paun *
* Dragos Paun is PhD and teaching assistant in Finance at the
Faculty of Business, Babes-Bolyai University, Cluj--Napoca. Contact:
dragos.paun@tbs.ubbcluj.ro
Table 1. Evolution of inflation rate
% Romania Eurozone Germany Spain
Ian-09 6,80 1,10 0,90 0,80
Feb-09 6,90 1,20 1,00 0,70
Mar-09 6,70 0,60 0,40 -0,10
Apr-09 6,50 0,60 0,80 -0,20
Mai-09 5,90 0,00 0,00 -0,90
Iun-09 5,90 -0,10 0,00 -1,00
Iul-09 5,00 -0,60 -0,70 -1,30
Aug-09 4,90 -0,20 -0,10 -0,70
Sep-09 4,90 -0,30 -0,50 -0,90
Oct-09 4,30 -0,10 -0,10 -0,60
Nov-09 4,60 0,50 0,30 0,40
Dec-09 4,70 0,90 0,80 0,90
Ian-10 5,20 0,90 0,80 0,70
Feb-10 4,50 0,80 0,50 0,40
Mar-10 4,20 1,60 1,20 2,70
Apr-10 4,20 1,60 1,00 2,40
Mai-10 4,40 1,70 1,20 2,50
Iun-10 4,30 1,50 0,80 2,10
Iul-10 7,10 1,70 1,20 1,80
Aug-10 7,60 1,60 1,00 1,60
Sep-10 7,70 1,90 1,30 2,80
Oct-10 7,90 1,90 1,30 2,50
Nov-10 7,70 1,90 1,60 2,30
Dec-10 7,90 2,20 1,90 2,90
Ian-11 7,00 2,30 2,00 3,00
Difference
for
achieving
Difference the
compared to convergence
% France Eurozone criteria
Ian-09 0,80 5,70 5,97
Feb-09 1,00 5,70 6,00
Mar-09 0,40 6,10 6,47
Apr-09 0,10 5,90 6,27
Mai-09 -0,30 5,90 6,30
Iun-09 -0,60 6,00 6,43
Iul-09 -0,80 5,60 5,93
Aug-09 -0,20 5,10 5,23
Sep-09 -0,40 5,20 5,50
Oct-09 -0,20 4,40 4,60
Nov-09 0,50 4,10 4,20
Dec-09 1,00 3,80 3,80
Ian-10 1,20 4,30 4,30
Feb-10 1,40 3,70 3,73
Mar-10 1,70 2,60 2,33
Apr-10 1,90 2,60 2,43
Mai-10 1,90 2,70 2,53
Iun-10 1,70 2,80 2,77
Iul-10 1,90 5,40 5,47
Aug-10 1,60 6,00 6,20
Sep-10 1,80 5,80 5,73
Oct-10 1,80 6,00 6,03
Nov-10 1,80 5,80 5,80
Dec-10 2,00 5,70 5,63
Ian-11 1,90 4,70 4,70
(Source: BCE: HICP--Overall index, Annual rate
of change, Eurostat, (Indices of Consumer prices))
Table 2. Evolution of exchange courses for the states from euro area
Bulgaria Czech Rep. Denmark Latvia
leva/euro koruna/euro krone/euro lats/euro
1999 36,884 7,4355 0,6256
2000 35,599 7,4538 0,5592
2001 1,9482 34,068 7,4521 0,5601
2002 1,9492 30,804 7,4305 0,581
2003 1,949 31,846 7,4307 0,6407
2004 1,9533 31,891 7,4399 0,6652
2005 1,9558 29,782 7,4518 0,6962
2006 1,9558 28,342 7,4591 0,6962
2007 1,9558 27,766 7,4506 0,7001
2008 1,9558 24,946 7,456 0,7027
2009 1,9558 26,435 7,4462 0,7057
2010 1,9558 25,284 7,4473 0,7087
Lithuania Hungary Poland Romania
litas/euro forint/euro zloty/euro leu/euro
1999 4,2641 252,77 4,2274 1,6345
2000 3,6952 260,04 4,0082 1,9922
2001 3,5823 256,59 3,6721 2,6004
2002 3,4594 242,96 3,8574 3,1270
2003 3,4527 253,62 4,3996 3,7551
2004 3,4529 251,66 4,5268 4,0510
2005 3,4528 248,05 4,023 3,6209
2006 3,4528 264,26 3,8959 3,5258
2007 3,4528 251,35 3,7837 3,3353
2008 3,4528 251,51 3,5121 3,6826
2009 3,4528 280,33 4,3276 4,2399
2010 3,4528 275,48 3,9947 4,2122
(Source: exchange rate BCE, Eurostat, statistics BCE)
Figure 7. % deficit in GDP
% deficit in PIB
2003 -2,3
2004 -1,1
2005 0,8
2006 -2,2
2007 -2,5
2008 -5,4
2009 -8,3
(Source: author's calculations, annual BNR reports 2004-2010)
Note: Table made from bar graph.
