Romania and the Challenges of Economic and Monetary Union

Romania and the Challenges of Economic and Monetary Union. An Overview

Andreea Avadanei

1 Introduction

Romania's integration in the European Union (EU) was undoubtedly a significant step, but reducing the existing gaps in relation to the developed countries will still continue for a long time. Joining the euro area is a second major step in this process.

Moreover, if the phenomenon of Economic and Monetary Union (EMU) accession is a key objective, the time of implementing this decision will be weighed carefully in order to see what are the advantages and limitations that this approach entitles.

According to the European Commission Report published in May 2010, Romania currently meets only one of the four nominal convergence criteria (public debt), with fiscal stability being the main obstacle towards the single currency adoption.

Although accession to the third stage of EMU involves as mandatory only the fulfillment of nominal convergence criteria, the sustainability of the process depends very much on real convergence degree, as the essence of integration.

Because of the problems affecting the implementation of structural reforms (especially privatization and price liberalization) in Romania, real convergence has had a delayed start.

2 Literature review

In the case of Romania, the euro adoption should mark the end point of a complex macroeconomic convergence process and not its debut; in essence, the single currency does not eliminate the Member States imbalances, but rather may worsen them. Unilateral adoption is neither feasible, nor constitutes a viable solution (Popa, 2009a).

The recent national discussions of the business arena and not only, are considering the possibility of early euro adoption against the original schedule. According to governor Isarescu (2007, 2009) and Andreescu (2010) early euro adoption, before a strong convergence with the EU, is problematic and can not replace the policy adjustment efforts.

To accelerate the single currency introduction means giving up the monetary policy prior to ensuring a sustainable convergence (before the elimination of the national economy imbalances). Popa (2009b) argues that the application of a policy designed by the ECB can possibly be inadequate to country-specific problems.

In terms of real convergence, the low correlation between the national and the Eurozone economic cycle and the differences regarding the economic structures represent strong arguments against accelerated euro introduction (Ionescu, 2007, Dumitru, 2009). This background leads to an increased probability of asymmetric shocks occurrence, the rigidity of domestic labor market making it impossible to accommodate to such events.

A comparative analysis of the pros (Toma and Nicula, 2007) and cons (Hurduzeu and Constantin, 2007; Daianu, 2010) of accelerating single currency adoption shows that maintaining the current timetable for euro area entry (January 2015) is the optimal solution, while speeding up the accession to Economic and Monetary Union involves major disadvantages.

3 The trade-off between nominal and real convergence

Convergence process calibration relates to two essential elements:

 Nominal convergence;

 Real convergence or the catching-up process.

The analysis of these aspects opens up a new perspective to practical actions in the areas of economic reform, the acquis communautaire and the integration process.

Nominal convergence criteria have a strong economic motivation, related to financial stability and anchoring the performances to those recorded in the states with the best indicators, considered as benchmarks in the evaluation process.

Since the Maastricht criteria imply a lower temporal perspective, we believe that in relation to the phenomenon of real convergence, nominal convergence is a privileged process.

Obtaining EMU membership is strictly subject to compliance benchmarks imposed on inflation, long-term interest rates, deficit and public debt, and nominal exchange rate stability.

Unlike the nominal convergence criteria stipulated in the Treaty of European Union, the real convergence criteria are not provided in any international treaty, although they represent an essential precondition for a country to fully benefit from the advantages of a common currency.

Moreover, there are no formal criteria and no full agreement regarding the variables that should be taken into account (the Maastricht Treaty states only the need for social cohesion and reducing economic disparities between countries and regions).

Academic literature offers many opinions that consider real convergence criteria synonymous with the properties of optimal currency areas-OCAs (degree of openness of the economy, the synchronization of business cycles, labor mobility, wage and price flexibility, the level of financial development). Developments driven by nominal criteria have influenced the real economic variables, highlighting the complementary nature of both phenomena.

Although it is possible for nominal convergence to initially draw a performance dilution, the complete fulfillment of the Maastricht criteria ensures greater macroeconomic stability, resulting in significantly higher growth rates. The more flexible is the national economy, the easier it is to adapt to a new scheme, reducing the intensity of the initial impact.

For the Central and Eastern Europe (CEE) states, and hence to Romania, the priority is beta convergence or, reformulating, catching-up to the most powerful EU countries.

Successful completion of this effort primarily involves high rates of saving and investment, refining educational standards and labor force, as well as improving competitiveness.

In order to highlight the speed of convergence, we divided the analyzed interval into two sub-periods, as shown in table 1.

Tab. 1: Convergence of CEE states to the EU-27

Country GDP per capita in EU-27 (PPP, EU-27=100) The speed of convergence (reducing the gap to EU-27 average, %)*

1995 2000 2004 2009 1995-2004 2004-2009

Bulgaria 32 28 35 n/a 3 n/a

Czech Republic 73 68 75 80 2 5

Estonia 36 45 57 63 21 6

Lithuania 36 39 50 53 14 3

Latvia 31 37 46 49 15 3

Poland 43 48 51 61 8 10

...