According to an Erste Group special report, the target of accessing Eurozone in 2019 is “very ambitious”, a more realistic time span should go beyond 2021. The financial analysts also points out that the development gap between the country and the rest of the EU is too large to be ignored.
At a time when Hungary and Poland have put on hold their plans to join the euro, Romania is over and over again making new plans to join the single currency in the not so distant future. During the past seven years, Romanian officials have transformed the date when the country should join the Euro Area into “a moving target”, Erste Bank analysts believe.
Thus, a special report of the Austrian financial institution, “Romania’s euro membership: a moving target?”, released yesterday, removes point by point the Romanian Government’s target of joining European currency in 2019.
“During the past years, Romania’s euro membership has become a moving target. The latest set deadline is 2019. We see this new timeline as very ambitious and believe that a
more realistic time span should go beyond 2021,” according to Erste Group analysts.
The perspective of euro membership in a determined period of time was a project that historically has been strongly supported by the central bank. During the past two decades, Romania’s appetite for reforms was rather mild and, therefore, ambitious objectives such as EU membership or the need for the safety belt provided by the IMF have been the motivating factors that made Romania swallow even the bitter reform pills, which otherwise would have been refused, offering at the same time scapegoats for the unpopular decisions.
Once the EU membership objective was reached, the central bank advocated the need for another objective aimed to act as an anchor for the economic decisions of the Romanian governments, meant to support Romania’s convergence story.
“The use of a Eurozone membership target as a carrot aimed at speeding up reform did not seem to work too well. Moreover, the financial crisis exposed even more the mistakes made in the past, making Romania’s euro membership date a moving target.” Erste notes.
Nominal euro membership criteria
Any country planning to join the Euro Area has to comply with the five nominal criteria as defined in the Maastricht Treaty. According to Erste report, the 12-month (y/y average) HICP inflation – Harmonised Index of Consumer Prices – of the candidate country has to be a maximum 1.5 percent higher than the unweighted arithmetic average of the HICP inflation rates in the three EU member states with the lowest inflation. “This criterion is not yet fulfilled. Despite the lowest-ever inflation posted by the Romanian economy, the disinflation in the Euro Area has been much stronger, making the inflation gap widen after a temporary narrowing in 2012.” the analysts show. The ratio of the annual general government deficit relative to gross domestic product (GDP) at market prices must not exceed 3 percent at the end of the preceding fiscal year. This criterion is already fulfilled by Romania. The ratio of gross government debt relative to GDP at market prices must not exceed 60 percent at the end of the preceding fiscal year. Despite peaking in recent years following the global crisis, the Romanian public debt to GDP indicator has remained well below the required benchmark.
Then, long-term interest should be no more than 2 percent higher than the unweighted arithmetic average of the similar 10 years government bond yields in the three EU member states with the lowest HICP inflation. The latest figures show Romania getting closer to the benchmark value, but the criterion is not fulfilled yet.
Applicant countries should have joined the exchange rate mechanism (ERM/ERM II) under the European Monetary System (EMS) for two consecutive years, and should not have devalued their currency during the last two years, meaning that the country should have succeeded in keeping its monetary exchange rate within a +/-15 percent range from an unchanged central rate. Romania has not yet formally joined the ERM and probably will join only two years before euro accession would be achievable. However, it is worth looking at the volatility posted by the EUR-RON over the past few years, which shows that the FX movement has been well below the +/-15 percent volatility criterion. The Erste conclusion is that “Romania is currently likely to meet three out of the five required nominal criteria to join the euro. The inflation and long-term yield criteria could be met in 1-2 years, as long as economic decisions remain prudent.”
Then, the labor productivity shows Romania standing 50 percent below the EU average and well below the most recent euro members. Assuming a 3 percent annual increase, which is a rather moderate figure, Romania would need about eight years to match the level of Latvia when it joined the Euro Area. Also, Romania is still far from the Euro Area in terms of development and real convergence is the risk of poverty and social exclusion. Assuming that the current convergence trend continues, Romania would need another 7-8 years to reach the level posted by Latvia when it joined.
In one scenario Erste notes that Romania would be able to reach 65 percent of the EU’s GDP per capita is 10-13 years. A second scenario would be one in which the entry bar would continue to be lowered and Romania would be willing to take the risk to join at a GDP per capita representing only 60 percent of the EU average.
As part of the report conclusion, Erste considers the restructuring and privatization of the state-owned sector, boosting budget revenue and EU fund absorption, and favouring infrastructure investments over social expenses are only some of them.