Convergence Program and Macroeconomic Policies for Romania Joining the Euro-Zone

• Author: Magdalena Rădulescu, Carmen Secar&#x0103
• Position: Associate Professor, Ph.D., University of Piteşti/Lecturer, Ph.D., University of Piteşti
• Pages: 407-423

Page 407

Introduction

According to the Treaty of Maastricht, the countries that adhere to the European Union become member states having a temporary derogation regarding adopting the common currency. This mans that, at a certain time, subsequent to the adherence, the new member states shall enter the ERM II, and then, conditioned by meeting the nominal convergence criteria, they shall adopt the EURO currency, which grants a full content to the integration into the Economic and Monetary Union. Although after the adherence to the European Union, the monetary and currency policies of every state become the object of common interest, is, at the same time, obvious that the monetary and currency strategy options after the adherence to the E.U. constitutes, mainly, o responsibility and a prerogative of that member state.

To the Romanian economy, the integration to the EURO area represents a very important strategic objective, and the achievement schedule has been made taking into consideration the benefits and costs which this process draws. The first edition of the convergence Schedule, definitive and published in 2007 – after the previous months it's project had been submitted to public debate -, has to Romania a special importance, being the first document which evaluates the economic development possibilities in the conditions of promoting the achievement of nominal and real convergence policies.

Taking into account the necessity of implementing structural reforms to lead to the increasing of the Romanian economic capacity to handle asymmetrical shocks, within thePage 408 convergence schedule it is appreciated that Romania will not be able to adhere the ERM II sooner than 2012. Within the conditions of joining the ERM II in 2012 and minimizing the participation time to this mechanism, EURO adoption could take place around 2014.

Within the preparation process of the convergence Schedule efforts have been made from all the institutions involved (Labor, Social Security and Family Ministry, National Bank of Romania, the Forecast National Commission, the National Statistics Institute, etc.) under the coordination of the Public Finance Ministry, in order to give eloquent and detailed data and information, in concordance with the European Commission demands through which to substantiate the macro economical increasing and economic and budget stability policies. In 2006, NBR, which had showed since 2003 it's preoccupation for submitting a vision upon the EURO adopting process course, has started to attend the meetings of the common work group in order to issue the convergence Schedule.

The current edition of the Convergence Program was elaborated in correlation with the provisions in the National Reform Program 2007-2010, as drawn up and sent by Romania to Brussels in July 2007.

In 2007, the NBR’s Administration Board has analyzed the scheme regarding the BNR strategic options for the convergence Schedule and also the material regarding meeting by Romania the economic convergence criteria, made by specialists within the central bank.

This paper aims to present some considerations about the Romanian convergence criteria comparative to the other CEE states, some monetary, fiscal and structural measures needed for achieving the nominal and real convergence and some scenarios of adopting euro in a short-run or in a long-run. The convergence matter is important for all EU new member states that aim to adopt euro for achieving a complete integration also in the monetary area. The paper is based on the Convergence Programs realized by the new member states and try to present from these some scenarios for adopting euro in the short-run and in the long-run.

Section 2 presents the CEE countries’ experience in the convergence area and section 3 presents the feature of the Romanian monetary and fiscal policy and structural reforms according to the Convergence Program elaborated in November 2007. Section 4 presents the advantages and disadvantages of adopting euro in the short-run and in a long-run and section 5 concludes.

CEE Countries experience in the convergence area

Nominal convergence criteria are somehow also inspired by the OCA theory (R. Mundell, 1961), stability prices criteria being in center and the others are complementary with it. Regarding the criteria of the relative stability of the exchange rate with no de-valorizations, the OCA theory states that if the exchange rates of the potential partners didn’t face tensions, this means that their economies are compatible for achieving a monetary union and that exist some conditions of symmetry and flexibility. Fiscal Maastricht criteria can be seen as being related to the criteria regarding the fiscal discipline and integration (Demertzis, M., Hughes Hallet, A. şi O. Rummel, 2000). The regulations of the SGP related to the balanced budgets in the view of using some fiscal stabilizers during the recession periods represent in a way a concern for potential adjusting mechanisms. In case of the fiscal des-centralization, although that in reality the SGP leaves less possibilities of using the national budgets for sustaining the markets flexibility, the SGP reform will allow some adjustments by using fiscal policy instruments. But the quality of the Maastricht criteria is given by their clarity and the possibility of measure them and these features were very important and they made the deciders’ task to be easier.

Generally, the nominal and real convergence criteria suggest that the new member states have a high level of macroeconomic convergence with the euro-zone, especially in the nominalPage 409 convergence area. Still, for some countries this pattern is a quite recent one. But regarding the real convergence, in different area of the macroeconomic policies, the convergence results are more different and mixed (Ciupagea C. - coordinator, 2006).

For example, the public finances represent a problem for many new member states. Shortly, the public finances situation per total seems to be relative comfortable in present, if we look at the present indebt ness level. Still, existence of an average high deficit accompanied by a high and increasing level of public consumption (difficult to reduce in the future) don’t allow a future convergence. Another aspect that deserves to be considered is the macroeconomic context of the new member states. These countries have a high level of economic growth comparative to the average level of the euro-zone that makes the actual fiscal situation in many new member states to be critical.

If we analyze the structural factors, we notice that while the commerce integration with the EU-15 evolved very quickly in the last years and it is now at a very high level, the convergence of the GDP structure to the EU standards (charecterized by a low share of the agriculture and a high share of services) was very slow, especially if we measure it in real terms (excluding the relative prices changes). This aspect suggests that, while the relative prices changed in a flexible way, a part of the processes that causes real adjustments (that these prices are supposed to stimulate them) don’t converge (N. Pop – coordinator, 2007). A conclusion could be that the development degree of the financial sectors is significantly lower in the new member states comparative to the euro-zone (Sebea M., Ionescu A., 2006). After entering in the EU in May 2004 and January 2007, the new member states become authomatically candidates for EMU and some of them have already announced the schedule regarding euro adoption.

Only Slovenia entered in euro-zone in 2007. Slovak Republic planns to do the same in 2009, although some analysts are afraid that the new social oriented governments could postpone this accession date.

In the present, the Baltic states watch their ambitions being shattered by a too high inflation rate. First, EU refused Lithuania’s request of entering the euro-zone, the last rejection being in 1999 when the euro-zone was created. The reason was that Lithuania had a too high inflation to afford adopting euro in 2007.

This decision gives a negative signal for the other new member states too, states that hope that the EU accession will rise their competitiveness and so they will manage to complete their transition to the Western economies. In the same time, the largest Estern economies (Hungary, Poland, Czech Republic) postponed the entering in the euro-zone mainly because of the political debates and feuds that followed the elections in 2007 and 2006 (Hungary, Poland and Czech Republic Convergence Program, 2004-2005).

The new political deciders in Poland (which represents the half of the GDP of the total new member states) afirm that they will be able to achieve the economic criteria for entering the euro-zone this decade, but they are sceptic regarding the adoption of euro.

Hungary also intends to enter the euro-zone, but it struggles with the largest public deficit of EU after many years of high public expenses. The social oriented government faces many protests against the austerity measures introducted so it couldn’t settle a new target date for adopting euro.

Czech Republic which has represented for a long time an example of economic stability and healthy performance, states that accession in 2010 at the euro-zone is a quite improbable date if we consider an increasing fiscal deficit and a rather inflexible labor market.

According to the latest prognosis, Poland and Czech Republic will enter in the EMUin...