Romania's progress in the convergence process
| Author | Adrian-Milutin Truichici - Luiza Neagu |
| Position | PhD, Associate Professor, Faculty of Law, 'Titu Maiorescu' University, Bucharest. Associate Researcher, 'Acad. Andrei Radulescu' Institute of the Romanian Academy. Lawyer, Bucharest Bar, ROMANIA - PhD Lawyer, Bucharest Bar, ROMANIA |
| Pages | 45-52 |
Romania’s progress in the convergence process 45
ROMANIA’S PROGRESS IN THE CONVERGENCE PROCESS
Adrian-Milutin TRUICHICI, PhD*
Associate Professor, Faculty of Law, "Titu Maiorescu" University, Bucharest
Associate Researcher, "Acad. Andrei Rdulescu"
Institute of the Romanian Academy
Lawyer, Bucharest Bar, ROMANIA
Luiza NEAGU, PhD**
Lawyer, Bucharest Bar, ROMANIA
Abstract:
The paper presents the progress made by Romania in the process of convergence1 in view of the
Treaty on the Functioning of the European Union.
Keywords: Single European currency, convergence criteria, average annual inflation rate,
gross domestic product, long-term interest rate.
1. Introductory remarks
Since the introduction of the euro in 11 European Union Member States on
January 1, 1999, another seven countries joined the Eurozone, the most recent case
being Latvia on January 1, 2014. Following Croatia’s accession to the European
Union on July 1, 2013, there are 10 Member States that are not full participants in
EMU2, meaning they have not adopted the euro yet3.
Under the Treaty on the Functioning of the European Union, the following
countries pledged to adopt the euro: Bulgaria, the Czech Republic, Croatia,
Lithuania, Hungary, Poland, Romania, and Sweden. This involves, from the part of
these countries, efforts aimed at fulfilling all the convergence criteria4.
* E-mail: adrian_truichici@yahoo.com.
** E-mail: cabinetavocatura@yahoo.com.
1 Before it could adopt the euro as its single currency, a Member State must meet a number of
economic and financial conditions, also called "convergence criteria". There are four conditions: price
stability; state of public finances; participation in the exchange rate mechanism of the European
Monetary System; convergence of interest rates.
2 Economic and Monetary Union.
3 Two of these states, Denmark and the United Kingdom, notified that they would not
participate in Stage Three of EMU.
4 N. Pop, Adoptarea euro de ctre România: recomandri pentru pregtirea unei strategii de succes,
Centrul de Informare şi Documentare Economic, Bucharest, 2005, p. 4.
Law Review vol. I, issue 1, Januar
y
-June 2015, p. 45-52
46 ADRIAN-MILUTIN TRUICHICI, LUIZA NEAGU
The euro changeover is contingent on the fulfilment in a sustainable manner
of the nominal convergence criteria and of the legal convergence ones. When
examining the sustainability of the convergence process, there are taken into
account a number of economic indicators that define the so-called real
convergence, such as: GDP 5 per capita, openness of economy, structure of
economy, financing of current account deficit, labour costs, degree of financial
intermediation etc.
2. The process of economic convergence
The process of economic convergence facilitates the objective of the monetary
policy, which is maintaining a stable level of prices throughout the Eurozone,
thereby contributing to the achievement of a non-inflationary growth6. Looking in
perspective, the European Union Member States that are to adopt the euro in the
future will have to ensure the convergence of their own economies with the
economy of the Eurozone7.
In 1993, the Maastricht Treaty established five criteria that the Member States8
must meet in order to join the EMU and consequently adopt the euro9:
a) An inflation rate of no more than 1.5% above the average of the first three
Member States with the best performance in price stability;
b) The long-term nominal interest rate should not exceed by more than 2%
the average interest rate in the first three Member States with the best performance
in price stability;
c) The budget deficit should not exceed 3% of GDP;
d) The debt-to-GDP ratio should not exceed 60%;
e) The fluctuation margins should tally the margins established by the
European Monetary System: within ±15% in the two years preceding the
examination (in actual fact, in the technical negotiations the fluctuation margin
accepted by the European Commission is 15% / -2.25%).
3. Real convergence
Real convergence means that the disparity between standards of living as to
income and productivity across a certain zone tends to disappear or the structural
disparities influencing a country’s competitiveness are diminished.10
5 Gross Domestic Product.
6 D. Miron, L. Pun, A. Dima, V. Bajenaru, O. Savoiu, Economia integrrii europene, Ed. ASE,
Bucharest, 2001, p. 28.
7 Criteriile de convergen, article published at http://www.ecb.int/ecb/ educational/
facts/euint/html
8 We must recall that Denmark and the United Kingdom are subject to a derogation from the
third stage of the Economic and Monetary Union. These two Member States do not envisage adopting
the euro yet. Therefore, they are exempt from obligations relating to the convergence criteria.
9 A. Szász, Calea unificrii monetare a Europei, Ed. Pandora, Târgovişte, 2002, p. 60.
10 G. Ferréol, Dicionarul Uniunii Europene, Ed. Polirom, Iaşi, 2001, p. 23.
Romania’s progress in the convergence process 47
According to the Maastricht Treaty, real convergence designates "the
long-term process of reducing the disparities between the standards of living,
which represents a fundamental objective of the Community", referring to levels of
economic and social development.11
In the long term, the levels of GDPs per capita in the EU Member States grew
noticeably closer, with less developed countries registering a faster growth than
the rich ones. Nevertheless, the specific contribution of the European integration
process to this convergence is far from being evident, as in most cases the approach
in the standards of living was actually more pronounced before the accession than
after it.
Similarly, recent developments seem to indicate that a forced nominal
convergence is accompanied by a general slowdown in growth, which does not
foster recovery by the less developed countries, even if a substantial increase in
transfers of structural funds could have beneficial effects.12
4. Nominal convergence
Nominal convergence regards the evolution of cost and price variables and of
their deep determinants (interest rate, exchange rate, budget deficit, public debt).13
The criteria included in the Maastricht Treaty pertain to the nominal
convergence of the European Union countries, which is to be evaluated for each
country by the European Council before proceeding to Stage Three of EMU.
In order to ensure sustainable convergence, the Treaty on the Functioning of
the European Union (Lisbon Treaty - TFEU) establishes the criteria that have to be
met by each Member State of the European Union before they could participate in
the third stage of the Economic and Monetary Union:
A Member State should not be the object of a Council decision concerning
excessive budget deficit;
There must be a sustainable price stability and an average inflation rate
which, in the year prior to the examination, should not exceed by more than 1.5%
the inflation rate of at most three Member States having the best results in price
stability;14
The long-term nominal interest should not exceed by more than 2% that of
at most three Member States with the best results in price stability;
The normal fluctuation margins stipulated by the exchange rate mechanism
must be observed without severe tensions in the latter for at least the last two years
before the examination;
11 T. Ştefan, Introducere în dreptul comunitar, Ed. C.H.Beck, Bucharest, 2006, p. 36.
12 Criteriile de convergen, article published at http://www.ecb.int/ecb/ educational/
facts/euint/html
13 C.Hen, J. Léonard, Uniunea European, Ed. C.N.I. Coresi S.A., Bucharest, 2002, p. 34.
14 N. Darie, Uniunea European. Construcie. Instituii. Legislaie. Politici comune. Dezvoltare, Ed.
Matrix Rom, Bucharest, 2001, p. 53.
48 ADRIAN-MILUTIN TRUICHICI, LUIZA NEAGU
Member States should ensure that their national legislation, including the
statutes of their national central banks (NCBs), is compatible with both Articles 130
and 131 of the Treaty and with the Statute of the European System of Central
Banks. This obligation, applicable to Member States with a derogation, is also
referred to as "legal convergence".15
The convergence criteria are meant to ensure balanced economic
developments within EMU, which should not cause tensions between the Member
States of the European Union.16 It must also be recalled that it is mandatory to
continue complying with the criteria regarding the public deficit and the public
debt after the start of the third stage of EMU (January 1, 1999) as well. In this
respect, the Stability and Growth Pact was adopted at the European Council
meeting held in Amsterdam in June 1997.17
5. The Convergence Reports of the European Central Bank
By the Convergence Reports, the ECB18, at least once every two years or at the
request of a Member State of the European Union,19 analyzes the progress made by
the Member States in fulfilling their obligations in achieving the economic and
monetary union or in joining the single European currency.
It is to be mentioned that the evaluation of the process of economic
convergence depends to a large extent on the quality and integrity of the statistics
provided by the countries under analysis. For this reason, the compilation and
reporting of statistics, particularly of those pertaining to government finance,
should not be influenced by political considerations or interference.20
As far as Romania is concerned 21 , within the reference period May
2013 - April 2014, the average annual rate of HICP22 inflation in Romania was 2.1%,
i.e. above the reference value of 1.7% for the criterion on price stability.
15 Criteriile de convergen, article published at http://www.ecb.int/ecb/ educational/
facts/euint/html
16 M. Diaconescu, Economie european, Ed. Uranus, Bucharest, 2004, p. 61.
17 Criteriile de convergen, article published at http://www.ecb.int/ecb/ educational/
facts/euint/html
18 European Central Bank.
19 Article 140 of the Treaty on the Functioning of the European Union as regards reporting to the
Council of the European Union.
20 It was recommended to the Member States to consider the quality and integrity of their
statistics as a priority, to ensure an adequate system of verification and corroboration when compiling
these statistics, and to apply certain standards in the field of statistics. These standards are of
particular importance, strengthening the independence, integrity and accountability of the national
statistics institutes and contributing to increased confidence in the quality of public finance statistics.
21 Romania is a Member State of the European Union with a derogation and must therefore
comply with all the adaptation requirements under Article 131 of the Treaty on the Functioning of the
European Union.
22 Harmonised Index of Consumer Prices.
Romania’s progress in the convergence process 49
Looking back over a longer period, the average annual rate of HICP inflation
in Romania decreased from very high levels in the early 2000s up to 2007, when the
downward trend was reversed. In 2009 inflation fell again and broadly stabilised
thereafter at an elevated level, before declining to historically low levels of 3.4%
and 3.2% in 2012 and 2013 respectively.23 In addition to unit labour costs, a
succession of major supply-side shocks (including a VAT rate hike in 2010),
adjustments in administered prices and excise duties, and the exchange rate
developments played a major role in inflation developments. Inflation dynamics
over the past ten years should be viewed against a background of “overheating” in
the economy from 2004 to 2008, which was followed by a sharp contraction of
economic activity in 2009 and 2010, and by a moderate recovery from 2011 to 2013.
During the period 2004-2008, unemployment declined and wage growth
significantly outpaced productivity growth, which in turn drove up unit labour
cost growth to double-digit levels. As unemployment picked up again and wage
growth moderated significantly, unit labour cost growth fell from 22.9% in 2008 to
2.5% in 2013. Looking at recent developments, annual HICP inflation broadly
followed a downward path from its peak of 5.4% in September 2012 to 1.1% in
September 2013, before picking up to a certain extent to 1.6% in April 2014,
following an increase in excise duties on fuel. This marked overall decline can be
attributed to a reduction in the VAT rate on flour and bakery products in
September 2013, as well as to easing pressures from energy and food prices against
the background of global price developments, a very good harvest, downward
base effects, the disinflationary pressures exerted by the negative output gap and
falling inflation expectations.
The latest available forecasts from major international institutions envisage
average annual inflation rising gradually from historically low levels and ranging
from 2.2% to 2.5% in 2014 and from 3.0% to 3.3% in 2015. While immediate risks
regarding the inflation outlook are broadly balanced, upside risks prevail in the
medium term. They relate to a stronger than expected rise in global prices of raw
materials and to depreciation pressures on the Romanian currency resulting from
renewed tensions in global financial markets. Risks from domestic sources are
associated with the impact of further deregulation of energy prices and with hikes
in excise duties as well as persistent uncertainty regarding the progress made in
implementing the structural reform measures agreed upon in the precautionary
financial assistance programme.
Lower than expected economic activity constitutes a downside risk to the
inflation outlook. Looking further ahead, the catching-up process is likely to have a
23 The dynamics of inflation in the last ten years should be considered in the context of
“overheating of economy” in 2004-2008, followed by a sharp contraction of economic activity in 2009
and 2010 and a moderate recovery in 2011-2013. In the period 2004-2008, unemployment declined and
earnings growth rate significantly exceeded productivity, which resulted in an acceleration of the
growth of unit labour costs of up to double-digit levels.
50 ADRIAN-MILUTIN TRUICHICI, LUIZA NEAGU
bearing on inflation and/or the nominal exchange rate in the years to come, given
that the levels of the GDP per capita and of prices are still significantly lower in
Romania than in the eurozone. However, it is difficult to assess the exact
magnitude of the effect that this catching-up process might have on inflation.
Romania is not currently subject to a European Union Council decision on the
existence of an excessive deficit. In the reference year 2013 the general government
budget balance recorded a deficit of 2.3% of GDP, i.e. below the 3% reference
value, and the debt-GDP ratio was 38.4%, a level significantly lower than the
reference value of 60%.
It is important for Romania to ensure that sufficient progress should be made
towards the accomplishment of the medium-term budgetary objective, namely a
structural deficit of 1% of GDP, and the fulfilment of commitments under the
agreement of financial assistance concluded with the European Union and the
International Monetary Fund. In addition, Romania has to cope with fiscal
challenges24, within the two-year reference period, as the Romanian Leu is not part
of ERM II25, but is traded under a flexible managed float regime of the exchange
rate.26
The exchange rate of the Romanian Leu against the euro showed a relatively
high degree of volatility. Following a slight appreciation of the Romanian Leu up
to May 2013, the currency weakened during a period of increased volatility in
mid-2013. Thereafter the leu strengthened again to a certain extent, stabilising
around the average level it had at the beginning of the reference period. Over the
entire reference period, short-term interest rate differentials against the
three-month EURIBOR27 remained, on average, at a high level, although they
declined gradually amid interest rate cuts operated by the National Bank of
Romania against the background of decreasing inflation differentials compared to
the Eurozone.28
During the reference period Romania did not draw on the resources available
under the precautionary arrangements. As these agreements helped to reduce
financial vulnerabilities, they might also have contributed to the reduction of the
exchange rate pressures over the reference period. In a longer-term context, in
April 2014 both the real effective exchange rate and the real bilateral exchange rate
24 D. Mazilu, Locul şi rolul monedei în schimburile comerciale internaionale. Impactul trecerii la "leul
greu" şi, apoi, la euro asupra schimburilor comerciale naionale, regionale şi internaionale, Revista de drept
comercial, 5/2005, pp 78-93.
25 Exchange Rate Mechanism II.
26 M. Tofan, Integration of Romania in the European Monetary Union, PhD thesis, University of
Bucharest, Faculty of Law, 2008, coordinated by D.D. Şaguna, p. 80.
27 EURIBOR (Euro Interbank Offered Rate) is the reference rate for the euro monetary market,
founded in 1999.
28 In 2009 it was agreed to grant a package of international financial assistance to Romania by the
European Union and International Monetary Fund, followed by a precautionary financi al assistance
agreement in 2011 and by an additional similar programme in 2013.
Romania’s progress in the convergence process 51
of the Romanian Leu against the euro stood relatively close to the corresponding
ten-year historical averages. As regards other external developments, Romania’s
cumulative current and capital account balance has adjusted substantially in recent
years.29 After reporting a progressive increase in the external deficit between 2004
and 2007, the combined current and capital account deficit adjusted in 2009,
improving further to 3.0% of GDP in 2012 and turning into a surplus of 1.2% of
GDP in 2013. At the same time, the country’s net international investment position
deteriorated substantially from -26.4% of GDP in 2004 to -67.5% in 2012, but
improved to -62.3% in 2013. Fiscal and structural policies continue therefore to be
important in supporting external sustainability and the competitiveness of the
economy.
Long-term interest rates were 5.3% on average over the reference period
May 2013 – April 2014 and were thus below the 6.2% reference value for the
interest rate convergence criterion. In the previous years, long-term interest rates in
Romania tended to fluctuate around 7%, within a margin of ±0.5%, with persistent
inflation preventing a sustained downward trend in nominal interest rates. More
recently, inflation declined sharply, allowing the central bank to ease monetary
policy rates faster than before. This contributed to the narrowing of the long-term
interest rate differential between Romania and the Eurozone average.
At the end of the reference period, the long-term interest rate stood at 5.2%,
with 2.8% above the Eurozone average and with 3.5% above the yield of the
AAA-rated30 sovereign bonds from the Eurozone).
6. Conclusions
Achieving an environment conducive to sustainable convergence in Romania
requires, among other things, the pursuit of economic policies meant to ensure
overall macroeconomic stability, including sustainable price stability.
Regarding its macroeconomic imbalances, the country is subject to
surveillance under a macroeconomic adjustment programme supported by
financial assistance. Romania is confronted with a wide range of challenges in the
field of economic policies.31
Romanian legislation does not meet all the requirements for central bank
independence, the ban on monetary financing and the legal integration of the
central bank into the Eurosystem. Romania is a Member State of the European
29 Following the progressive increase of the external deficit in 2004-2007, the cumulative current
account and capital deficit underwent an adjustment in 2009 and continued to improve, reaching 3.0%
of GDP in 2012, and in 2013 it registered a surplus of 1.2% of GDP.
30 The highest possible rating assigned to the bonds of an issuer by credit rating agencies.
AAA-rated issuers have an exceptional degree of creditworthiness and can easily meet their financial
commitments. Agencies such as Standard & Poor’s and Fitch Ratings use the AAA nomenclature to
indicate the highest credit quality, while Moody's uses Aaa.
31 P. Welfens, European Monetary Union: Transition, International Impact and Policy Options”, Ed.
Springer, Berlin; Heidelberg; New York, 1997, p. 10.
52 ADRIAN-MILUTIN TRUICHICI, LUIZA NEAGU
Union with a derogation and must therefore comply with all the adaptation
requirements under Article 131 of the Treaty on the Functioning of the European
Union.
References
[1] Darie, N., (2001), Uniunea European. Construcie. Instituii. Legislaie. Politici
comune. Dezvoltare, Ed. Matrix Rom, Bucharest.
[2] Diaconescu, M., (2004), Economie european, Ed. Uranus, Bucharest.
[3] Ferréol, G., (2001), Dicionarul Uniunii Europene, Ed. Polirom, Iaşi.
[4] Hen, C., Léonard, J., (2002), Uniunea European, Ed. C.N.I. Coresi S.A., Bucharest.
[5] Mazilu, D., (2005), Locul şi rolul monedei în schimburile comerciale internaionale.
Impactul trecerii la "leul greu" şi apoi la euro asupra schimburilor comerciale naionale, regionale şi
internaionale, Revista de drept comercial, Nr. 5.
[6] Miron, D., Pun, L., Dima, A., Bajenaru, V., Savoiu, O., (2001), Economia integrrii
europene, Ed. ASE, Bucharest.
[7] Pop, N., (2005), Adoptarea euro de ctre România: recomandri pentru pregatirea unei
strategii de succes, Centrul de Informare şi Documentare Economic, Bucharest.
[8] Szász, A., (2002), Calea unificrii monetare a Europei, Ed. Pandora, Târgovişte.
[9] Ştefan, T., (2006), Introducere în dreptul comunitar, Ed. C.H.Beck, Bucharest.
[10] Tofan, M., (2008), Integration of Romania in the European Monetary Union, PhD
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[11] Welfens, P., (1997), European Monetary Union: Transition, International Impact and
Policy Options, Ed. Springer, Berlin; Heidelberg; New York.
