Analysis Erste: the objective of accession to the euro zone in 2019 is very ‘ambitious’ but more realistic it would be after 2021

Romania’s objective to access the euro zone in 2019 is ‘ very ambitious’, a more realistic date would be over 2021, so that Romania avoid the premature accession to the European currency, while the decision factors seem to ignore the challenges and the risks of the member state, according to Erste.

‘Over the last years, Romania’s accession to the euro zone has become a moving target. The latest deadline mentioned now is 2019. We consider that this new deadline as very ambitious and we think that a more realistic date would be over 2021.’ The Erste report says. ‘ Romania’s accession to the euro zone; a moving target?’ Romania’s plans to access the euro zone stayed unchanged even during the period of crisis, when the existence of the European currency was under discussion and Hungary and Poland turned this objective into a waiting one.

Romania’s accession to the euro zone, a moving target since the accession to the European Union, was used as ‘ historic project’ necessary to serve as anchor for the economic decisions of the governments, being supported by the BNR.The countries which propose to access the euro zone must observe five nominal criteria, such as the ones defined by the Maastricht Treaty.

Romania does not cover the criterion regarding average inflation over the last 12 months, which should be maximum 1.5% higher than the non-weighted average of average inflation in the countries with the lowest inflation in the euro zone. The countries with low figures caused by severe recession or the salaries cuts are excluded from the inflation standard.

‘In spite of the lowest historic inflation in Romania, the disinflation in the euro zone was more powerful, making the difference against the level of reference to increase in 2013 after a temporary decrease in 2012’ stated the analysts of the credit institutions.The Romanian authorities meet the criteria regarding the budgetary deficit which should not be over 3% of GDP. At the same time, the public debt is significantly under the level of 60%, this as another condition.

Romania is close to the meeting of another criterion, which requires that the interest rates on long term do not surpass by more than 2% the average of governmental bonds yields with maturity of 10 years in the most performing three EU member states from the perspective of price stability (countries which qualified for the calculation of the reference value of inflation).

At the same time, the candidate countries must enter, for two years, in the Mechanism of Exchange Rate (ERM/ERMII) in the European Monetary System (EMS) and at the same time, not devalue the national currency along the last two years. This means that the candidate country should keep the rate of exchange in an interval of plus/minus 15% against the central course.

Romania has not yet accessed officially the ERM and will enter only two years before accession to the monetary union to become a more feasible objective. However, the volatility recorded by the euro-leu rate over the last years shows that the national currency varied more or less between +/- 15% as required, Erste shows.

The financial crisis showed that only the nominal convergence criteria do not meet the possible problems which a country could have after premature accession to the euro zone, ignoring both competitivity and the convergence gap of real economy, the bank says.

An analysis made on the basis of real convergence indicators would offer a better image to understand how far Romania is from the EU development standards.A first indicator, work productivity, shows that Romania is 50% under the EU average and much under the level reported by the most recent member states euro at the moment of their accession (Slovenia, Slovakia, Estonia and Latvia). Supposing there is an annual growth of 3% which is a moderate growth rhythm, Romania would need approximately eight years to reach the level recorded by Latvia at the moment of accession to the euro zone.

Another indicator which shows that Romania is far from the euro zone as regards the development and real convergence, risking poverty and social exclusion. Supposing the present trend of convergence will continue, Romania would need another 7-8 years to reach the level of Latvia when they accessed, Erste shows.

One of the most important factor for accession to the euro zone is GDP per head at the parity of purchasing power.Both GDP per head of Romania is growing, but it got to 50% of the EU average, while the gap between the last states which became members of the euro zone and the EU average was much lower at the respective moment than the reported by present Romania.

The value of this indicator gradually lowered, so that the gap between the candidate country and the EU average increased gradually from 11% to 33%.

A first scenario should be one where the minimum threshold will not be reduced for Romania, which should have a GDP per head of at least 65% of the EU average, the level recorded by the last member state. Romania needs economic growth rates as high as possible, comparable to the EU to reduce the gap in a shorter period of time.According to the Erste calculations, the period which is most probable in which Romania could reach the level of 65% of GDP per head is 10-13 years.

A second scenario takes into consideration the possibility that the necessary threshold for accession to the monetary union to be reduced and Romania should be willing to take the risk of accessing at a GDPper head of only 60% of the EU average. The reduction of the limit would drop the number of necessary years to surpass this threshold. The most probable thresholds of economic growth of the E and Romania suggest that 7-9years would be necessary to reach this objective.

Romania needs more time than it is considered at present in public discussions for accession to the euro zone. Although the criteria for nominal convergence could be reached soon, the difference of economic development between our country and the rest of the EU is higher than it can be ignored, the Erste analysts say.

‘The easiness with which the accession calendar has varied along the last years suggests that the decision factors in Romania have the tendency to forget the challenges posed by the member state of the euro zone and the risks generated by accession lacking the corresponding preparation. The most recent advanced term, 2019 respectively, was considered as ambitious by the central bank and we cannot but agree with this taking into consideration that the scenarios discussed previously suggest that accession post -2021 is more realistic’ the report says.

Even a date after 2021 will not be easy to reach without the tough decisions which supposes the boost of economic competition. Restructuring and privatisation of state companies, increase of budgetary income and absorption of the European funds and the favouring of the investments in infrastructure instead of social expenditure are only some of them, the Austrian bank shows.

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