Central Bank Governor: Romania Needs Comprehensive Vision for Euro Adoption

“This is by no means to say that Romania is skeptical about euro adoption, but merely that it needs a comprehensive view, meant to ensure an adequate timing of this moment and a successful entry into the euro area,” said Isarescu at The Danube Triangle conference on convergence towards euro enlargement.

Romania has not yet set a date for euro accession, while neighboring Bulgaria is in a more advanced stage of accession and other smaller countries in the region have adopted the single Europe currency.

“Bulgaria has a currency board in place and it is natural for it to contemplate euro adoption as a sound exit from this monetary policy arrangement, the adoption of which, two decades ago, meant half a step towards the euro area. By contrast, Romania pursues both a floating exchange rate and a direct inflation targeting strategy, the same as Hungary, Poland and the Czech Republic and, therefore, the approach is different, the changeover to the euro being more complex in this context,” Isarescu explained.

Moreover, new member states that adopted the euro – Latvia, Lithuania, Estonia, Slovakia, Slovenia – are relatively small countries, with a different level of real convergence.

“Romania has certainly come a long way in terms of economic convergence, a process whose inception is tied to the prospects of EU membership, witnessing a significant increase in per capita GDP as a share of the euro area average (based on PPS), from 31.7% in 2005 to 58.6% in 2017,” said Isarescu.

Peer countries recorded a similar trend: Bulgaria went from about 33% to 47%, while the Czech Republic, Hungary and Poland, which started from a more advanced level, added 9 to 20 percentage points to the same indicator during 2005-2017. However, this process is still far from completion in these non-euro new member states, added Isarescu.

“Euro adoption by the new member states is a matter of when, not if, because they do not have an opt-out clause. The commitment to join the euro area is undeniable, yet how the complex process of ensuring the prerequisite economic convergence is conducted remains largely at the discretion of the authorities in candidate countries. In this context, the approach has varied both across time and across states,” he said.

The central bank official stressed the need for sustainable convergence.

“In order to reap the benefits of euro area accession, several essential prerequisites have to be cumulatively met. The fact that nominal convergence criteria need to be fulfilled in a lasting – not accidental, forced or temporary – manner is just one aspect. Actually, the durability of convergence has been set forth in the Maastricht Treaty itself (“high degree of sustainable convergence” is the exact wording), but this “detail” has been taken too lightly for a while. Moreover, now it is obvious for everybody that real convergence is also essential for the sustainability of the entire process of euro adoption,” said Isarescu.

While opinions on the optimal level and even on the relevance of this factor for successfully joining a currency union are quite diverse, attaining a certain degree of per capita income convergence before switching to the euro is essential, as a large convergence gap may complicate business cycle management in the absence of independent monetary policy. Even the countries that are already euro area members should continue to increase their level of real convergence, Isarescu added.

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