When Romania joined the EU it implicitly assumed responsibility for adopting the euro. After ten years, contrary to what was expected, East European states including Romania meet the nominal criteria for being accepted in the Eurozone while states from the Eurozone itself do not. The Eurozone crisis managed to convince many people that it is not advisable to enter the Eurozone anyhow. The developments so far show that most nominal criteria were met with difficulty in all these states, and the fact that they are currently being met doesn’t guarantee that they will always be. On the other hand, the experience of the states within the Eurozone has demonstrated that meeting the Maastricht criteria at the time of their entry didn’t mean they managed to keep the same position, and this is what happened to the countries with large differences of income.
Why do these differences matter?
Until recently, Romanian people thought that meeting the nominal criteria was all it took to trigger the procedures for being accepted into the Eurozone. Some do still believe this, mainly based on rather political or geopolitical reasons when invoking a quick transition to the euro. In fact, Romania has always been the only country in the area to lack a thorough economic analysis on this topic. The idea of nominal criteria sufficiency was refuted by the experiences during and after the crisis. This explains why the official reports of the European Central Bank speak of “ex ante sustainable real convergence” for all the countries willing to enter the Eurozone. This shows how large initial differences of economic performance among the actual members of Eurozone have led to the accumulation of ever larger external imbalances, which in turn led to crisis of outstanding debts after the governments overtook private debts to public debts. Without some mutual tools (fiscal transfers or functional banking union) the differences of development within the Eurozone will generate imbalances as they did in the actual crisis, or they will persist in having negative effects for the entire area. The Eurozone obviously needs reformation.
Romania has made remarkable progress in catching up with differences over the last ten years. However, with a GDP per capita, with a purchasing power parity (PPP) of just 57 percent of the EU28 average (59 percent is estimated for 2016), Romania is far below the current level of Eurozone (106 percent) or of Germany (125 percent) and below the levels registered in Spain, Portugal, or Greece at the moment of their entry into the Eurozone. Besides, we are currently even behind the other East European states such as the Czech Republic (87 percent), Poland or Hungary (68/69perecent). Even though between 2000 and 2015 Romania had the biggest average economic growth rate (3.6 percent compared to 1.18 perecent in the Eurozone), there are great differences in the GDP/capita. In 2015, for example, Romania had a GDP per capita of only 15.100 euro, compared to the 29.200 average for ZE, 33.900 euro in Germany, 29.300 in France. Even compared to the Czech Republic (23.200), Poland (18.600) and Hungary (18.600), the GDP per capita is far smaller.
Adopting euro with a significantly larger development gap, would further constrict the real convergence process, risking the gap to remain or further extend. This implies the risk of the salaries/earnings to remain far smaller than the ones in the Eurozone. In 2015, the income convergence was of only 19.8 percent in Romania, while the price convergence rose to almost 50 perecent compared to EU28. In Romania, the income convergence (19.8 percent) is less than half compared to the Czech Republic (41 percent) and below the level of Poland and Hungary (about 30 percent), while the price convergence is relatively similar (about 50 percent). Besides, differences in productivity aren’t of any help to us. As per latest statistics, work hour productivity in Romania is of only 51.1 percent of the EU28 average, while work productivity per occupied person is of 56.7 percent. This is far below the level of Hungary and Poland, for example (both above 70 percent), even further below that of the Czech Republic (almost 80 percent) and incomparable with that of the core states of Eurozone (over 100 percent). The risk of Romania remaining in the vicious cycle of big development gaps – small convergence of income – high unemployment – poverty – is very high.
Is an ex ante convergence critical mass really needed?
Yes, it is. There is extensive literature in the field proving it. At the same time there is also empirical proof. Spain and Portugal joined the ZE with the smallest GDP per capita of 82 percent, respectively 68 percent. In 2015, the GDP per capita fell to 80 percent in Spain and 67 percent in Portugal. If Eurozone initially was for catching up the differences in income per capita (on the expense of some large external imbalances claiming for extremely costly correction policies), after 2009, part of the real convergence was inversed. In Portugal this catching up didn’t take place and Spain lost after the crisis most of what it had won until its outbreak. On the other hand, countries that adopted the euro after 2007, previously had a GDP per capita between 94 percent in Cyprus and 64 percent in Estonia (which had a currency board and is a very small country anyway). The Baltics, which had functioned with currency boards many years before joining the eurozone had in average about 70 percent, and the other countries (Cyprus, Slovenia, Malta, Slovakia) an average of 83 percent.
What needs to be done?
Ten years from its entry into the EU, Romania will have to start discussing its way into the euro. The agreement for us shouldn’t be whether or not to enter into the Eurozone, but on what terms we shall do that. At the same time, we need to understand that the accession in the eurozone is a much more complicated process than the entry into the EU, however tempting it would be from the political or geopolitical point of view.
In my opinion, the large development gap between Romania and the eurozone is now the main obstacle in the way to a quick adoption of the single currency. Romania should bridge the gap before adopting the euro, if we expect more benefits than costs. If not entirely, at least a “critical mass” or real convergence should be reached and used as a safety net.
Besides, how we bridge the gap will matter greatly. We should not forget that Romania has already experienced the PIGS model – high rates of growth followed by imbalances, both internal and external. The correction of these imbalances cancelled the previous income – we needed six years to go back to the level of GDP registered in 2008. Romania will need a healthy economic growth, which should not generate major imbalances that are difficult to sustain.
Aura Socol is a PhD Professor at The Bucharest University of Economic Studies, specialized in Macroeconomics and Monetary Integration. She has gone through numerous specialization stages in these fields, at prestigious international institutions (International Monetary Fund, European Commission, etc), and she also conducted research studies in prestigious European universities. She has a PhD and a postdoctoral studies, both concerning Romania’s accession to the euro zone. She has published 15 books in this field, over 50 studies and articles in scientific journals. She has taken part as project manager and researcher in 12 scientific research grants on macroeconomics themes.
Photo: The Romanian Flag, Kurious | Pixabay
Published on September 6, 2017.
