The Eurozone Question

EUROmania Part 4

Intro - How Come?

As the clock struck midnight this New Year’s Eve, Romania celebrated another year of resilience, having repealed the far-right in the presidential elections (“The Showdown For Democracy”), despite the disastrous economic situation.

However, looking around at their neighbor, they discovered they were celebrating more than usual.

Bulgaria, of course, had every right to be pleased with themselves, as they had just entered the exclusive Eurozone union, ditching the national Lev and adopting the Euro.

If you are from either of these two countries or have read our article “The Road To 2007” you would know that Bulgaria and Romania entered the European Union at the same time.

So, why does one move toward European unity and the other stays in place?

In this article, we will document the failed efforts made for Romanian Eurozone integration, identify the root cause for them, analyze the impact it would have, and in the end, settle on whether or not the country should work towards it.

You are reading Inside Romania, and this is the final article in the 4-parter series EUROmania that aims to educate you about Romania’s past, present and future with the European Union.

A Bad Calendar

Romania’s path towards adopting the Euro has been viewed objectively as a series of shifting timelines rather than constant progress. Over the past two decades, several deadlines for when it would enter: from 2011 to 2019, and more recently the 2024-2026 window. However, due to political crises and simply the inefficiency of reforms, plans have been put on the backburner.

Because of this, while the Euro remained a strategic objective in theory, the pattern of missed targets has affected Romania’s credibility within groups of investors.

By creating a pattern, past administrations have shown the world that, strategically, the country is not prepared for the next level of integration, raising concerns about Romania’s reliability within the EU framework, instead of strengthening existing bonds within the Union.

But is all hope lost?

Certainly not. More recently, President Nicușor Dan has mentioned that a realistic timeline would include Eurozone integration by 2030. The factors taken into account were the need for structural reform and fiscal stability, since joining requires controlling inflation, maintaining a stable exchange rate, reducing budget deficits, and ensuring manageable public debt levels.

Most importantly, a 2030 deadline also accounts for unpredictable economic or political issues that can be resolved in due time, without a major impact on the course the country is looking to take with such a massive commitment.

So, what are the issues we are facing in this context?

The Diagnosis

To begin, Romania faces multiple challenges in joining the Eurozone, primarily because the Leu does not meet the necessary economic convergence rate established by the Maastricht Treaty, which was designed to further accelerate European integration through introducing a single currency throughout the union.

Basically, the convergence criteria consists of roughly 4-5 main criterias: Price Stability, Sound Public Finances, Sustainable Public Debt, Exchange Rate Stability and Long-Term Interest Rates.

One of the primary reasons why Romania can’t enter the Eurozone is due to a high budget deficit well above the 3% of the GDP limit set by the treaty. Moreover, increasingly high energy prices, strong consumption and structural inefficiencies in the economy are the main source of higher inflation than most EU members, especially in recent years. Another issue is also the high interest rates in Romania as many investors expect more money than they lend due to the fear that deficits are large and economic stability is perceived as being weaker.

As a result of these issues, Romania has not yet entered the European Exchange Rate Mechanism II (ERM II), which is a preparatory stage that assists members in the switch to the Euro, thus monitoring the countries to make sure that the national currency is stable against the Euro for another 2 years.

Ultimately, Romania cannot join the Eurozone due to the fact that it fails to meet key criteria in the Maastricht Treaty, mainly because of the large deficit, high inflation and unstable economy, thus resulting in the nation being outside of ERM II, the required step before adopting the Euro.

Would It Work?

Supposing we ignore all the economic problems Romania currently faces and it manages to switch to Euro, what would be the obtained benefits?

First of all, the currency risk would start to lower and stabilize, thus making it more attractive for companies and foreign industries to invest in emerging businesses. In the long run, loans may become cheaper since interest rates also start decreasing alongside lessening loans taken by the government and people.

Furthermore, Romania would benefit from the credibility of the European Central Bank (ECB) in case of national crises by offering support and strengthening the banking system, which is a huge advantage due to it being the central component of the Eurosystem and one of the world’s most important central banks.

However, the conversion to Euro might bring some risks or disadvantages such as the loss of money control since there is no longer a national currency and the ECB will have to make decisions for all Eurozone regarding the Euro, thus making devaluing currency harder for Romania in case of economic struggles.

Moreover, in countries like Croatia, people felt prices rose after adopting the Euro which consequently brings us to the next possible disadvantage: risk of price increases, which is not always dramatic but noticeable in everyday goods. National companies would also face stronger competition from the Eurozone on weaker sectors, giving the state less flexibility to adjust their own prices over goods.

Lastly, Romania would need to tighten its control over deficit and spendings since fiscal discipline becomes stricter and governments would have less room for populist spending.

Conclusion - Should We?

Questions like these always have two clear cut answers, each with their perspective blocs of support: yes or no.

The sentiment from the entire continent is that the Euro is the future. With the increasing centralization of monetary and financial policy, it has definitely shown that it would be more accessible and stable for the entire EU to have one currency. Several medium-sized nations have experienced a clear economic growth since entering the Eurozone. Most notably, for Slovakia and the Baltic states, the Euro has opened doors that their national currency could have never.

On the other hand, this has its downsides: the state practically loses control over their currency, rendering it unable to play around with interest and exchange rates. One could take Poland’s or Czechia’s perspective, as they are better economies than Romania’s, but they aren’t very interested in switching to the Euro, preferring to keep their financial sovereignty.

Taking everything into account, joining the Eurozone is only beneficial if Romania enters prepared. Otherwise it could face similar problems to those seen in countries like Greece during the debt crisis.

If you were to ask our opinion on this matter, we would say that only after the economy is stabilized and the deficit reduced should Romania start to think about Eurozone integration. Long term, it would help in future economic crises and align the country even more to the EU, benefitting as much as it can from the partnership.

If you have a different opinion or want to reinforce ours, you can use the comment section to do it, but remember to keep things civil.

We’re glad you read this article all the way, this marks the end of the EUROmania series. If you wish to support Inside Romania, be sure to subscribe for more articles like this!

Edited by Surdu Răzvan

Written by Alexa Ștefan, Hanganu David & Surdu Răzvan