JOINING THE AREA. THE CASE OF

Bogdan Drăghia

Abstract In this paper, I will analyze Romania’s situation on the road to joining the and adopting the single currency, trying to address several diff erent issues. I will approach theoretical aspects (which is the path that a candidate country has to take to join the euro area), but also practical ones regarding the fulfi lment of the accession criteria by Romania. The research will also approach the advantages and disadvantages of membership in the euro area, both in general and in the case of Romania. I will also discuss what is happening at the moment when Romania no longer meets any accession criteria and after the announcement that a new calendar for the adoption of the euro will not be achieved soon. To answer these questions, I analyzed the situation arising from the convergence reports of 2016, 2018 and 2020, how the fulfi lment of the accession criteria by Romania has evolved. I also analyzed some papers and specialized articles. The paper also contains a brief analysis of the perception of Romanians about the adoption of the single currency, the data being present in a Eurobarometer of the . Keywords: Eurozone accession, European Union, European Commission, criteria, single currency adoption. JEL classifi cation: F20, F60

Introduction The idea of a single currency is not a new one, such initiatives existed in the interwar period, but the creation of the European Economic Community also provided the framework in which this currency can develop. However, the idea became a reality half a century after the creation of the European Economic Community, the 1993 , triggering the process of switching to the single currency. The name of the currency was established in 1995, and in 1999 it was launched as a virtual currency. In 2002, the euro entered circulation in 12 European Union countries: Austria, Belgium, Finland, France, Germany, Greece, the Netherlands, Ireland, Italy, Luxembourg, Portugal and Spain. Romania’s accession to the Euro Area is an objective assumed by the Accession Treaty, so our country is obliged to take this step. But accession

94 Romanian Statistical Review Supplement nr. 2 / 2021 is not an easy process, as the Maastricht Treaty introduces several criteria that any candidate state must meet. Professor Daniel Dăianu & collab. made an extensive analysis of the accession criteria and what Romania should do to achieve those objectives in the paper „Romania and accession to the euro area: the question is under what conditions!”, where the economist concludes that Romania’s integration in the Euro Area must be a responsibly assumed goal, as it could create many problems for our country if several goals are not met. Also, professor Silviu Cerna, in several articles, considers that the adoption of the euro should be „the best country project for Romania” (Cerna, 2020), but also draws a parallel between the advantages and disadvantages of this accession. The fulfi lment of the accession criteria was made in several offi cial documents, the Convergence reports from 2016, 2018, 2020, but also by various economic analysts, Dobreanu (2019) or Bărbulescu (2021), and these documents conclude that Romania does not ever meet all the accession criteria simultaneously.

Romania and the euro, between pros and cons The advantages of adopting the euro are obvious, but they are also doubled by certain costs. „The benefi ts and costs of adopting the euro were also identifi ed by the 1990 <> Report, which ultimately recommended the adoption of the single currency” (Dăianu, 2016, p. 31), which means that the advantages of adoption are much higher than the costs. Among the advantages of joining the euro are the elimination of the risks of currency fl uctuations and exchange costs, the strengthening of cooperation between the Member States by intensifying trade links, better economic stability, leading to economic growth, better integrated fi nancial markets, consumers (individuals or legal entities) have access to a wider range of products and services, at more stable prices, enterprises have more business opportunities, in safe conditions (Dăianu & collab., 2016; Cerna, 2017, 2020). Last but not least, the symbolism must be remembered, the euro currency being a strong symbol of the European identity.

Criteria for joining the euro area The criteria for accession to the Euro Area are defi ned in the Maastricht Treaty, art. 140 and concern in particular economic elements: Price stability (Infl ation) . The infl ation rate may not exceed 1.5 per cent above the rate of the three Member States with the lowest infl ation. Longterm interest rates. The long term interest rate should not be more than 2 per cent above the rate of the three Member States with the lowest infl ation.

Revista Română de Statistică Supliment nr. 2 / 2021 95 Exchange rate stability. Before joining the euro area, any candidate country must be part of the Exchange Rate Mechanism (ERM1) for two years; during this period, the country’s own currency must not experience signifi cant deviations from the euro (in other words, the devaluation must not be signifi cant); a currency fl uctuation within the standard limit of 15% above or below this agreed central exchange rate is permitted. Restrictive fi scal policy . This criterion refers to the budget defi cit, which cannot be less than 3%, and to the public debt, which cannot be higher than 60% of GDP. There are voices who consider that accession to the Euro Area is not guaranteed by meeting these criteria. In 2016, when Romania met some of the accession criteria, Daniel Dăianu raised several objections regarding Romania’s ability to join the euro area: „The large development gap between Romania and EZ 2 is the essential obstacle in adopting the single currency” (Dăianu & collab., 2016, p. 182). However, the problems also come from within the euro area, not only from Romania. „The current fi nancial crisis has shown that simply meeting nominal criteria is far from enough for a country to benefi t from entering the EZ 3” (Dăianu & collab., 2016, p. 182). The conclusion drawn in 2016 by Professor Dăianu showed that it is „unlikely that a premature accession will be accepted by the countries that set the tone in EZ 4” (Dăianu & collab., 2016, p. 182), in other words, it would not be excluded to have a will of European political leaders for the enlargement of the euro area.

When did Romania meet the accession criteria? The current situation As stated in the accession treaty, Romania must integrate into the euro area, but a clear deadline is not set. Being a member state of the European Union that is not part of the euro area, Romania, like the other countries in a similar situation, is the object of a convergence report of the European Commission. Prepared every two years, this report examines the fulfi lment of the accession criteria of the respective countries, but the conclusions of these documents are in fact a faithful mirror of the economic situation of the states concerned. In April 2016, the convergence report on Romania looked like this:

1. Exchange Rate Mechanisms, or ERMs, are systems designed to control a currency’s ex change rate relative to other currencies 2. Euro Zone 3. Idem 4. Idem

96 Romanian Statistical Review Supplement nr. 2 / 2021 Table 1 Price Government budgetary developments Exchange rate stability and projections HICP Country General General Currency Exchange Long Infl ation in government government participating rate vis term excesive surplus (+)/ debt in ERM II avis the interest defi cit defi cit () euro rate

2014 1,4 No 0.9 39.8 No 0.6 4.5 2015 0.4 No 0,7 38.4 No 0.0 3.5 2016 1.3 No 2.8 38.7 No 1.0 3.6 Reference 0.7 3.0 60.0 4.0 value Source: Convergence report 2016 https://www.ecb.europa.eu/pub/pdf/conrep/cr201606.en.pdf

The data of the report published in May 2018 were as follows: Table 2 Price Government budgetary developments and Exchange rate stability projections General Long Country in General Currency Exchange HICP government term excesive government participating in rate visa Infl ation surplus (+)/ interest defi cit debt ERM II vis the euro defi cit () rate

2016 1.1 No 3.0 37.4 No 1.0 3.3 2017 1.1 No 2.9 35.0 No 1.7 4.0 2018 1.9 No 3.4 35.3 No 1.9 4.1 Reference 1.9 3.0 60.0 3.2 value Source: Convergence report 2018 https://www.ecb.europa.eu/pub/convergence/html/ecb.cr201805.en.html

Revista Română de Statistică Supliment nr. 2 / 2021 97 The data of the report published in 2020 show a major change regarding Romania. Price Government budgetary Exchange rate stability developments and projections Country General Exchange Long General Currency HICP in government rate vis term government participating Infl ation excesive surplus (+)/ avis the interest debt in ERM II defi cit defi cit () euro rate

2018 4.1 No 2.9 34.7 No 1.9 4.7 2019 3.9 No 4.3 35.2 No 2.0 4.5 2020 3.7 Yes 9.2 46.2 No 1.1 4.4 Reference 1.8 3.0 60.0 2.9 value Source: Convergence report 2020 https://www.ecb.europa.eu/pub/convergence/html/ecb.cr202006~9fefc8d4c0.en.html#toc34

Thus, as we can see, in 2016 and 2018, Romania met the criterion regarding price stability, with rates lower or equal to the reference ones. In 2020, however, the data show that infl ation was at double the reference level. The criterion on the budget defi cit and public debt met the levels set by the Maastricht Criteria in the 2016 reports for 2015 and 2018 for 2017. For 2019, however, the report was also negative. „While Romania’s debt complied with the Maastricht debt criterion, its government defi cit breached the 3% reference value in 2019; an excessive defi cit procedure was thus launched in April 2020, under which the country was required to rectify its excessive defi cit by 2022 at the latest. „(Convegence Report, 2020). That being said, Romania not only does not meet the criteria for joining the Euro Area but even risks an infringement procedure. The criterion of longterm rates was met by Romania only between May 2015 and April 2016, as shown in the table above, after April 2017 the reports indicate an exceedance of the reference levels. In all three reports cited above, there are three elements that indicate that Romania has never been close to meeting all the criteria for adopting the single currency. The fi rst of these refers to the presence of the leu in the Exchange Rate Mechanism. In the analyzed period, 20152019, the national currency of Romania was „traded under a fl exible exchange rate regime involving a managed fl oating of the currency’s exchange rate” (Convegence Report, 2016, 2018 2020). A second common element refers to the Romanian legislation which, according to the report, „does not comply with all the requirements for central bank independence, the monetary fi nancing prohibition and legal integration into the ” (Convegence Report,

98 Romanian Statistical Review Supplement nr. 2 / 2021 2016, 2018 2020). Finally, all three reports consider that „ stabilityoriented economic policies and wideranging structural reforms” are needed in order to create an environment conducive to sustainable convergence in our country.

Pros or cons of joining to the Euro Area Joining the Euro Area brings several obvious advantages for Romania, but also some additional obligations. There are many costs to be paid, but as we can conclude from the „One Market, One Money” report, the benefi ts are superior. If Romania were to join the euro area, we can talk about better „macroeconomic stability; a more advantageous international position, access to a wider fi nancial market” (Dăianu&collab., 2016, p. 30), but also about price stability and all the benefi ts resulting from achieving this objective, stimulating trade, by eliminating foreign exchange costs (most of Romania’s trade takes place with European Union countries), the possibility of direct comparisons in terms of prices of similar products, creating a stable economic framework, which will stimulate foreign investment, which would later lead to GDP growth, reduced unemployment, increased intra and extraEU trade (Cerna, 2017). Regarding the costs of accession, Professor Silviu Cerna listed in 2017 the loss of independence of monetary policy (manoeuvring interest rates and exchange rates), infl ationary risk of this transition, technical costs, such as adapting IT systems to new requirements or recalculating prices. Professor Silviu Cerna also brings decisive arguments related to joining the Euro Areaand implicitly the adoption of the single currency: „(...) it is the best country project for Romania because that objective can serve as an anchor for the implementation of internal reforms. The Euro Area indeed implies the achievement of real and nominal convergence of the Romanian economy, a process likely to contribute to the recovery of its huge gap with the economies of Western countries „(Cerna, 2020).

Romania and the future accession to the euro area „I think that no country will enter the Euro Area in the next fi ve years, because the Euro Area is not ready for enlargement,” said Georgi Angelov Bulgarian economist, in 2018 (according to Dobreanu, 2019). His prediction was made in the preCovid19 period, and what Angelov claimed in 2018 today seems an extremely optimistic horizon. and have taken a step forward in joining the eurozone, but in the case of Romania, it is clear that the adoption of the single currency will be delayed.

Revista Română de Statistică Supliment nr. 2 / 2021 99 The Romanian Government has offi cially acknowledged that Romania will not enter the eurozone in 2024, as the Government had assumed in the spring of 2019. In a document of the Ministry of Finance, quoted by profi t.ro, offi cials in Bucharest acknowledge that our country does not meet the criteria of nominal convergence, regarding the solidity of public fi nances, price stability and longterm interest rate convergence (Bărbulescu, profi t. ro, 2021). Also, the same source acknowledges the fact that “Romanian legislation is not fully compatible with the Treaty on the Functioning of the European Union” (Bărbulescu, profi t.ro, 2021), but also the fact that the leu is not part of the Exchange Rates mechanism (ERM II). The same document states that „Romania is facing a series of macroeconomic imbalances, some of which are exacerbated in the context of the pandemic” (Bărbulescu, profi t. ro, 2021), and a new calendar will be developed after the application of the National Recovery Plan and Resilience, which should lead to a restoration of macroeconomic balances. In the midst of the COVID19 pandemic, the European Union seems to have other priorities at the moment. The future enlargement of the Euro Area depends very much on how European economies recover from this health crisis, with strong eff ects on the economy. The European Union has launched a recovery program of European economies, Next Generation, worth 750 billion euros, and if this program will give the expected results we can talk about an expansion of the euro area.

What do Romanians think about joining the Euro Area? The European Commission published in July 2020 a Eurobarometer „Introduction of the euro in the Member States that have not yet adopted the common currency May 2020 June 2020”. This research took place in May and June 2020, had a sample of 1,000 participants and shows that Romanians are generally in favour of joining the euro. According to this Eurobarometer, 63% of Romanians would agree with the introduction of the Euro, while 30% would disagree, and just over half, 52% consider themselves informed about the single currency. More than half of the respondents to this study, 51%, believe that the adoption of the euro would be a positive thing for Romania, and a similar percentage, 53%, believe that it would be a positive thing for them as individuals. Even if Romanians welcome the adoption of the single currency, 62% are aware that Romania is not ready to adopt the euro. Romanians were optimistic about the adoption of the single currency, 41% believing that this will happen in the next fi ve years. However, 17% of Romanians believe that our country will never join the euro area. Regarding the loss of national identity, 55% believe that Romania will

100 Romanian Statistical Review Supplement nr. 2 / 2021 lose part of it if it adopts the euro, while half of Romanians believe that our country will also lose control over economic policies. Rising prices as a result of the adoption of the euro are seen as possible by 50% of respondents, while only 5% believe that they will fall. On the communication side, the National Bank is the most reliable institution. Before joining the euro area, Romanians would like to be informed by the National Bank 78%, European institutions 50%, Government, national and regional institutions 42%, tax administrations 42%, journalists 36%.

Conclusions The advantages of Romania's accession to the Eurozone are obvious, even if they are expensive. However, the advantages are superior, so joining the single currency should be one of Romania's next country goals, along with integration into the . Even if the accession treaty obliges our country to join the Eurozone, Romania has never been fully prepared for this. There have been times in recent years when it has simultaneously met some of these requirements, but each time there have been criteria that have not been met. We must remember that the national currency did not participate in the MCS II Exchange Rate Mechanism, and the Romanian legislation never met the requirements for the independence of the central bank, the ban on monetary fi nancing and the legal integration of the central bank into the Eurosystem. The COVID19 pandemic has obviously moved Romania away from integration targets, Croatia and Bulgaria have taken important steps in joining the single world, but our country is still far from this goal. Even Romanian state offi cials acknowledge that our country is not yet ready, and a time horizon in which we will be able to use the euro in daily transactions in Romania is diffi cult to predict. However, the euro has support among Romanians. They want to join the euro area, they consider themselves good information when it comes to the euro and they think that Romania's accession to the euro area is a good thing, both for Romania and for them as a person. An extremely interesting thing, however, emerges from the study of Eurobarometers regarding the trust of Romanians in public institutions. In the fi eld of communication on joining the euro area, Romanians prefer to receive information from the National Bank or the European institutions and less from the Romanian media or from the Romanian state.

Revista Română de Statistică Supliment nr. 2 / 2021 101 References 1. Cerna S. (2018). Efectele adoptării euro. Piaa Financiară, 9 (262) septembrie 2017, 10 (263) octombrie 2017, 12 (265) decembrie 2. Cerna S. (2020). Adoptarea euro elimină distorsiunile monetare ce degenerează în tensiuni politice, https://fi neco24news.blogspot.com/2020/09/profunivdrsilviu cernaadoptareaeuro.html 3. Bărbulescu O. (2021), România amână (din nou) calendarul de adoptare a monedei euro: Un alt calendar după combaterea efectelor pandemiei de Covid19 și aplicarea Planului de Reziliență https://www.profi t.ro/povesticu profi t/fi nanciar/banci/documentromaniaamanadinnoucalendaruldeadoptare amonedeieurounaltcalendardupacombatereaefectelorpandemieidecovid 19siaplicareaplanuluiderezilienta19863872 4. Dăianu D. (coordonator), Kallai E., Mihailovici G., Socol A. România i aderarea la zona Euro: întrebarea este în ce condiii, Institutul European din România, 2016 5. Dobreanu C. (2019) De ce România nu se apropie de zona euro, în vreme ce Bulgaria este la doar un pas https://romania.europalibera.org/a/deceromania nuseapropiedezonaeuro%C3%AEnvremecebulgariaesteladoarun pas/30191799.html Convergence report 2016 https://www.ecb.europa.eu/pub/pdf/conrep/cr201606. en.pdf Convergence report 2018 https://www.ecb.europa.eu/pub/convergence/html/ecb. cr201805.en.html Convergence report 2020 https://www.ecb.europa.eu/pub/convergence/html/ecb. cr202006~9fefc8d4c0.en.html#toc34 Eurobarometru Introduction of the euro in the Member States that have not yet adopted the common currency May 2020 June 2020 https://ec.europa. eu/commfrontoffice/publicopinion/index.cfm/Survey/getSurveyDetail/ yearFrom/1974/yearTo/2020/surveyKy/2261

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