ANALELE UNIVERSIT ĂłII

“EFTIMIE MURGU” RE IłA

ANUL XV, NR. 1, 2008, ISSN 1453 - 7397

DianaBărglăzan,MihaelaVartolomei,CameliaTurcu

Research on the Nominal Convergence of to the Area

AlltheEuropeanUnion(EU)memberstatesengagedtoadopt,sooner or later, the euro. In order to do so, they must accomplish the convergencecriteria concerningtheinflationrate, the exchange rate, the interest rate, the public deficit and the public debt. The paper analysesthesituationofRomania,basedontheconvergencecriteria. Romania accomplishes only the criteria referring to public finances, whileinflationstillseemstobetheworstproblem.

Keywords :EuropeanUnion,euro,convergencecriteria,nominalcon vergence

1. Introduction

Since all the new member states of the European Union (EU) will have to becomepartoftheEuropeaneconomicandmonetaryunion(EMU),theyhaveto reachahighdegreeofnominalconvergence,asdefinedbytheMaastrichtTreaty [Călin,2004]. Alreadysomeofthenewmemberstates(Slovenia,CyprusandMalta)arepart oftheEMU.ThecriteriarequiredbytheMaastrichtTreaty[Silasi,1998]referto: - a high degree of price stability an average rate of inflation that does not exceed by more than 1,5% that of the three best performing EU member statesintermsofpricestability; - a sustainable public finance position – apparent from having achieved a government budgetarypositionrespecting the reference values established in theProtocolontheexcessivedeficitprocedure o 3%ofGDP,forthepublicdeficit,and o 60%ofGDP,forthepublicdebt; - alevelofthe longterminterestrate reflecting„thedurabilityofconvergence achievedbythememberstate”–moreprecisely,an averagenominallong terminterestrate(forlongtermgovernmentbondsorcomparablesecurities)

71 that does not exceed by more than 2% that of, at most, the three best performingMemberStatesintermsofpricestability; - exchangeratestability –theEuropeanCentralBank(ECB)examineswhether thecountryhasparticipatedintheexchangeratemechanismoftheEuropean MonetarySystem(ERMII,whichsupersededtheERMin1999),foraperiod ofatleasttwoyears,withoutseveretensions(inparticularwithoutdevaluing againsttheeuro). TheECBpublisheditsmostrecentConvergenceReportinMay2008.Itanalyses 10 countries, from which 9 are CEEC (, Czech Republic, Estonia, Latvia, Lithuania,,,Romania,Slovakiaand).SinceSloveniaalready adoptedtheeuroonthe1 st ofJanuary2007,itisnolongerconsideredintermsof convergencecriteria.Romaniaisconsideredforthefirsttime. In the following, we analyse the situation of Romania, from the nominal convergence point of view. First we analyse the inflation rate, than the public deficit andthe public debt, afterwardsthe interestrateandfinallytheexchange rate.ThenwepresentsomeconclusionsrefferingtothewayRomaniameetsthe convergencecriteria. 2. Inflation rate (price stability)

Afterregisteringahyperinflationinthefirstyearsoftransition,inmostCEEC, the inflation rate decreased inthe following years [Vartolomei, 2004]. Gradually, someCEECmanagedtoaccomplishtheconvergencecriterionreferringtoinflation: Lithuania(since1999),theCzechRepublic(since2002),Estonia(since2003). Withregardtotheinflationrate,intheConvergenceReportpublishedbythe ECBin2008,theperiodApril2007–March2008wasconsidered.The following threeEUmemberstateswereconsideredforcalculatingthereferencevalue:Malta (1.5%), the Netherlands (1.7%) and (2.0%). As a result, the average rateis1.7%andtherefore,byadding1.5%,weobtainthereferencevalue:3.2%. From the 9CEECconsidered, onlySlovakia was below the reference value. Dueto thalatest oil priceevolution onthe international market, butalso dueto other factors, the inflation rate increased in almost all Eastern and European countriesinthelastmonths. For the period mentioned, Romania registered an average inflation rate of 5.9% a value much higher than the reference value, while the 12months inflationratemeasuredinMarch2008washigherthan8%,fuelingtheconcerns regardingourcountry’scapacitytomeettheconvergencecriteriaonpricestability inthenearfuture. Romania’sperformancesinthefieldofinflationwereweak,inflationbeingone of the biggest and most persistent problems of Romanian economy after 1989. Still, starting with 2000, the inflation rate decreased significantly in Romania, reaching onedigit levels after 2004. The evolution continued until 2006 – as showninTable1andFigure1. 72 Table 1 – Inflation rate in Romania (%) Inflation (yearly (endofthe Inflation (yearly (endofthe rate average) year) rate average) year) 1992 210.4 199.2 2000 45.7 40.7 1993 256.1 295.5 2001 34.5 30.3 1994 136.7 61.7 2002 22.5 17.8 1995 32.3 27.8 2003 15.3 14.1 1996 38.8 56.9 2004 11.9 9.3 1997 154.8 151.4 2005 9.0 8.6 1998 59.1 40.6 2006 6.6 4.87 1999 45.8 54.8 Source:NBR,nationalInstituteofStatistics

Figure 1. TheevolutionofinflationrateinRomania Source:Isărescu,2007 Starting with 2007, the inflation rate increased again. In March 2008, the annualinflationrateinRomaniawasover8%.Thesametrendcouldbeobserved inmanyotherEuropeancountries. Itwasfrequentlysaidthattheinflationratewasthemostimportantobstacle inthewayof Romania’saccessiontotheEMU.With all the significant progress fromthelastfewyears,thisstillseemstobetrue. 73 3. Budgetary deficit

Withregardtothebudgetarysituation,inthe2008ConvergenceReportthe situation from 2007 was examined. Four countries from the 9 CEEC considered (theCzechRepublic,Hungary,PolandandSlovakia)weresubjecttoanEUCouncil decisionontheexistenceofanexcessivedeficit.However,in2007onlyHungary hadadeficitabove3%ofGDP,whiletheotherthreecountriesmanagedtoreduce itbelow3%ofGDP.In2007,fiscaldeficitswerealsorecorded in Lithuaniaand Romania(2.9%ofGDP).Incontrast,twoCEEC(BulgariaandEstonia)recorded fiscalsurplusesin2007,whileLatviapostedabalancedbudget. WecouldsaythatfromthispointofviewRomaniaisalreadyaccomplishing theconvergencecriteria,butitshouldpayattentionnottoincreaseitsdeficitover 3%oftheGDP,becauseoncetheprocedureonexcessivedeficitisstarted,itwill behardtocomebacktoanormalsituationandthecountrywillstillsubjectofa EUCouncildecesionontheexistenceofanexcessivedeficityearsafterthedeficit hasbeenreducedunderthelimitof3%(forexample,inSlovakia,thepublicdeficit was3.6%in2006;thedeficitwasreducedto2.2%in2007andtheprojections for2008indicatealevelofonly2.0%;still,theConvergencereportpublishedin 2008saysthat„SlovakiaisatpresentsubjecttoanEUCouncildecisiononthe existenceofanexessivedeficit“[ECB,2008,p.51].TheEuropeanCentralBank doesnotseempleasedwiththeseresults,mentionaningthat„furtherconsolidation isrequiredforSlovakia“[ECB,2008,p.51]. 4. Public debt

Asregardsgeneralgovernmentdebt,in2007onlyHungaryhadadebtratio abovethe60%ofGDP(66.0%ofGDP,slightlyhigherthaninthepreviousyear). InallotherCEEC,debtratioswerelower:between45%ofGDPinPoland,around 30%ofGDPintheCzechRepublicandSlovakiaandbelowthatlevelintheother fivecountries. Lookingbackatlasttenyears(theperiodfrom1998to2007),wenoticethat governmentdebttoGDPratiosincreasedsubstantiallyintheCzech Republic(by 13.7percentagepoints)andtoaconsiderablylesser extent in Poland, Hungary, Lithuania and Latvia. By contrast, in Bulgaria, Estonia, Romania, Slovakia and Swedenthe2007debtratiostoodclearlybelowthevalueof1998. For2008,thedebtratioisexpectedtoriseinLatvia,HungaryandRomania. Intheothercountries,thedebtratioisprojectedtodeclineorremainstable. Considering the debt ratio, we can see that Romania,withapublicdebtof 13.6%ofGDPhasreachedasatisfactorylevelofnominalconvergence(although wecannoticeaconstantincreaseinthelevelofpublicdebtofRomaniainthelast few years, some specialists considering this trend as an important reason for concern,eventhoughthelevelofthepublicdebtisstilllow).

74 5. Interest rate

For the 12month reference period considered in the 2008 Convergence Report(April2007–March2008),thereferencevalueforlongterminterestrates was6.5%.Itwascalculatedbyadding2%totheunweightedarithmeticaverage of the longterm interest rates of the same three countries considered for the inflationratereferencevalue:Malta(4.8%),theNetherlands(4.3%)andDenmark (4.3%). Overthereferenceperiod,sixoutofnineCEEC(Bulgaria,theCzechRepublic, Latvia,Lithuania,PolandandSlovakia)hadaveragelongterminterestratesbelow thereferencevalue. InRomania(7.1%)andHungary(6.9%),longterminterestrateswereabove thereferencevalueduringthereferenceperiod. InEstonia,duetotheabsenceofadevelopedbondmarketinEstoniankroons andreflectingthelowlevelofgovernmentdebt,noharmonisedlongterminterest rateisavailable. TheanalysisofCEECshowedarapidconvergenceof the longterm interest rates.Attheendof2002,thedifferentialbetweentheCEECandtheEU,fora10 yearsinterestrate,wasonly1.4%.Suchaconvergenceis,partially,theresultof „convergenceplay”(theanticipationoffinancialmarketthatthosecountrieswould beintheEMUbeforetheterm. In February 2003 the CEEC had a better situation, from the interest rates point of view, than Greece, Portugal or Spain 4 years prior to their entry in the EMU[Călin,2004]. Romaniaisnotaccomplishingtheconvergencecriteriareferringtotheinterest rate, and it has the highest interest rate from all the EU Member States. Considering the inflation rate registered and the inflation differential between RomaniaandtheEMUwecaneasyunderstandthatRomaniawillnotbeableto meetthiscriterioninthenearfuture. Yet we must be carefull not to consider tat reducing the inflation rate will automatically reduce the level of theinterest rate.WecaneasilyseethatinEU therearecountrieswithaninflationratehigherthanourcountry,butwithlower interestrates(ex:Bulgaria,Lithaunia,Latvia–allthesecountrieshavinginflation ratehigherthanRomania,butlongterminterestrateslowerthan5%). 6. Exchange rate

Fromthe10CEECmembersoftheEU,one(Slovenia)isinsidetheEMU,and four(Estonia,Latvia,LithuaniaandSlovakia)areparticipatingtotheERMIIsince 2005.WithinERMII,noneofthecentralratesofthecurrenciesexaminedinthe 2008ConvergenceReportwasdevaluedintheperiodunderreview.TheEstonian kroonandtheLithuanianlitastradedcontinuouslyattheirrespectivecentralrates. The Latvian lats showed a very low degree of volatility visàvis the euro. 75 Regarding Slovakia, for most of the two year reference period, exchange rate volatilityoftheSlovakkorunavisàvistheeurowasrelativelyhigh. FortheotherCEEC(Romaniaincluded)wecannottalkaboutexchangerate stability,sincetheircurrenciesdidnotparticipatetotheERMII.Still,theevolution of their currencies against the euro was evaluated. It was seen that the Czech koruna and the Polish zloty strengthened against the euro in the period under review.TheHungarianforintwassubjecttowidefluctuations,whichconvincedthe nationalauthoritiestoabolishtheunilateralestablishedfluctuationbandof+15% (on25February2008). As far as Romania is concerned, we can see that the modification of the referencecurrencybaskethadapositiveimpactonthestabilityoftheexchange rateoftheRomanianleu,againsttheeuro.Ananalysisoftheperiod19972004 showacontinuousdepreciationofthenominalexchangerate(onlyfrom2002to March 2004, the depreciation exceeded 30% (from 29.000 ROL/EUR to 40.000 ROL/EUR),inatrendwithoutsignificantfluctuations. InOctober2004,theNBRdecidedtoreducethefrequencyofitsinterventions ontheexchangemarket.Itsinterventionsbecamefewer,butmoremassiveand lesspredictable.Inonlyafewmonths,thenominalexchangerateoftheRomanian leuagainsttheeuropassedfrom41.127lei/euro(October2004)to38.494lei/euro (December2004)–anappreciationof6,84%.InMarch2005,theexchangerate was36.422lei/euro–meaninganominalappreciationof13%forafivemonths period.IfweconsideralsotheinflationdifferentialbetweenRomaniaandtheEuro ortheUSA–around7%atthattime)wecanhaveaclearerimageofthesizeof therealappreciationoftheRomanianleu. ThisevolutioncameasashocktomostRomanians(populationandcompa nies).After15yearsofdepreciation,forthefirsttime,theRomanianleustrongly appreciated in nominal terms against strong currencies as the euro and the US dollar.Apparently,thestrongappreciationofthenationalcurrencywasnotdesired bytheNBRandmaybe,notevenanticipatedbyit.Nevertheless,theNBRheldto its decision,and after severalmonths of strong appreciation, the exchange rate stabilised.ItslevelinJanuary2006(3,6445RON/EUR)wasveryclosetothelevel from February 2005 (3,6765 RON/EUR). The market seemed to have found its equilibrium. StartingwithFebruary2006,theRomanianleushowedaclear tendencyof appreciation,butinacompletelydifferentrhythm(passingto3,1337RON/EURin July2007–anappreciationof14,75%overaperiodof18months). Inthelastfewmonths,inthecontextofanincreaseintheleveloftheinfla tionrate(atover8%),thenominalexchangeratestartedtodepreciate(passing from 3,1337 RON/EUR in July 2007 to 3,7218 RON/EUR in March 2008). This seemstobeashorttermdeviationfromthetrendasitcanbeseeninthefigure 2,thetrenddidnotchange.Still,itrepresentsadepreciationby18,75%inonly9 months.

76 4.2

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XR HPTREND03

Figure 2.Thetrendoftheevolutionofthenominalexchangerate (January2004–March2008) We could say that the exchange rate between the leuandtheeuroisnow stable.Intheend,theleveloftheexchangeratenowadays(July2008)isaround 3,6RON/EUR,veryclosetothelevelfromJanuary2006orFebruary2005.Butisa depreciationofover18%injustafewmonthscompatiblewiththeERMII? The ERM II allows fluctuations inside a band of +15%, a band established around a central rate. If we should have chosen a central parity for the leu, it would have been, most probably, somewhere around 3,5 RON/EUR (most fore castsmadeinthelastfewyearsareestimatingtheexchangerateRON/EURbe tween3,4and3,65RON/EURfortheperiod20072013).

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XR HPTREND04 Figure 3. Thetrendoftheevolutionofthenominalexchangerate (April2006–March2008)

77 Letusconsiderthelast2years:April2006March2008(theperiodconsidered inthe2008ConvergenceReport).Theevolutionoftheexchangerateispresented infigure3.Ifwelookatthetrend,thestabilityisobvious. Forourdatasample,themeanis3.446571,andthemedianis3.4809.The maximum level reached by the exchange rate in the last 24 months is 3,7218 RON/EUR in March 2008, while the minimum value is 3,1337 RON/EUR in July 2007. Intable2wepresentthemaximumdeviationoftheexchangeratebetween theRomanianleuandtheeuro,assumingvariouscentralparities. Table 2. CompatibilityoftheexchangerateevolutionwiththeERMII Central Maximumde Maximumap Compatible parity preciation preciation withERMII 3,2 16.3% 2% NO 3,3 12,78% 5% YES 3,4 9,46% 7,83% YES 3,5 6,33% 10,46% YES 3,6 3,38% 12,95% YES 3,7 0,59% 15,3% NO ConsideringthefluctuationbandacceptedintheERMIIas+15%,theevolu tionoftheexchangeratebetweentheleuandtheeurocanbeconsideredassta ble (and compatible to the ERM II) for any central parity between 3,2363 and 3,6867RON/EUR. TheRomanianexchangeratemarketreachedahighlevelofmaturity.Bythe time the NBR decided to dramatically cut the frequency of its intervention, the marketwasalreadyabletofunctionwellwithoutmanyinterventions. ForyearsithasbeensaidthatinRomaniathemainproblemconcerningthe convergencecriteriaistheinflationrateandthatoncetheinflationisundercon trol,thecriteriaconcerningtheinterestrateandtheexchangeratewouldbeeasily accomplished.Thisseemstobetruefortheexchangerate–withannualinflation ratesexpressedwithasingledigit,theexchangerateisalreadystableenoughas tofluctuatewithinabandof+10%aroundacentralparityof3,4RON/EUR. 7. Conclusions

Inthetable3,wecanseethesituationoftheEUmemberstatesfromcentral andEasternEurope,fromtheconvergencecriteriapointofview. WecanseethatRomaniaisaccomplishing,sofar,onlythecriteriareferringto the public finances (public deficit and public debt). Most CEEC present a better situation, accomplishing at least three convergence criteria – exception being Hungary.Inourcountry,theinflationrateandtheinterestratearstilltoohigh. Theexchangerateseemstobestableanditsrecent evolution suggest that the 78 Romanian exchange market is mature enough, and our country is able to participatetotheERMII. Table 3. Economicindicatorsofconvergence

Source:ECB(2008),ConvergenceReport,May2008,p.30 Certainly,thisdoesnotmeanthattheparticipationtotheERMIIisriskfree (onthecontrary–sofar,sincetheNBRwasnotforcedtodefendacertainlevelof theexchangerate,theincentivestospeculativewaslower;afterjoiningtheERM II,thatincentivewillincrease).ButitprovesthatRomaniawillsoonbeabletopar 79 ticipatetotheERMIIandtoaccomplishtheconvergencecriteriaconcerningthe exchangerate,ifthatparticipationishandledwithcompetenceandcaution. The national authorities plan on waiting until most structural vulnerabilities areovercome–somewherearound2012–beforeenteringtheERMII.Themain ideaistoremaininsidetheERMIIaslittleaspossible–preferablyonly2years, andtoadopttheeuroin2014. Butbesideoureconomicproblemsalreadymentionedinthepaper,2008isan electoral year, and the Romanian Government seems weak faced with mass protest. Based on the decisions taken by this Government, at the end of its mandate,Romaniawillbeabletoaccomplishtheconvergence criteria sooner or later.If theplansmade by ourauthorities will turn into reality, Romania might adopttheeuroin2014.Otherwise,itwillbehave tochange and postpone this objectives–asmanyotherCEECalreadydid(Estonia,Latvia,Lithuania,Hungary).

References

[1] Călin D. ImplicaŃii ale unificării monetare europene asupra României . Tezădedoctorat,Timioara,2004 [2] Cerna S. Unificarea monetară în Europa, Ed. Enciclopedică, ColecŃia BănciiNaŃionale,nr.20,Bucureti,1997,ISBN9734501917 [3] Cerna S., Donath L., eulean V., Bărglăzan D., Boldea B., Economie monetarăifinanciarăinternaŃională, Ed.UniversităŃiideVest,Timioara, 2005,ISBN9737608488 [4] ECB,ConvergenceReport ,May2008,availableon www.ebc.int [5] Isărescu M., România – Trecerea la euro, Bucureti, 17 mai 2007, presentationavailableon www.bnro.ro [6] Silai G. Integrarea monetară europeană– între teorie i politică . EdituraOrizonturiUniversitare,Timioara,1998,ISBN9739400035 [7] VartolomeiM.EMUChallengesandEUROmarching .BuletinultiinŃific alUniversităŃii„Politehica”dinTimioara.Tomul2(2),Fascicola1,2004 pg.8592,ISSN15837475

Addresses:

• LectorDr.Ec.DianaBărglăzan,“Politehnica”UniversityofTimioara, PiaŃaVictoriei,nr.2,300006,Timioara, [email protected] • AsistDr.Ec.MihaelaVartolomei,“Politehnica”UniversityofTimioara, PiaŃaVictoriei,nr.2,300006,Timioara, [email protected] • Drd.CameliaTurcu,UniversityofPoitiers,15,ruel’HotelDieu,86034 Poitiers(France),[email protected]

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