Your Excellencies, Ambassadors,
Dear Members of the Diplomatic Corps,
Ladies and Gentlemen,
First I would like to welcome you all today at the event organised by Profit.ro and titled “Romania – 10 Years in the EU. Progress, Development Prospects, Challenges”.
We celebrate this year 60 years since the Treaty of Rome was signed, 25 years since the Treaty of Maastricht was signed, and 10 years since Romania joined the European Union. As a matter of fact, yesterday the National Bank of Romania launched a set of three collector coins (made of gold, silver and copper) and a brass collector coin for numismatic purposes, along with a brass commemorative circulation coin, dedicated to the anniversary of 10 years since Romania’s accession to the European Union. The mintage of this numismatic issue is as follows: 150 sets of three coins (made of gold, silver and copper), 5,000 brass collector coins with face value of bani 50, and 1,000,000 brass commemorative circulation coins with face value of bani 50.
Romania’s European and Euro-Atlantic road, though marked by symbolic milestones, is a continuous and consistent process. The year 1995 saw the entering into force of the Association Agreement with the European Union, in December 1999 the European Council decided to begin accession negotiations with Romania, which ended in December 2004; in April 2005 the Accession Treaty was signed and starting on January 1st, 2007 Romania formally became an EU Member State. At the same time, Romania concluded a Strategic Partnership with the United States in July 1997 and became a NATO member in 2004. The economic progress recorded ever since has also been ascribed to the improvement in the investment climate in light of the security guarantees deriving from these momentous events.
I would like to point out that both prior to joining the EU and afterwards Romania has made headway towards nominal and real convergence with the European Union. Inflation rate dropped from 32.2 percent in 1995 to 11.9 percent in 2004, 4.9 percent in 2007 and even -1.1 percent in 2016. The monetary policy rate was cut from 39 percent in 1995 to 17 percent in 2004, 7.5 percent in 2007, down to 1.75 percent at present. International reserves increased from USD 2.7 billion in 1995 to EUR 12 billion in 2004, EUR 17.19 billion in 2007 and EUR 37.9 billion in 2016. GDP per capita at purchasing power parity expanded from 34 percent of the European average in 2004 to 43 percent in 2007 and 59 percent in 2016. Looking at GDP formation, the share of the state-owned sector declined from 59 percent in 1995 to 29 percent in 2007 and to 23 percent in 2016 (compared with a 16 percent European average) and the share of services in GDP increased from 40 percent in 1995 to 51 percent in 2007 and 56 percent in 2016 (versus a 66 percent European average). Foreign direct investment stock rose from 2.2 percent of GDP in 1995 to 24.5 percent in 2004, 33.4 percent in 2007, and 40 percent in 2016. The share of European funds in gross fixed capital formation widened from 3.5 percent in 2007 to 19.1 percent in 2016. These are only a few statistical data showing Romania’s gradual alignment with the structure of the European economies that we have been aiming at, on the one hand, and the resilience of the convergence process to external shocks, on the other hand, taking into account that not even the economic crisis that started in the final quarter of 2008 and lasted for several years could cause a reversal of this process.
Nevertheless, we should not forget that the convergence process has often faced difficulties. About 3 million Romanians of the active labour force are now working abroad, most of them across Europe. Public debt surged from 6.6 percent of GDP in 1995 to 12.7 percent of GDP in 2007 and 37.6 percent of GDP in 2016, but at the same time access to foreign financing has improved considerably, and today it is much more diversified, it spans over longer maturities and it comes at lower costs than prior to the EU accession. The benefits of economic growth were unevenly distributed, leading to growing regional, intergenerational and group disparities. Nevertheless, overall, my opinion is that, 10 years after joining the European Union, Romania’s integration in the EU has been a success story of the entire society, an anchor of sustainable development and a support for financial, political and social stability.
Ladies and Gentlemen,
Let me now clearly express the standpoint of the National Bank of Romania regarding Romania’s accession to euro area. From the monetary policy perspective, there is no other option for Romania than adopting the euro. How and when this is going to be done is open to discussion, not in order to delay it sine die, but to make it as smooth as possible, when the economy reaches a high enough level of competitiveness and preparedness.
A few days ago, I was stopped by a guard on my way out from a pharmacy in Bucharest. He said: “I wanted to ask you a question for quite some time now. When the euro is adopted, my pay will go down, won’t it?”. “What makes you say that?”, I asked. “Well, my wage is in lei and the euro is rising against the leu”, he retorted. “Then your wage will be in euro”, I replied. “Yes, but if the euro gets stronger against the leu, I will earn less”, he insisted. “Just a moment! So you earn now, say, lei 2,000.” “Lei 1,800”, he said. “OK. This means EUR 400. If we join the euro area tomorrow, you will get EUR 400. The euro may only fluctuate against other currencies, for instance against the US dollar, but not against the leu, as the Romanian currency will be withdrawn from circulation. All prices will be in euro and there is no reason for your pay to go down.” “What do you mean, there will not be lei any longer? I did not know that. Now I understand.” So people are concerned with the euro adoption and it is useful to explain what this means, and even go into detail.
This was not the first time I was asked about specific aspects on the euro adoption. For instance, a cousin of mine who lives in Drobeta-Turnu Severin, a pensioner, just like his wife, was concerned about receiving only two EUR 100 notes for her pension of lei 900. Although we speak of the same value, the psychological impact of getting just two bills after a life-long work should not be underestimated.
These two real-life examples testify to the fact that euro adoption is not a mere currency changeover. It is an intricate process, with the most diverse and profound implications, and, no doubt about it, it can be triggered only by a political decision based on a broad consensus of the society. And this is only natural, because the euro is a political project and a prosperity promise, as Jens Weidmann, the President of the Deutsche Bundesbank, put it.
The National Bank of Romania does everything within its powers to prepare and facilitate this process. The inflation rate is even lower than the EU average and the interest rate has hit an all-time low. We have cut and will continue to cut the minimum reserve requirement ratio in order to achieve harmonisation with the good European practice. Furthermore, we have narrowed the corridor defined by interest rates on the standing facilities around the policy rate and we may say that the reference rate for banks is, in fact, 0.25 percent. We have laid the groundwork for excess liquidity in the market to support the increase in corporate lending. We have ensured and will ensure financial stability. No public funds were required for the banking sector, as was the case with most European countries. The Romanian banking sector has an appropriate level of capitalisation and the non-performing loan ratio declined to 9 percent, from 22 percent, in the past three years, whereas the NPL coverage by provisions is high, i.e. 57 percent. On this occasion, I would like to inform you that, in 2018, we will conduct a comprehensive asset quality review (AQR) of the banking sector and the European stress test. The steering committee of this AQR has been established and it comprises representatives of the European Banking Authority, the European Commission and the IMF (the latter as an observer).
The National Bank of Romania is fully aligned to the European model of central banks. The NBR is an independent central bank, member of numerous European institutions: European System of Central Banks, the General Council of the European Central Bank, European Systemic Risk Board, European Banking Authority, resolution colleges. Representatives of the NBR are members of more than 100 different committees and working groups at the European level. The role of the National Bank of Romania, after Romania’s joining the euro area, will remain very important and will even gain significance due to its participation in the Governing Council of the ECB (reserved to euro area countries) and its membership of the Eurosystem, the monetary authority of the euro area, as well as of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The NBR will also remain the authority directly responsible for supervising credit institutions that are not under the direct supervision of the SSM and the national resolution authority for credit institutions beyond the scope of the SRM. The NBR will continue to ensure the management of its international reserves as well as of parts of the euro area international reserves (based on the ECB’s allocations). The NBR will also perform monetary policy operations delegated by the ECB.
Romania’s joining the euro area does not depend, however, on our desire and efforts alone. Europe must be into it as well. The European Union and the euro area are undergoing a redefining stage. The institutional architecture of the euro area is yet incomplete. The legislative changes in the financial and banking fields in the past years focused on creating the Banking Union, as well as on developing the bank resolution framework, improving the financial infrastructure, the payment systems and increasing the transparency of shadow banking across the EU. Risk reduction measures (RRM) to strengthen financial stability in the European Union are currently debated. The RRM package implies amendments to the CRD IV Directive, the CRR Regulation, the Bank Recovery and Resolution Directive (BRRD) and the Regulation establishing the Single Resolution Mechanism. Additionally, negotiations are conducted for the purpose of setting up the third pillar of the Banking Union, i.e. the European Deposit Insurance Scheme (EDIS). By the time Romania joins the euro area, the risk-weighting regime for sovereign exposures may change as well. Anyway, the euro area membership means a lower risk premium for participating countries, as a result of investors’ perception of an implicit guarantee of other members.
The discussions concerning the future of the European Union and the euro area also require a better harmonisation of the policy mix. Allow me to give you a concrete example. Back in 2013, when I held the position of budget minister, Romania exited the excessive deficit procedure and met the medium-term objective (MTO) of structural deficit of 1 percent of GDP. Subsequently, in 2014, I suggested my colleagues in Ecofin (Council of EU finance ministers) to exempt the increase in military expenses from the excessive deficit procedure. This suggestion could be more successful at present. It is impossible to have a free and functioning market economy, a single European market where investors feel safe and the ownership right is defended, without firm security guarantees. Romania has a part of the European Union border. With euro accession in mind, such guarantees are mutually reinforced.
During college years, I learnt that it is impossible for an economy to simultaneously have a fixed exchange rate, an independent monetary policy and free capital movement – the impossible trilemma postulated by Mundell, Fleming and – after the Asian crisis – Obstfeld. The single European currency is a solution to this impossible trinity. But the euro area crisis makes us think about the effectiveness of the policy mix. In a recent speech, Francois Villeroy de Galhau, Governor of the Banque de France, highlighted that we are facing a new impossible trinity (or impossible trilemma): the impossibility to reach the growth potential if the autonomy of economic policy at the national level is maintained and the European fiscal rules remain unchanged. The solution he sees is that of a so-called growth triangle: national structural reforms, improved euro area policy mix and sustainable financing.
Romania’s natural place is in the euro area. I say that without hesitation. The decision to join the euro area had already been taken when Romania became an EU Member State. However, the changeover to the euro is not a panacea. Economic theory states that money is neutral in the long run; it only serves as a means of payment. Joining the euro area brings no certainty of welfare. We should ensure our own wealth before joining the euro area. Structural reforms need to continue before entering the euro area in order to achieve higher convergence of income and of the economic structure, so that we can get closer to fulfilling the conditions of an optimal currency area.
Let me wish you all fruitful discussions at this conference!
June 20, 2017