Dear President Oudea, Ladies and Gentlemen
It is a great honor to address such a distinguished gathering of people who are, at the very top, deeply involved in European finance. On behalf of Governor Mugur Isarescu, of the Board of the Romanian Central Bank, I extend to you a warm welcome. I very much hope that this event, which is held in Romania, will help you get better acquainted with the reality of a new EU member state.
I am pretty sure that you will continue in Bucharest your dialogue on key issues regarding the financial industry in Europe –at a time when Europe and the global economy are facing so many challenges and uncertainties, including what former governor Mervyn King called “radical uncertainty”.
Romania joined the EU in 2007 and, since then, it has gone a long way in reducing its development gaps vis-à-vis older members of the Union. As a matter of fact, faster catching up started when my country was given strong signals that it will join the Union. One such signal was during Mr. Isarescu’s tenure as a prime minister, when he had a fateful encounter with the then EC President Romano Prodi, in 2000; other signals followed suit.
Let me give an example of this catch up process: in 2018, GDP/head in PPP terms reached about 62% of the EU average, while two decades ago, it was below 25% of the same average. Surely, GDP/head is far from illustrating how much, still, has to be done –in terms of infrastructure, provision of other key public goods like education and health-care, modernization of manufacturing and services, social inclusion, etc. Romania is facing also an ageing problem (like the rest of Europe), that is magnified by considerable migration. But, overall, it is indisputable that belonging to the EU has put Romania on a path of economic and institutional modernization and has deepened its ties with European democracies. I am not blind to what still plagues our society in many respects and what still needs to be done when it comes to fairness and equal opportunities, fostering critical underpinnings for sustainable economic growth. But to downplay achievements would be a mistake.
Finance has played a major role in helping integration in the Union and the openness of the economy. I say it in spite of personal misgivings I have always had when it comes to complete liberalization of financial markets in an emerging economy. But the logic of the Single Market, that implies free movement of capital and financial services, had to be observed. And reminding the role of finance in economic development is never redundant.
Our financial markets are heavily bank-based and banks have helped economic modernization. I would remark, however, that our “ return to Europe” has not been a smooth sail. For instance, the global financial cycle took its toll here as well. And our economy went into a tailspin, like elsewhere, following the eruption of the financial crisis in 2008 and after massive inflows of capital had gone into non-tradable sectors. Boom and bust had its episode in our markets too. Fortunately, our financial sector did not implode, not least due to the Vienna Initiative and the cooperation between NBR and central banks from mother countries, to the management teams of local banks, and not least, to the support of ECB and the EC.
Banks are well capitalized in Romania and more robust now; they rely more on own resources than a decade ago (credits are well below the level of deposits). The volume of NPL, around 4,9% currently, has gone down dramatically (it used to be above 20% during 2014-2015).
But one has to note also that financial intermediation is substantially lower than before the crisis. There had been an over-expansion of credit (mirroring the boom) at that time. Nonetheless, cca. 26 % of GDP private sector credit currently, is, arguably, too low. And banks and business leaders have to make substantially more in order to fund the Romanian economy adequately; SMEs in particular are in need of this, for big companies get external funding easily. And SMES are essential for social cohesion and for preventing further fragmentation of the economy.
The slowdown of the European economy is a concern, though one could argue that current growth rates are close to potential. It must also be said that Romania needs an international environment that does not succumb to trade wars and other sorts of fractures. This is why the erosion of the multilateral order is very worrisome. I should say that the ECB’s nuanced policy stance and the Fed’s seeming inclination to freeze further policy rate hikes can help avert new tremors in world markets.
Internally, we need to address a macroeconomic twin deficit problem, a rising trade/current account deficit. And this can be done with a proper policy mix, that should not overburden monetary policy. I should mention that NBR uses also macro-prudential tools to pursue financial stability. Here I would highlight the dialogue NBR has with commercial banks in all matters that concern the financial industry.
The National Council for Macro-prudential Oversight, our domestic macro-prudential institution (that is similar to ESRB), takes into account the views of key stake-holders in the running of the Romanian economy; this institution was instrumental in amending the Emergency Ordinance 114 of December 2018, which was so heatedly debated in recent months.
Is Romania interested to join the euro area? It is definitely interested. I do not wish to extoll the benefits of belonging to it. Our interest is genuine, not only because the EU accession treaties are unambiguous about the obligation to join it. We believe that, apart from symbolism, the quest to join the EA would discipline policies and focus efforts on key issues such as: budget consolidation (that implies reducing deficits in conjunction with raising fiscal revenues), limiting external imbalances, structural reforms that should foster steady productivity gains and help overcome the middle income trap, deal with the challenges of automation (AI) and move up the ladder of supply chains, etc. I mention all this since the euro area pains have been a wake up call to everybody as to what it takes to be a robust member and not turn a currency risk into a redenomination risk.
Romania is bound to enter and stay in the ERM2 (for two years at least) before joining the EA. This ante-chamber will severely test the capacity to absorb shocks when monetary policy’s space is dented. Entering the ERM2 is no less demanding than joining the EA and it has to occur together with joining the Banking Union (by the way, the latter presumes a thorough ARQ review to have been undertaken before entering it). Key preconditions for doing well in the ERM2 are therefore: low and easy to fund internal and external deficits, a sound banking system, and policies that foster robustness and maintain the economy competitive.
I would add that emerging economies which practice managed floating for their exchange rate regimes seem have a more cautious approach than currency board regime based economies in deciding when to join the euro area; size, complexity, the need for more real convergence, etc. provide explanatory variables in this regard.
We need a critical mass of real and structural convergence (so that nominal convergence be sustainable) in order to join the EA under favorable terms; and this asks for consistency, smart policy-making, structural reforms. Reforms of the euro area, that imply both risk-reduction and risk-sharing tools, would make our demarche more encouraging.
At the NBR we believe that by mid next decade Romania may be able to join the EA. This is a timetable that one finds in the report worked out by a team of experts under the guidance of the National Commission for the adoption of the euro; NBR experts were involved in the drawing up of this report. But accession in the euro area hinges on consistent and coherent domestic policies, and it would be enhanced by reforms in the design and mechanisms of the euro area.
Enjoying a favorable European context would clearly help.
Thank you for your attention.
10 mai 2019, Banca Națională a României