Will Romania attend the Monetary Union?

1. Monetary Union- Introduction

2. Conditions that need to be fulfilled by a country
before attending the Monetary Union
3. Non-euro area countries
4. Romania and the Monetary Union
1.Monetary Union- Introduction
Becoming a member of the EU is a complex procedure which does not happen
overnight. Once an applicant country meets the conditions for membership, it must implement
EU rules and regulations in all areas.
Any country that satisfies the conditions for membership can apply. These conditions
are known as the ‘Copenhagen criteria’ and include a free-market economy, a stable democracy
and the rule of law, and the acceptance of all EU legislation, including of the euro.
The Economic and Monetary Union(EMU) takes the EU one step further in its process
of economic integration, which started in 1957. EMU represents a major step in the integration
of EU economies. Launched in 1992, the union involves the coordination of economic and
fiscal policies, a common monetary policy, and a common currency, the euro. Whilst all 28 EU
Member States take part in the economic union, some countries have gone the extra mile
adopting the euro. Together, the above mention countries constitute the euro area. The single
currency presents undeniable advantages: it lowers the costs of financial transactions, makes
travel easier and strengthens the role of the EU at international level.
The economic integration brings the benefits of greater size, internal efficiency and
robustness to the EU economy as a whole and to the economies of the individual Member States.
This, in turn, offers opportunities for economic stability, higher growth and an increase in the
employment rate — outcomes of direct benefit to EU citizens.
Economic and monetary union(EMU) is not an end in itself. It is an instrument to further
the objectives of the European Union and improve the lives of citizens in EU countries. As a
consequence, the economic policy-making becomes a matter of common concern to all EU
countries. To ensure the smooth operation of the EU economy as a whole, it is important that
all countries coordinate their economic and fiscal policies with the common objective of
stability and growth. As well as bringing the benefits of economic stability, economic and
monetary union and the single currency also support a more effective single market which
benefits people and enterprises.
Furthermore, within economic and monetary union, a single monetary policy is set by
the European Central Bank and is complemented by harmonised fiscal and coordinated
economic policies. Within economic and monetary union, there is no single institution
responsible for economic policy. Instead, the responsibility is divided between Member States
and various EU institutions.

2. Conditions that need to be fulfilled by a country before attending the Monetary Union
Nowadays the euro is the official currency of 19 out of 28 EU countries. These countries
are collectively known as the Eurozone.
The euro is the most tangible proof of European integration: around 341 million people
use it every day, making it the second most-used currency worldwide. The benefits of the
common currency are immediately obvious to anyone travelling abroad or shopping online on
websites based in another EU country.
In order to adopt the euro, EU countries have to bring their national legislation in line
with relevant EU law and meet specific conditions designed to ensure economic
convergence. These requirements, agreed by the EU Member States in Maastricht in 1991, are
known as the convergence criteria.
These binding economic and legal conditions were agreed in the Maastricht Treaty in
1992 and are also known as 'Maastricht criteria'. All EU Member States, except Denmark and
the United Kingdom, are required to adopt the euro and join the euro area, once they are ready
to fulfil them. The Treaty does not specify a particular timetable for joining the euro area, but
leaves it to member states to develop their own strategies for meeting the condition for euro
adoption.
Convergence criteria were put in place to measure progress in countries' preparedness
to adopt the euro, and are defined as a set of macroeconomic indicators, which focus on: Price
stability, Sound public finances, to ensure they are sustainable, Exchange-rate stability, to
demonstrate that a Member State can manage its economy without recourse to excessive
currency fluctuations, Long-term interest rates, to assess the durability of the convergence.
The European Commission and the European Central Bank jointly decide whether the
conditions are met for euro area candidate countries to adopt the euro. After assessing the
progress made against the convergence criteria, the two bodies publish their conclusions in
respective reports. These are further ratified by the Economic and Financial Affairs
Council (ECOFIN) in consultation with the Parliament and Heads of State. If favourable,
the adoption process can begin.

3. Non-euro area countries

The list of the countries where the euro has still not been adopted, but who will join
once they have met the necessary conditions consists mostly of countries of member states
which acceded to the Union in 2004, 2007 and 2013, after the euro was launched in 2002. Non-
euro area countries are: Bulgaria, Croatia, Czech Republic, Hungary, Poland, Romania,
Sweden.
The eight euro-outs are a heterogeneous group of countries that follow very different
economic models and are at different stages of economic development.
The dynamics of economic growth in these euro-out countries are affected by their
different stages of economic development. The less developed among them often achieve
higher growth rates due to the catch-up effect. With the exception of Sweden and Denmark,
whose economic growth in 2017 was slightly below the euro area average of 2.4 percent, the
economies of those EU Member States outside the euro area that are less economically
developed grew much faster.
The individual relationships of the euro-outs to the euro and the eurozone are also very
different. Most of them pursue independent monetary policies. The Bulgarian lev is pegged to
the euro at a fixed rate as part of a currency board arrangement. Romania and Croatia maintain
exchange rate regimes with a managed floating exchange rate against the euro.
All countries in the group are open economies interested in deepening the single market.
Furthermore, they are all in favour of the euro area being open to new members. At the same
time, they support euro area integrity, even though they are unwilling to bear the necessary
stabilisation costs. The economic diversity of the non-euro countries and their different relation-
ships to the euro and the euro area make it difficult for the euro-outs to cooperate politically
with one another within the EU. This increases their risk of losing influence within the Union
after Brexit.
Although all EU countries, except Denmark and the UK, have a legal obligation
to participate in the monetary union, this obligation is not linked to any timetable. It has also
never been an object of political pressure. The most likely candidates to introduce the euro are
the EU’s three poorest countries: Romania, Bulgaria and Croatia. Theoretically, Bulgaria
currently meets almost all convergence criteria, but the country’s structural problems,
corruption and weak institutions are standing in the way of Sofia’s path to membership. There
is also an urgent need for measures to improve the institutional environments and economic
conditions in Romania and Croatia. Croatia currently has the most difficult economic situation.
It is battling excessive macroeconomic imbalances and facing a high public debt to GDP ratio
(78 percent in 2017). Private and public debt, which is largely held in foreign currencies,
remains a source of vulnerability for the Croatian economy.
An important factor in adopting the euro is public support for the single currency.
According to Eurobarometer surveys conducted in May 2018, the majority of respondents in
Romania (69 percent), Hungary (59 percent) and Bulgaria (51 percent) support the introduction
of the euro. In Poland, 48 percent are in favour and in Croatia, the figure is 47 percent. Sweden
(40 percent) and the Czech Republic (33 percent) are the least willing to adopt the euro. These
sentiments influence the policy strategies of the euro-outs. In Poland, the Czech Republic and
Hungary, the national currency is considered a symbol of state independence. It is, therefore,
unlikely that Prague and Warsaw will accede to the eurozone. Budapest, on the other hand, is
keeping this question open.

4. Romania and the Monetary Union

Article 140(1) of the Treaty on the Functioning of the European Union ( TFEU) requires
the Commission and the European Central Bank (ECB) to report to the Council, at least once
every two years, or at the request of a Member State with a derogation , on the progress made
by the Member States in fulfilling their obligations regarding the achievement of economic and
monetary union. The latest Commission and ECB Convergence Reports were adopted in June
2016.
The 2018 Convergence Report covers the following seven Member States with a
derogation: Bulgaria, the Czech Republic, Croatia, Hungary, Poland, Romania and Sweden.
In accordance with Article 140(1) of the Treaty, the Convergence Reports shall examine
the compatibility of national legislation with Articles 130 and 131 of the Treaty and the Statute
of the European System of Central Banks (ESCB) and of the European Central Bank. The
reports shall also examine the achievement of a high degree of sustainable convergence by
reference to the fulfilment of the four convergence criteria dealing with price stability, public
finances, exchange rate stability and long term interest rates as well as some additional factors.
Legislation in Romania is not fully compatible with the compliance duty.
Incompatibilities concern the independence of the central bank, the prohibition of monetary
financing and central bank integration into the ESCB at the time of euro adoption. In addition,
the BNR Law contains imperfections relating to central bank independence and to central bank
integration in the ESCB at the time of euro adoption with regard to the BNR's objectives and
the ESCB tasks. According to Article 33(10) of the BNR Law, the Minister of Public Finances
and one of the State Secretaries in the Ministry of Public Finance may participate, without
voting rights, in the meetings of the BNR Board. Although a dialogue between a central bank
and third parties is not prohibited as such, this dialogue should be constructed in such a way
that the Government should not be in a position to influence the central bank's decisionmaking
in areas for which its independence is protected by the Treaty. The active participation of the
Minister and one of the State Secretaries, even without voting right, in discussions of the BNR
Board where BNR policy is set could structurally offer to the Government the possibility to
influence the central bank when taking its key decisions. Against this background, Article
33(10) of the BNR Law is incompatible with Article 130 of the TFEU.
Romania does not fulfil the criterion on price stability. The average inflation rate in
Romania during the 12 months to March 2018 was 1.9%, at the reference value of 1.9%. It is,
however, projected to increase well above the reference value in the months ahead.
Romania meets the criterion on public finances. Romania is not the subject of a Council
Decision on the existence of an excessive deficit. However, Romania is the subject to a
significant deviation procedure (SDP) due to the significant observed deviation from the
medium-term budgetary objective in 2016. In autumn 2017, it was found not to have delivered
effective action under the SDP and a revised recommendation was issued. Moreover, the
Commission recommends opening again a Significant Deviation Procedure for Romania in
light of the significant observed deviation from the requirements of the Stability and Growth
Pact also in 2017. Based on the assessment of the 2018 Convergence Programme, there is a risk
of a significant deviation from the requirements also in 2018 and 2019.
Romania does not fulfil the exchange rate criterion. The Romanian leu is not
participating in ERM II. Romania operates a floating exchange rate regime, allowing for foreign
exchange market interventions by the central bank. The leu's exchange rate against the euro
displayed a stable behaviour until September 2016, when it has started to moderately depreciate.
The main drivers of the depreciation were a procyclical fiscal policy boosting trade and current
account deficits and higher inflation expectations. The exchange rate reached 4.63 RON/EUR
at the end of 2017 and continued to depreciate in early 2018 up to 4.66 RON/EUR in March
2018. In comparison with other regional peers operating under floating exchange rates, leu's
exchange rate against the euro was relatively less volatile. During the two years before this
assessment, the leu depreciated against the euro by about 4%.
Romania does not obey the criterion on the convergence of long-term interest rates. The
average long-term interest rate in Romania in the year to March 2018 was 4.1%, above the
reference value of 3.2%. Long-term interest rates declined gradually to some 3% in October
2016, when they started to increase again. They have been on an increasing path to date,
reaching 4.5% in early 2018. The long-term spread vis-àvis the German benchmark bond
declined from around 340 basis points in April 2016 to below 300 basis points in October 2016,
when it started to increase again. In March 2018, it stood at 400 basis points.
Additional factors have also been examined, including the balance of payments
developments and the integration of markets. Romania's external balance has been deteriorating
progressively since 2015 and in 2017 turned negative for the first time in five years. On the
basis of selected indicators related to the business environment, Romania performs worse than
most euro-area Member States. Major challenges also relate to the institutional framework
including corruption and government efficiency. Romania's financial sector is well integrated
with the EU financial sector, in particular through a high level of foreign ownership in its
banking system.
External factors, due to the openness of the Romanian economy and its deep integration
into the world and the EU economy, developments in import prices play a significant role in
domestic price formation. In particular, energy and food commodity prices have been a
significant determinant of price inflation in Romania, given the large weight of these categories
in the Romanian HICP and the fact that Romania is a net importer of both energy and food.
Import price inflation (measured by the imports of goods deflator) was negative and
significantly below consumer price inflation in 2016 as the price of fuel commodities declined.
With the price of fuel commodities increasing again, import price inflation in 2017 was positive
and rose significantly above the inflation rate. Fluctuations of the leu have only moderately
influenced import price dynamics in recent years. The nominal effective exchange rate) has
remained broadly stable in the last two years.
In the light of its assessment on legal compatibility and on the fulfilment of the
convergence criteria, and taking into account the additional relevant factors, the Commission
considers that Romania does not fulfil the conditions for the adoption of the euro.
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