Tue, Mar 27 2007, 13:01 GMT
PRAGUE (Dow Jones)--Romania plans to enter the exchange rate mechanism in 2012, as a prelude to joining the euro, thereby gaining time to push through necessary domestic reforms and also allowing its own currency to achieve a viable rate against the single currency, the deputy governor of the National Bank of Romania said Tuesday.
With low debt and a modest budget deficit, Romania could plausibly push for earlier adoption of the euro.
But successful entry into the euro area will require reforms and "we need the time to carry that out," Deputy Governor Cristian Popa said at a conference in Prague.
Maintaining monetary and foreign exchange flexibility - which would be significantly surrendered if Romania were to join the ERM2 system for aspiring euro area members - should help execute structural reforms such as making labor markets and the whole economy more flexible, Popa said.
Just as important, waiting until 2012 will allow for the massive inflows of foreign direct investment into Romania to be digested and provide a sustainable reading of the country's natural currency rate.
It will "provide the possibility of setting a central parity rate based on a more accurate estimate of the equilibrium rate after overcoming the peak in capital inflows," Popa said.
Last year, Romania recorded around EUR8 billion in foreign direct investment, covering around 90% of its current account deficit, which exceeded 10% of gross domestic product. Responding to that inflow of funds, the Romanian leu was one the world's best-performing currencies, rising 10% against the euro in 2006.
The question of the currency rate at which prospective members join the euro has taken center stage in the past month, as highlighted by Slovakia's central bank decision to revalue its central parity rate by 8.5% earlier this month. Slovakia is a member of ERM2, which requires that local currencies be kept within a trading range against the euro.
Tuesday, Slovakia's central bank cut its main interest rate by 25 basis points to 4.5% in a bid to cool off the Slovak koruna's gains.
The night before, for similar reasons, the National Bank of Romania also slashed rates, taking its main lending rate down by 50 basis points to 7.5% from 8.0% after having cut by 75 basis points in February.
"The 50-basis point cut was partly to squelch speculative investors," Popa said.
Fast-growing economies may suffer imbalances if they link to the euro prematurely, as suggested by Latvia, which last year posted a current account deficit of more than 20% of GDP. Popa noted that Bulgaria, which joined the European Union this year with Romania but also has a currency board arrangement linking its currency to the euro, had a current account deficit of around 16% of GDP.
Popa said the large deficits may not be cause for alarm so long as they are being fueled by foreign direct investment, which tends to boost productivity and also constitute equity rather than debt that needs to be financed.
-By Christopher Emsden; Dow Jones Newswires; firstname.lastname@example.org; +39 348 861 9789