Tuesday, March 27, 2007

Romania refuses to be rushed on euro entry

von Christopher Condon

Romania, which has seen a big increase in interest from foreign portfolio investors on the back of EU membership, wants to avoid the scenario lately seen in Hungary.

Romania will resist European Central Bank exhortations to bring forward its target date for adopting the euro, opting instead for a more cautious path towards the single currency, according to the country's central bank governor.

Mugur Isarescu told the FT that while Romania, which joined the European Union in January, was on course to meet the Maastricht criteria for eurozone membership earlier than expected, he was keen to avoid rushing ahead until "real convergence" had occurred.

"Euro adoption seems like a simple decision, but it is a complicated one, and we have to balance being ambitious with being realistic."

He said Romania, which has seen a big increase in interest from foreign portfolio investors on the back of EU membership, wanted to avoid the scenario seen in Hungary where the central bank has twice been forced to abandon its target dates for joining the eurozone. Those delays angered investors and undermined the Hungarian currency.

Mr Isarescu recounted with satisfaction a recent encounter with Jean-Claude Trichet, ECB president, who suggested that Bucharest's target for joining the euro in 2014 could be brought forward, asking: "Why are you not more ambitious?"

The Romanian answered that adopting the euro on the technical basis of the Maastricht criteria alone was dangerous.

"Speaking only of nominal convergence, Romania could reach it in the short term," he told the FT. "But without real convergence, [adoption of the euro] is clearly unfavourable for Romania."

To adopt the euro in 2014, Romania would have to comply with Maastricht and enter the so-called ERM II - the eurozone's waiting room - in 2012. But, as Mr Trichet recognised, the country is on course to comply in 2010 or 2011.

Public debt is now 18 per cent of gross domestic product, well below the Maastricht line of 60 per cent. The budget deficit for 2006 is likely to be about half the Maastricht limit of 3 per cent of GDP. Inflation is below 5 per cent and the central bank is targeting 2 per cent within three years, which would also comply. The bank's main interest rate is 8 per cent but if inflation falls towards 2 per cent, the rate would also fall.

However, Mr Isarescu said he worried about Romania's ability to sustain the criteria, especially the inflation mark, and about other threats to long-term financial stability, such as exchange rate volatility.

Structural reforms, he said, must also begin before euro adoption to remove fiscal uncertainties. He pointed to poor government budget management, as well as a need for pension, health and education reforms that would make long-term budget obligations more predictable.

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