In the public debate in Romania last year, the subject of adopting the euro in 2019 was dissected, politicized and then abandoned, but not for a moment was discussed as a project.
Following this experience, I draw two conclusions about our elite behavior in society and issue a warning. I am convinced that you, the opinion leaders and treasurers of a part of the country’s human resources – the main national resources, treat it responsibly.
The first conclusion concerns our inability, as an elite of society, to take on the management of a country project and to carry out such a project. The public discussion on the adoption of the EU currency has, in my opinion, focused on the false zone, in relation to this moment, of the technical debate on the optimal level of real convergence that a state must achieve when adopting the single currency. In fact, I find that, most of the time, on all the topics brought by the media in the public debate, many “technocrats” are launched with analyzes, often broken by the economy and real life, as well as many “speakers” with references to technical aspects that they are not very aware of. What Romania’s elite had to bring into question was the process of preparation for accession to the Economic and Monetary Union, a real reform that concerns all economic decisions taken at the national level.
The second conclusion concerns the myopia that we show at the level of the whole society. Romanian society is indifferent to the direction and speed with which EU institutions set new targets and build new integration projects at EU level. These changes are not secret, the information can be found on the official websites of the EU institutions, but our elite seems to have other priorities than to discuss these initiatives, which concern us as European citizens. We have drawn attention several times in recent years to the fact that the recent crisis has created problems, but at the same time it has generated many opportunities worth exploring and exploiting and that humanity is going through a period of profound transformations and realignments with significant influences. the future of Romania and the countries in our region.
On this basis, I would like to sound the alarm that the deadlines that the EU has set for itself to increase competitiveness and deepen integration into the euro area do not allow us much time to prepare ourselves for institutional participation in these transformations.
Time is running out on us
There are currently at least three projects that will affect Romania institutionally and economically in the next economic cycle.
Firstly, a report has been drawn up at EU level (Completing Europe’s Economic and Monetary Union), better known as the “Document of the 5 Presidents” (the presidents of the most important institutions in the political and economic structure of the euro area), on deepening economic integration in the EU and the euro area. The document contains the outline of a plan, in which the first stage has a deadline of June 30, 2017 (an extremely tight schedule) and Romania is targeted, like all other EU Member States, both at the institutional level and at the level of economic management .
Second, the international economic context will be dominated by the disjoint of monetary policy between the US (where the monetary policy rate will rise, perhaps even starting in September 2015) and the euro area (where relaxed monetary policy and the introduction of liquidity into the economy, through special operations, will continue at least until 2016). This will mean a decrease in investor interest in other currencies compared to the US dollar and an increase in international credit.
Thirdly, the sources of financing the economy in the next economic cycle can no longer be exclusively bank financing because banking institutions are in the process of transformation and restructuring, looking for a new business model and will offer more expensive financing. This means that any economy must be prepared institutionally as well as at the level of education and economic culture of the economic agent in order to attract other types of financing from the market.
Stages of EU reform (1)
The three stages of EU reform, as set out in the above-mentioned document, have as their ultimate goal the achievement of full Economic and Monetary Union by 2025 at the latest (in the sense that there is currently no effective coordination of economic policies to ensure the smooth functioning of Economic and Monetary Union).
This complete Union consists of four objectives that the states that will want to adopt the single currency in 2025 will have to assume: economic union (the four functional freedoms), the financial union (including the Banking Union), the fiscal union (including a mechanism shock absorbers in the euro area), political union.
The first step (due in June 2017) is to deepen EU-wide integration by using all existing tools to ensure that Member States’ economies are more competitive.
The second stage is one of institutional construction at the level of Economic and Monetary Union. These institutions will give a legal obligation to obtain and maintain convergence through mutually agreed benchmarks.
At the end of the third stage (at the latest in 2025), Economic and Monetary Union should have all the institutions and instruments in place, so as to allow the adoption of the single currency by other EU states that will be prepared.
Stages of EU reform (2)
The first stage gives us less than 24 months to achieve the following four objectives, as included in the above-mentioned document. I would like to point out again that this stage concerns all EU Member States, not just the euro area:
– Increasing competitiveness and achieving structural convergence (the role of structural policies is to remove market barriers and dose structural policies compared to fiscal policy).
– The end of the Financial Union (this is especially the end of the Banking Union, an issue on which the Romanian authorities have not made much progress. Even if the name indicates the responsibility of the NBR in this field, the reality is different. The decision to join the Banking Union belongs , and the contribution paid by Romania initially to the Single Resolution Fund, a component of the UB, is paid by the Romanian budget). I have repeatedly expressed the opinion that Romania’s accession to the Banking Union is a priority given the structure of capital in our banking system and that this step is possible and necessary even before our accession to the euro area.
– Maintaining responsible fiscal policies at the level of the euro area Member States (even if the other EU countries are not directly targeted by this objective, such a target is all the more necessary for them, as they do not benefit from the same level protection through euro area instruments).
– Increasing the responsibility of the elected and the political class in general
The intention of the 5 Presidents is to set up a Competitiveness Authority at the level of each Member State. The mandate of this institution will be to monitor performance and policies in the field of competitiveness and to develop recommendations that will be part of the country recommendations issued during the European Semester (agreement of which Romania is a part). Let us remember in this context one of the basic rules regarding competitiveness, namely the evolution of wages in proportion to productivity, so as not to create macroeconomic imbalances.
Reducing the competitiveness gap that separates us from developed countries in the EU puts Romania in front of one of the most complex priorities and challenges. The approach is directly related to measures to implement an effective and efficient economic governance that includes the much desired budgetary governance. Our country needs an urgent analysis of the state and structure of the national economy, having among other things the main goal of identifying the branches and areas that still offer us or can offer us a competitive advantage at European and international level. The structural reforms are called to develop the branches and economic zones with potential of competitive advantage and to create the premises for the appearance of new structures and competitive branches. The national industrial policy must be based on innovation and in this sense measures and decisions are needed in the following directions:
– Creating favorable conditions for innovation
– Access to finance for SMEs
– Large investments in research
– Allocation of important resources to productive investments. In this context, I consider it very important to create conditions for innovative collaboration between companies, research centers and universities.
– Opening new markets and reopening traditional markets for Romanian products
The NBR starts from the belief that supporting the business environment, financial inclusion, progress and innovation are aspects of its main objective, namely ensuring financial stability. The realization of these desideratums is part of the corporate social responsibility, of the position of public institution of national interest of the central bank. Such directions of action have their support in the national project of financial education and in the partnership of the central bank with the academic and business environments in Romania. The NBR understands this national mission as an investment with long-term effects. But this component of the NBR’s activity must be preceded, accompanied and enhanced by an effective and efficient involvement of the state and the government, which should include the allocation of important funds for productive investments, for research and innovation. This, of course, has its place in the innovative partnership between the NBR, universities, research centers, the business environment (perhaps the consultative embryo of the future National Competitiveness Committee?). This is how we will achieve the “closing” on all sides of the triangle of effective partnership, as I like to call it, namely:
NBR – universities, academia
NBR – business environment
Universities, academia – business environment
Stages of EU reform (3)
Romania should be ready to start the process of joining the single currency by 2022 at the latest, because it needs at least 30 months for the transition. I base this calculation on three hypotheses:
– Romania does not join the eurozone before 2022
– The euro area does not change the accession stages from an institutional point of view
– The third stage of EU reform is completed in 2025
Romania’s preparation for joining the eurozone has been delayed due to both our inability to initiate and administer this project and the (implicit) changes in the eurozone.
Preparing for accession to the euro revolves around achieving structural convergence. As we have shown above, this is also the aim of the first stage of EU reform.
The decision-makers and the Elites in our country no longer have many possibilities to avoid starting the structural reform project. The danger is that in 2025 Romania will not be considered ready for the “new euro area” and will remain peripheral and isolated from economic aid, in case of adverse economic events at regional or global level.
The international macroeconomic context
Structural reforms in Romania are objectively necessary even without this process taking place at EU level.
International developments call for this transformation. One of them concerns the divergence of monetary policy interest rates between the US and the euro area.
As we have seen, there is a high probability that starting with September 2015, the Fed (US Central Bank) will enter a cycle of increasing the monetary policy interest rate. At the same time, the monetary policy rate in the euro area will be kept at an all-time low of 0.5% and above, the ECB (euro area central bank) will continue to pump liquidity into the system.
A first effect of this divergent development will be to increase the value of the US dollar against other currencies. In addition, the first currencies to be “abandoned” in favor of investing in dollars will be those in emerging areas (they have a higher risk, even if they offer better returns). Thus, the interest shown by investors so far for the leu and the securities denominated in lei could decrease. International markets are constantly signaling that they are fluid and restless.
A second effect of rising interest rates in the US will be to raise credit globally (given that the dollar is still the most important currency for transactions). This means that public debt refinancing will become more expensive, and states that need funds to finance investment projects (this is the case in Romania) will have less fiscal space for other expenditures.
Financing in the new economic cycle
I have used several times the conferences and debates within the “BNR Academy” to draw attention to the changes in the banking model as well as the evolution of the financing typology in the future.
I emphasize once again that the banking sector will no longer be the main source of funding for companies in this business cycle. We need to develop alternatives for both long-term and medium- and short-term financing. For the short term, it is possible that banks will disappear completely from those who can provide funds.
What is essential for an economy like Romania’s is the fact that it has an untapped financing potential in the case of the capital market. At EU level, the Capital Markets Union project is progressing quite rapidly. I would like to draw my attention again to the fact that this project is urgent, because it is part of the first stage of EU reform. In addition, Romania is underdeveloped in this area, which can generate, among other things, faster financing and improved governance in state-owned enterprises. We must also take into account the characteristic of this period in terms of focusing the Romanian banking system (dominated by banking groups in the Eurozone and Central and Eastern Europe) on attracting resources from the domestic market (both lei and foreign currency), banks the mother withdrawing a large part of the financing previously offered to the Romanian subsidiaries and branches (deleveraging). How such (limited) internal financial resources are used should be a topic of national interest, accompanied by the more active involvement of institutions with domestic capital with competitive solutions and tools that will bring them into the position of “market makers” (and here we have lost and continue to neglect a huge field of opportunities).
Another issue we have insisted on is the financing of SMEs. Even if banks will no longer be the main source of funds for their businesses, Romania will already have to take steps to regulate the field of “shadow banking” (ie those alternatives for small financing needs) so as to succeed in protecting small investors. If we look at the priorities of Eurozone governments and the ECB, we can identify at the forefront of finding the best ways and solutions for SME financing, an area that is expected to have a significant influence on growth and job creation. increasing the competitiveness of the area and the effective and efficient use of resources (a comparison between the definition of an SME in the Eurozone and the one in Romania is necessary, especially the limits within which the annual turnover falls).
conclusions
I tried to make a brief review of the emergencies that Romania, as a society, should have in the near future.
The false opinion that we do not have a country project should be combated by the fact that we have an unfinished project (EU integration, to which we have been committed since 1990) and we can still outline a clear and tight timetable for reforms in due course.
The only thing we have to do, the national decision-making environment and the elite of society, is to decide what resources we invest in this project (ie to identify those who want to participate in this project) and to prioritize and we take on tasks (to be transparent and aware of who is responsible for decisions and results).
I am convinced that we are able to respond responsibly to the question and answer launched today.
Prof. Univ.Dr. Nicolae Danila
Member of the Academy of Romanian Scientists