OUTSIDE THE EUROZONE WHILST TRACKING THE EURO - IS IT IN

THE BEST INTEREST OF THE ROMANIAN ECONOMY?

By Robert C. Kramer

Yes, Romania still wants to adopt the euro currency, and they made no secret about it.
Eurozone membership is a constant goal for the country’s political class. But this story
has its twists and turns. First, Romania declared a eurozone entry for 2019, then they
reiterated it for 2022, and especially after Greece’s crisis, the Governor of the National
Bank of Romania discovered Romania may not be very well prepared for switching to
euro, he even suggested that Romania actually might not be ready to enter the eurozone
until a decade later than that!
Would Romania’s adopting the euro be fruitful? Well, let’s first look at the pros and cons
of the Euro.

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Countries that use euro receive many benefits to adopting it. Smaller ones have the
advantage of being backed by Europe's powerhouse economies, Germany and France.
The euro allows these weaker countries to enjoy lower interest rates. That's because the
euro wasn't as risky to investors than a currency with less demand from users and
traders. Over the years, these lower interest rates have led to more foreign investment.
That boosted the smaller nations' economies. Romania could benefit from that, too.
Some say the larger countries benefited even more from the euro. Their companies were
larger, and so could produce more at a lower cost. They exported these cheap goods to
the smaller eurozone nations, which couldn't compete. These companies also profited
from investing cheaply in the smaller economies. This increased investment meant prices
and wages rose in the smaller countries, but not the larger ones. That made the
businesses in the larger countries even more competitive. In a sense, the euro allowed
them to export the inflation that typically comes with the expansionary phase of the
business cycle. They enjoyed the benefits of high demand and production without paying
the higher price.
Among other benefits of having the euro as national currency, we must also remind
transaction costs (with a single currency, there will be no longer a cost involved in
changing currencies), price transparency (different European countries, almost similar
prices which enables firms to source cheaper raw material and consumers to buy
cheaper goods), eliminating exchange rate uncertainty, I like this the most, because it
eliminates the dectruction of the profitability of the exports (a.g. the Swiss currency
crisis), low interest rates or various benefits to the financial sector. The introduction of
the Euro appears to have reduced the cost of trading in bonds, equity, and banking
assets within the eurozone.
Overall, adopting the euro while in a strong European Union would appear to be very
beneficial for a small economy like Romania. After all its economy remains relatively
small — about half the size of the current EU average. After Bulgaria, Romania is the
second poorest country in the European Union.
But let’s have a look at the disadvantages of adopting the euro currency. When we look
at the sentences above, we must but wonder, with all these advantages, why haven't the

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remaining EU members adopted the euro? (As of 2016, these countries were: Bulgaria,
Czech Republic, Denmark, Hungary, Poland, Romania, Sweden and the United Kingdom.)
Evidently, some countries are reluctant to give up some authority over their monetary
and fiscal policies when they join the eurozone. That's because adopting the euro means
countries also lose the ability to print their currency, whish is the greatest fiscal power a
state has. That ability allows the government to control inflation by raising interest rates
or limiting the money supply.
Other benefits of not adopting the euro within the eurozone are all related to power
over currency and autonomy of the decisions. For instance, independent currency
valuations: In the last year, non-euro EU currencies have generally performed better
than the euro. While the euro saw a continuous free fall against the U.S dollar (and other
currencies), the Polish zloty, Hungarian forint, Danish krone and British pound had better
valuations.
Also, the devaluation of the currency exemption: Spain, Italy, and Greece, which are EU
countries that have adopted the euro, have faced great economic challenges owing to
the economic crisis, debt crisis, high wages, high inflation, and reduced productivity.
These resulted in the three countries losing price competitiveness for exports (and this is
a situation in which normally a nation is normally deliberately devaluing its currency in
order to make its exports cheaper and more attractive. However, as members of the
eurozone, none of these countries have the power or option to devalue their currency,
since it is shared by 19 countries and policies are set by the European Central Bank. On
the other hand, the United Kingdom, which is an EU member nation but never adopted
the euro, was able to devalue its currency quickly in response to the financial crisis. Its
economy bounced back more quickly than some other EU countries.
To have an independent monetary policy… Priceless. Starting 2008, as the United
Kingdom faced the global financial crisis, it was able to cut interest rates quickly to
encourage investment and spending in the country. Through its central bank, the Bank of
England, the UK also engaged in a QE program (where the central bank buys bonds on
the open market) in March 2009 and again in October 2011. This appears to have helped
the brittish economy recover by boosting business activities. In contrast with the UK, the

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European Central Bank did not initiate its own quantitative easing program until March
of 2015, a full 7 years after the financial crisis.
And now, for a brief moment, let’s imagine Romania meets all the criteria for the
eurozone. Is this in the best interest of the economy?
From a theoretical perspective, the euro adoption lead to a reduction in transaction
costs, an intensification of trade and an increase in investment, which contribute to
increasing the productive potential of the Romanian economy. The business
environment becomes more attractive which can increase economic affairs. Joining the
euro area will intensify the competition for Romanian economic agents, but also will
generate a loss of tools to shocks adjustment, like printing new money, flexibility of the
labour market or speculating the Euro/Leu foreign exchange rate. But everything
suggests that adopting the Euro would be bad news for the entire national economy due
to lack of adjustment mechanisms of the economic shocks.
I would wager Romania will not hurry into adopting the euro. . They will be wary because
of the, first, the cost of the euro introduction, made by the printing or minting the new
currency and the withdrawal of the national currency and the costs of the informing
campaigns on the euro, of the consumers, replacing the banking and ATM software’s
costs will be huge, and second, because prices will increase, consequence of the
adjustment effect speculated by traders, in spite of the consumers.
And maybe third, the longer we wait, the more time we delay, the more time to make
the needed structural changes. After all, Romania is now one example that a EU country
can improve its economy and institutions without adopting the euro. In fact, by delaying
euro adoption, and avoiding the policy constraints that joining the eurozone imposes on
member states, Romania has benefitted by allowing the underlying real economy time to
become more competitive in a gradual way, through trade with the EU, receiving foreign
direct investment, and financial market reform. Today, by most financial market
measures, Romania looks sound. Romania has a stable currency, low interest rates, bond
yields and other market-related measures that reflect a strengthening sovereign credit.
Romania is favored by most of the credit rating agencies that measure credit-worthiness.
Foreign investors are interested, too. The economy looks better than ever, growing at
full tilt by aggregate growth measures.

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Definitely, the adoption of the unique currency by our country before having made a
minimum real economical progress would be risky and even counterproductive. It is
essential that the main reforms (restructuring, privatization, salary policy, mobility of
labor force, fiscal policy) be approached before and not after entering the euro zone.
I also have my doubts about the relative becoming big external debt that Romania has.
Managing debt is harder if you don’t have your own currency. That's why Japan's huge
debt compared to GDP wasn't that of a problem as was Greece's debt.
In short, I think that Romania should adopt the euro only if it's not capable enough to
manage its own to produce growth, which I do belive that it can. Will Romania have
adopted the euro by 2019 (Romania will hold the rotating presidency of the Council of
the EU in 2019)? Certainly not. By 2022? I also think not. As it is, the euro only serves
successful very productive economies, denying the others the possibility of achieving
their own development. The European Central Bank should be completely reformed to
allow for the different economic realities of each different country.
Romania wil likely take on the example of Denmark and Sweden, and hold its own
currency while a member of the EU. And they aren’t in a hurry of becoming Schengen
members, either. You’ll see, they’ll delay this as long as possible, since this somehow
shuts them from Romanian land, the republic of Moldavia.

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Sources :

http://www.huffingtonpost.com/entry/romania-euro-greek-crisis_us_55b14617e4b0a9b948541edc

https://www.thebalance.com/what-is-the-euro-3305928

http://www.economicshelp.org/europe/benefits-euro/

https://www.quora.com/Why-do-some-European-countries-use-the-Euro-as-their-currency-while-others-prefer-
to-use-their-own

http://www.investopedia.com/articles/investing/043015/what-are-advantages-not-adopting-euro.asp

http://www.academia.edu/3546319/THE_COSTS_AND_BENEFITS_OF_ROMANIAS_ADERATION_TO_THE_EURO_Z
ONE_AND_ADOPTION_OF_THE_UNIQUE_CURRENCY

http://www.huffingtonpost.com/john-sydney-hopkins/the-disintegration-of-the_b_10928028.html