Price stability remains the main obstacle for Romania’s adoption of euro, according to the EC's convergence report published on June 4.
The country also operates a managed floating exchange rate regime that is incompatible with the ERM II mechanism thus failing formally on another of the five euro adoption requirements. Romania meets the other three requirements namely on budget deficit, public debt and long-term interest rates, the Commission concludes.
INFLATION – PRICE STABILITY THREATENED BY REAL CONVERGENCE. The 12-month average inflation, used for assessing the country’s price stability under the Mastricht criteria, was 0.4pps above the benchmark 1.7% level in April 2014 and is expected to remain above the reference value in the months ahead. A series of inflationary drivers are listed by the European Commission, which thus recommends a prudent fiscal policy and continuation of structural reforms in order to support sustainable convergence.
Short- and medium-term inflation outlook reveal higher annual inflation in 2015, namely 3.3% from 2.5% in 2014 – driven by the gradual recovery in domestic demand and continued price convergence towards the EU average. The risks to this inflation outlook are balanced, the Commission comments. Among factors possibly driving inflation at higher than forecasted levels, it mentions i. the stronger than expected rise in domestic demand, ii. the shocks from the commodity prices and iii. the gradual withdrawal of monetary stimulus in the US and the associated capital outflows from emerging markets that would exert downward pressures on the exchange rate and thus put pressure on inflation. On the opposite, weak bank credit lending caused by banks still repairing their balance sheets and low inflation in the euro area are mentioned among the drivers that could keep Romania’s inflation below projections on medium term.
Over the long run, there is significant potential for further price level convergence, the Commission’s report reads – which implies continuous inflationary pressures. The price gap between Romania and the EU average is quite wide, the report explains - the level of consumer prices in Romania was around 54% of the euro area average in 2012, with the relative price gap widest for services. The expected catching-up of the Romanian economy where the income levels were about 46% of the euro-area average in PPS in 2013, will however favour price convergence over the long term.
EXCHANGE RATE – VOLATILITY TONED DOWN BY CENTRAL BANK. Speaking of the other euro adoption criteria not met by Romania, the Commission underlines that the lower short-term volatility was supported, in addition to the agreements with the IMF and the EU, by the central bank’s operations. The depreciation seen in May-June of 2013 was more moderate compared to other peers in the region – but this was mainly due to the central bank’s interventions, the Commission reads implying that in the absence of such interventions [banned under ERM II] the volatility would have been much higher.
LONG-TERM INTEREST RATES – INSUFFICIENT DATA. At this point, the Commission admits that Romania formally meets the euro adoption criteria – however noting that the limited number of Romanian long term bonds issued and the lack of liquidity on the secondary market may pose some difficulties in interpreting the data. The criterion was actually estimated based on a single benchmark bond, with a residual maturity of some nine years, traded on the secondary market.
Romania’s largest opposition party, the National Liberal Party (PNL) elected Ludovic Orban as its new leader on June 17, after he defeated his rival within the party, Cristian Busoi. Although ... more
Romania’s Prime Minister Sorin Grindeanu is reportedly backed by the so-called “Cluj Group” within the senior ruling Social Democratic Party (PSD), according to unofficial sources quoted by B1 ... more
Romania’s High Prosecution Office is understood to have launched an investigation into the former government’s planned purchase of multi-role warships from Damen shipyards for €1.6bn. ... more