Mugur Isărescu: The single currency - a central banker's viewpoint from
an EU Member State outside the euro area
Opening speech by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the
2015 COFACE Country Risk Conference, Bucharest, 29 April 2015.
* * *
Dear Professor Issing,
Ladies and gentlemen,
I am delighted to have the honour of opening this conference, the more so as this is an
opportunity to meet Professor Issing again - the similarity of our surnames brought us
literally side by side at many events over the years. Professor Otmar Issing's career is
stupendous, but it is only natural that the general public has been remembering him as a
prominent figure of the European Central Bank, whose inaugural chief economist he was,
and as a key contributor to the building of the Economic and Monetary Union.
I. Euro adoption by Romania: between desirable and feasible
My intention today is to speak about the issue of the single currency from the viewpoint of a
central banker in an EU Member State still outside the euro area. During my address, it is
inevitable to touch upon various opinions which our distinguished guest has expressed over
the years.
I start by recalling what Otmar Issing said back in 2006, in a dinner speech occasioned by his
leaving the ECB: "We were all privileged to participate in a historically unique experiment: the
creation of a new currency for Europe. We had to manoeuvre through uncharted waters and
we may not yet have arrived in the Promised Land". I take these words as a prophecy, made
in those heydays, when things seemed to move into the right direction all by themselves. The
outbreak of the global crisis had not yet exposed the fracture lines of the European construct,
which originated in the incomplete institutional architecture of the Economic and Monetary
Union, as reflected by the weakness of fiscal rules and the absence of transnational
instruments to monitor cross-border private capital flows. Many a times I heard Professor
Issing talk about the need to address the vulnerabilities of the monetary union project,
particularly in the area of public finance, where monetary policy more than often overlaps
politics.
To what extent the Eurozone is now closer to the Promised Land than in 2006 is debatable.
On the one hand, euro area enlargement continued at a sustained pace, so that it now
encompasses 19 countries from 12 originally. On the other hand, for the non-euro area EU
Member States, recent experience has made the benefits of euro adoption become less
visible than its costs. Thus, in the pre-crisis period, euro area membership was seen as
automatically delivering lower risk premiums, thereby helping achieve faster growth rates. In
retrospect, the then benefit should not be viewed otherwise than as a consequence of
improper risk assessment - financing costs for several euro area member countries have
been exceeding those of some non-euro area Member States, Romania included.
Obviously, not only the developments in the Eurozone, but also the progress in non-euro
area countries contributed thereto. As for Romania, I cannot refrain from underscoring that,
while in 2008 the country did not fulfil any of the Maastricht criteria (the only indicator below
the reference value was that on government debt, which is part of the fiscal sustainability
criterion), today it is a frontrunner in terms of macrostability. This refers to the fulfilment of the
nominal convergence criteria and the observance of the reference values in the scoreboard
for the surveillance of macroeconomic imbalances (net international investment position is
the only indicator in excess of the reference value, the same as in all new Member States).
This is the right time to reassess the schedule for euro adoption, especially in the context of
the governance framework reform that is underway in the euro area and of the wait-and-see
approach of other non-euro area Member States (I am referring to Central and Eastern
European countries, namely Bulgaria, the Czech Republic, Croatia, Poland and Hungary).
We should ask ourselves whether setting a target date is a good idea. The answer would be:
yes, to the extent that it helps reach political consensus, while also providing a policy anchor
by rendering macroeconomic policies more coherent and acting as a catalyst for structural
reforms. However, in case the target date turns unrealistic or the formal commitment is not
accompanied by a roadmap with clearly defined intermediate objectives, the credibility of
euro adoption is rightfully questioned and the process loses its positive features mentioned
above.
We cannot speak of euro adoption and sustainable nominal convergence without referring to
real convergence as well. Even though the latter lacks a clear-cut definition and quantitative
benchmarks, attaining a sufficient degree of real convergence is an important parameter for
successful euro area membership, since it minimises the risks associated with abandoning
monetary policy independence. This is all the more important as euro adoption implies, in the
words of Professor Issing, a "permanent commitment". From this perspective, the two types
of convergence are mutually reinforcing: nominal convergence provides the stable
macroeconomic environment that fosters real convergence, while the latter lays the
groundwork for sustainable nominal convergence by reducing the economy's exposure to
asymmetric shocks and containing differences in the transmission of symmetric shocks. It is,
however, of the essence that the pursuit of real convergence gains should not be governed
by a short-term vision, in which case they would come at the cost of macroeconomic
imbalances.
II. Is Romania prepared for ERM II?
Professor Issing is going to speak today about the global currency war, about whether we
are indeed witnessing a genuine clash of currencies, as well as about the consequences of
the massive exchange rate swings. It is a topical issue, also relevant to Romania, because
the reshaping of the relations among major global currencies - including on the background
of the ECB's recent quantitative easing - complicates the task of identifying the equilibrium
exchange rate of the leu suitable for ERM II entry and thereafter for euro adoption.
Technically, the adoption of the single currency as of 1 January 2019 would imply joining
ERM II in 2016 H1 and the minimum two-year stay. Aside from the difficulty of setting the
central parity, ERM II participation calls, however, for a certain preparedness of the economy
as well, considering the risks inherently posed by a target-band regime. The need to
minimise such risks and the requirement to fulfil the Maastricht criteria by the end of the
second year of ERM II participation render all the more important the completion of major
economic policy adjustments ahead of adopting this exchange rate regime. I am mainly
referring to removing the sources of repressed inflation (the relevant example being the
completion of the energy market deregulation), of quasi-fiscal deficits (by restructuring
lossmaking state-owned enterprises), as well as other sources of future budgetary pressure (for
instance, the unavoidable expenditures to modernise road infrastructure). There are also
monetary adjustments that need to be carried out ahead of ERM II entry, namely finalising
the process of bringing minimum reserve requirement ratios in line with euro area levels. The
large volumes implied by the cut in reserve ratios and the potential impact on the exchange
rate call for a gradual approach to this process, possibly spanning one year to one year and
a half, which is yet another reason why ERM II entry in 2016 and hence euro adoption in
2019 are highly ambitious goals.
III. The rationale behind other EU Member States' wait-and-see approach to euro
adoption
In fact, Romania is the only non-euro area EU Member State that has set a target date for
the adoption of the single currency. The other countries show a prevailing wait-and-see
approach, driven not necessarily by the difficulty to observe the limits provided for by the
nominal convergence criteria (generally achieved or within reach), but rather by a
fundamental change in the overall approach to euro adoption. This occurred amid the
benefits of euro adoption becoming less obvious and the costs more apparent.
I have already pointed out at the beginning of my speech the fading benefits that euro area
membership provided in terms of financing costs. Additionally, the benefits of trade
integration, previously deemed as irrefutable, have been drastically diminished by the weak
euro area growth.
As for the costs of euro adoption, Central and Eastern European economies with floating
currencies went through relatively milder economic contractions than those with fixed
exchange rate regimes, which highlighted the relevance of this element of policy flexibility. It
has become clearer than ever that early euro adoption is undesirable, at least from this
standpoint.
Furthermore, direct costs have emerged in relation to euro area membership, arising from
the sovereign debt crisis and the establishment of resolution mechanisms. Bearing such
costs entails not only additional financial efforts. It is politically difficult to justify to the general
public the need for financial contributions to mechanisms that richer countries currently
benefit from (the collapse of the Radičová Cabinet in Slovakia in 2011 is illustrative in this
respect).
Another argument for the reluctance to set a target date for euro adoption is also linked to
the fact that the euro area, unlike the European Union, appears not to have been a
convergence club for its members. Hence, the standard deviation of GDP/capita at PPS
relative to the group average indicates higher disparities among countries part of the initial
euro area setup, while homogeneity in terms of income has been increasing across the EU.
In my opinion, this state of affairs does not rule out the success within the euro area, but
merely highlights that it can be achieved only under certain circumstances (the prior
achievement of a sufficiently high economic development level and coherent macroeconomic
policies). The thorough preparation of euro adoption is therefore essential, so as to ensure
the sustainable compliance with nominal convergence criteria, because a single currency
area is no place for economies with competitiveness issues or rigid markets.
Last but not least, the changes to the euro area governance framework for solving the
deficiencies highlighted by the crisis need to stand the test of applicability. Only one year
ago, Professor Issing insisted that the euro area prosperity was conditional on the
observance of the rules of the club by its members. The turn that the Greek crisis has taken
is relevant for the effectiveness of the new institutional architecture of the euro area.
Unfortunately, the expectations that the Riga Summit should bring us closer to an orderly
resolution have not been confirmed.
IV. Should we be concerned, should we think positively or should we use our
sense of humour?
Currently, the debates over the present and future of the euro area are dominated by the
assessment of the situation in Greece. For us, as EU members having not yet joined the
euro area, these debates also raise the question of whether we should be very much
concerned or take a positive, constructive approach. Although the trials and tribulations
caused by the situation in Greece have often been described as a conflict between two
totally different mentalities - namely, the Teutonic strictness versus the Levantine
easygoingness - my view is that it is an overstatement, just like any generality. I remember
the speech our distinguished guest delivered at the end of his ECB tenure and the fact that
the closing remarks showed not only a good sense of humour, but also a subtle
comprehension of the manner in which physical distances and especially distances in time
alter the assessment of individuals and, if I may add, of events. Please allow me to read the
final part of the aforementioned speech, which presents the timeline of the news published
by Le Moniteur concerning the return of Napoleon from his exile on Elba Island:
10 March - "The Corsican ogre has landed at Cape Juan";
11 March - "The tiger is in Gap. Troops are on their way and will stop him. He will end his
miserable adventure as a homeless refugee in the mountains";
12 March - "The monster succeeded in proceeding to Grenoble";
13 March - "The tyrant is now in Lyon. Horror has caught the people";
18 March - "The usurper is some days' march distant from Paris";
19 March - "Bonaparte approaches in a hurry, but he will not succeed in advancing to Paris";
20 March - "Napoleon will be in Paris tomorrow";
21 March - "Emperor Napoleon is in Fontainebleau";
22 March - "Yesterday evening His Majesty celebrated his arrival in Paris. The jubilation
cannot be described".
At the end of his speech, referring - with an irony that shows a keen sense of human nature
- to how the public might change its future perception on his activity, Professor Issing added:
"I can only hope that in my modest case the reversal of the sequence of events does not end
where the news on Napoleon started".
For me, a European of Latin origin living at the gates of the Orient, this excerpt does not
reflect the so-called German rigidity whatsoever, but rather a healthy, accommodating sense
of humour, which is part, I hope, of the new European culture.
Turning back to the euro area tensions generated by the situation in Greece, the future
definitely holds new surprises in store for us. One never knows who the next ogre may be...
No matter how much uncertainty surrounds any prediction, I would rather conclude my
presentation today on a positive note, by recalling the words of Jean Monnet, one of the
founding fathers of the EU project, who thought that "Europe will be forged in crises, and will
be the sum of the solutions adopted for those crises". I only hope that policymakers in
Europe have learned their lessons well enough from treading the desert of the crisis so that it
has taken us closer to that Promised Land Professor Issing was mentioning. If I may
continue along the lines of the Bible, as the Tablets of Law preceded the arrival in Canaan,
we should not forget that we will get there no sooner than all club members have not only
formally accepted, but also made their own, the rules underlying the monetary union.