Mugur Isărescu: Convergence towards euro enlargement
Opening speech by Mr Mugur Isărescu, Governor of the National Bank of Romania, at the
Conference "The Danube Triangle", Bucharest, 25 October 2018.
* * *
Distinguished guests,
Ladies and gentlemen,
Allow me to welcome you to the National Bank of Romania. It is the seventh time that the National
Bank of Romania hosts an ELEC Conference. It started in 2011 with "Renewable energy and
transport infrastructure in the Black Sea Region", a year later we talked about "Eastern Europe
and the EMU: finding the optimal path for introducing the euro". In 2013 there was the 3rd edition
of the Danube Financing Dialogue. The following year the dialogue focused on "Agriculture and
environmental protection in Central and Eastern Europe and their contribution to growth and
employment". In 2016 we discussed on "How the EU can generate a virtuous circle in the Black
Sea Region - the case of food and energy security" and last year we debated on "the challenges
for Eastern Europe in the present turmoil in the EU and EMU - persevering in the reforms and
investing for the future". As one could notice, the topics previously discussed during all ELEC
Conferences have most certainly cast a new light on possible ways to handle the challenges
ahead of us.
The European League for Economic Cooperation has stood out, ever since its foundation in
1946, as an independent network of business people who put their knowledge and influence
together to extend European integration. The diversity and independence of its membership have
always inspired ELEC to ask the appropriate questions and formulate coherent opinions,
constantly having in mind the European interest.
This year's ELEC conference promises to be equally interesting as it concentrates on
"Convergence towards euro enlargement" and I am honoured to be one of the keynote speakers.
I salute the close cooperation between government officials in the region with high European
officials, as well as with the private sector and prestigious organisations such as ELEC.
We should never allow ourselves to lose sight of the fact that these discussions aim to help us
on a journey made for the benefit of all. And it is a journey that can only be made through
constant and diverse dialogue.
Allow me to greet our renowned foreign guests: Baron Bernard Snoy, President of ELEC
International, Wim Boonstra, President of ELEC Monetary Commission, Mr. Servaas Deroose,
Deputy Director-General, ECFIN, as well as the distinguished speakers and panelists.
Ladies and gentlemen,
The same as the topics discussed in the previous reunions, "Convergence towards euro
enlargement" is highly important and is worth debating at length. Let me start from the fact that
euro adoption by the New Member States is a matter of when, not if, because they do not have
an opt-out clause. The commitment to join the euro area is undeniable, yet how the complex
process of ensuring the prerequisite economic convergence is conducted remains largely at the
discretion of the authorities in candidate countries. In this context, the approach has varied both
across time and across states.
Shortly after the new Member States' accession to the European Union, the assumed target
dates for euro adoption were very ambitious, although the fulfilment of some of the Maastricht
criteria was still a long way ahead at the time. The more prudent stance manifest afterwards
does not necessarily point to the inability or difficulty in complying with the nominal convergence
criteria. Rather, it occurred after the beginning of the global crisis, when some of the benefits of
euro adoption faded away, while the related costs became increasingly visible. We are therefore
witnessing a substantially revised and more comprehensive approach to the euro accession
process overall.
As regards the actual differences in countries' strategies, for some it might be puzzling that
Bulgaria is thinking of joining the euro area sooner than Romania. It is true that these
neighbouring countries have a lot in common, but there are also other things that set them apart
(not only the Danube!). Bulgaria has a currency board in place and it is natural for it to
contemplate euro adoption as a sound exit from this monetary policy arrangement (the adoption
of which, two decades ago, meant half a step towards the euro area). By contrast, Romania
pursues both a floating exchange rate and a direct inflation targeting strategy, the same as
Hungary, Poland and the Czech Republic and, therefore, the approach is different, the
changeover to the euro being more complex in this context. This is by no means to say that
Romania is sceptical about euro adoption, but merely that it needs a comprehensive view, meant
to ensure an adequate timing of this moment and a successful entry into the euro area.
While we are on the subject, it cannot be overlooked either that the New Member States having
adopted the euro - Latvia, Lithuania, Estonia, Slovakia, Slovenia - are relatively small countries,
with a different level of real convergence. Referring to countries that are currently in the process
of adopting the euro, I myself am among those who stress the need for sustainable
convergence, being aware that, in order to reap the benefits of euro area accession, several
essential prerequisites have to be cumulatively met. The fact that nominal convergence criteria
need to be fulfilled in a lasting - not accidental, forced or temporary - manner is just one aspect.
Actually, the durability of convergence has been set forth in the Maastricht Treaty itself ("high
degree of sustainable convergence" is the exact wording), but this "detail" has been taken too
lightly for a while. Moreover, now it is obvious for everybody that real convergence is also
essential for the sustainability of the entire process of euro adoption.
It is true that the opinions on the optimal level and even on the relevance of this factor for
successfully joining a currency union are quite diverse. However, to attain a certain degree of per
capita income convergence before switching to the euro is essential, as a large convergence
gap may complicate business cycle management in the absence of independent monetary
policy. But even the countries that are already euro area members should continue to increase
their level of real convergence. In my opinion, the direction of the real convergence process and
its sustainability and smoothness are just as important as its degree.
Romania has certainly come a long way in terms of economic convergence, a process whose
inception is tied to the prospects of EU membership, witnessing a significant increase in per
capita GDP as a share of the euro area average (based on PPS), from 31.7 percent in 2005 to
58.6 percent in 2017. Peer countries recorded a similar trend: Bulgaria went from about 33 to 47
percent, while the Czech Republic, Hungary and Poland, which started from a more advanced
level, added 9 to 20 percentage points to the same indicator during 2005-2017. However, this
process is still far from completion in these non-euro New Member States.
A smooth convergence path requires a combination of prudent macroeconomic policies (be they
monetary, fiscal or macroprudential), even though in practice it is difficult to build support for
such policies. In this context, allow me to mention that the concern of central bankers for
achieving the price stability objective is not always consistent with the desideratum of fast
economic growth. This sometimes gives the impression that central bankers are
overconservative and limit the stepped-up development of national economies. The fear of inflation
tends to be dwarfed by the desire for quickly-gained prosperity and the central banks' "obsession
with stability" may be seen as a refusal of progress.
Coming back to macroeconomic policies, in order to increase their effectiveness, they should go
hand in hand with structural reforms aimed at providing for a more flexible economic
environment, so that their combined usage paves the way for a smooth and long-lasting
convergence of living standards. In other words, countercyclical policies and structural reforms
are not at odds, but in a relation of complementarity.
In general, structural reforms are critical for strengthening convergence, ensuring durable growth
and making the economy more flexible in order to benefit from euro area entry, as the
advantages of euro adoption are not unconditional. What exactly do we mean by structural
reforms? As Draghi said in 2017, for many, they describe a pragmatic policy agenda to raise
long-term growth and accelerate adjustment to shocks, which is essential for countries in a
monetary union; but for others, the term is viewed as a "catch-all" for a wide range of policies,
some of which have potentially negative short-run costs and adverse distributional effects.
One area that would definitely benefit from the implementation of such reforms is the labour
market, at a time when the Romanian one faces challenges that are certainly not new or
uncommon. Given our status of an open catching-up economy, within a European Union which
has at its core the free movement of capital and labour, we were bound to end up sooner or later
in somewhat of a dilemma. To be more specific, there are various opinions in our economy
about where wages should be: on the one hand, they should be governed by productivity
dynamics, so as not to lead to an erosion of the competitive position, yet on the other hand, they
cannot be significantly below what is available in other economies, as it would simply lead to a
labour force drain, with dramatic consequences if not addressed quickly. We are actually dealing
with an emigration problem today, as more than three million Romanians (a significant
percentage of the population) have left their homeland for other EU Member States.
In order to mitigate this, wages should go up. As noted above, the only way to do that without
upsetting competitiveness is to boost productivity. This can be done along a number of avenues,
many of them involving, however, a significant amount of time (for example, one cannot solve the
population-aging problem overnight).
Foreign direct investment in recent years helped total factor productivity, but employers are
currently being challenged by the shortage of labour force, in part determined precisely by the
significant emigration. As a result, we can even talk now about discouraged employers, as
opposed to the periods that follow a crisis, when the employees are the discouraged ones. Thus,
we have ourselves another dilemma: ensuring that wage levels are compatible with attracting
investors, but acknowledging that, at least in certain areas, wages need to come up at present, in
order to mitigate the labour force drain, which affects the private and public sector alike. The key
is, in my opinion, to increase wages at an adequate, sustainable pace, so as to ultimately benefit
from an improved living climate reflected in a higher purchasing power, but also from preserved
macroeconomic equilibria, as well as higher-quality public goods - roads in particular -,
because, after all, wages are not the only part of the emigration story.
Speaking about roads, I would like to point out that infrastructure is essential for connecting
different regions of Romania and promoting cohesion. This is all the more important that, even
though EU membership has acted as a catalyst for country-level real convergence, the
development gaps across the regions of the New Member States, including in Romania, have not
diminished significantly.
Let me conclude by recalling the words that Otmar Issing said during a dinner speech on his
leaving the ECB, back in 2006, when things seemed to move into the right direction all by
themselves: "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". It is obvious that for a smooth economic catch-up it is
important to maintain a long-term perspective and to implement coherent policies and reforms.
Past achievements in nominal and real convergence, while significant, do not guarantee future
success (for instance, joining other countries in the middle-income trap is a real danger). A
realistic and balanced approach to euro adoption implies that it should be steered taking into
consideration absolutely all relevant elements for the sustainability of economic convergence. It
is the only way we can safely sail to the port of destination...
Thank you for your attention and I wish you lively, yet equally fruitful debates!