TheMarketForIdeas

Recently released: Part I – The Bulgarian Experience

Like other EU countries, Romania committed to adopting the single European currency. At the time of accession to the EU (2007), no precise date was set for this. In the years before and immediately following, however, there were projections and indicative deadlines circulated by the authorities. The initial deadline, presented as an unofficial objective, was the period 2012-2014. Subsequently, the authorities repeatedly postponed this deadline: 2015, 2019, 2024-2026, and now, it seems, sine die. This delay shows that the adoption of the euro was never taken seriously by the Romanian authorities.

Adopting the euro would bring numerous advantages that would contribute to Romania’s economic prosperity and greater financial and political security. These benefits concern both businesses and citizens and the national economy as a whole.

Romania’s accession to the EU has already had remarkable effects. GDP per capita has increased from 40% of the eurozone average in 2007 to 79% of the average in 2024. This unprecedented progress in Romania’s history has been driven by the increasing integration of the national economy into the European economy and, in particular, into the eurozone economy. Currently, 67% of the country’s exports go to EU countries, mainly in the eurozone.

For Romanian businesses, adopting the euro would eliminate the transaction costs involved in exchanging lei for euros – and vice versa. Instead of spending money and time on such operations, Romanian companies could invest in their development.

Another major advantage of adopting the euro is the much easier access for Romanian companies to European capital markets. This would eliminate the risk of insolvency, make bonds and shares issued by Romanian companies more attractive and safer, reduce financing costs, allow the use of much larger sources of capital, managed by institutional investors (pension funds, mutual funds) from all over Europe, and give domestic companies greater visibility and credibility internationally. Easy access to financing is also essential for long-term investment, innovation and expansion of Romanian companies at regional and global levels, directly contributing to national prosperity.

The third advantage is financial and political security. The current world is unstable and marked by numerous external shocks. In the case of a small and open economy, such as Romania’s, exposure to global shocks can be particularly serious. Membership of the EMU confers institutional credibility, an element that, under current conditions, constitutes a strong means of protection against global financial instability. The disappearance of foreign exchange operations and the related exchange rates would eliminate the negative effects of the volatility of these rates on commercial and financial relations with Romania’s main trading partners in Europe. Romanian companies would be protected, in particular, against the consequences of sudden exchange rate fluctuations, which can greatly erode their international competitiveness.

Beyond the financial aspects, the euro is a powerful symbol of European unity and a major step in the European integration process, reconfirming Romania’s membership of European civilization. Adopting the euro would consolidate Romania’s prosperity and financial and political security – in an increasingly fragmented world. The euro is more than a currency, it is a geopolitical insurance policy in a fragmented world. Postponing that moment is tantamount to giving up these advantages to the detriment of the Romanian people and national interests.

However, the idea of ​​introducing the euro is controversial. Opinion polls show that almost 40% of Romanian citizens believe that this event will have negative consequences [here]. One reason for this sceptical attitude is the fear that Romania will lose its sovereignty, because the ECB’s monetary policy will not take into account national interests. Given the long history of the leu as a symbol of Romanian independence, this concern is understandable. However, it should be emphasized that entering the EMU does not mean the loss of Romania’s sovereignty, but on the contrary, its strengthening. By adopting the euro, the Governor of the National Bank of Romania becomes a member of the ECB’s Governing Council, with the same right to participate in the discussions prior to decision-making, the same voting rights and the same responsibility as any other member. Romania will participate, on an equal footing, in the design of the monetary policy applied at the level of one of the world’s largest economies. Therefore, the ECB’s monetary policy will not constitute a restriction imposed from outside Romania, but an amplifying framework for domestic economic activity.

The second fear is that the adoption of the euro will lead to an increase in prices. This concern is also justified. The change in the monetary system may indeed cause a temporary increase in inflation, as sellers have the opportunity to round up prices during the exchange of the old currency (the leu) for the new currency (the euro). As a result, the population may have the impression that inflation is increasing, although official data do not show this. This feeling stems from the fact that the most visible prices – those of everyday consumer goods, such as food and basic services – almost always increase faster than the general price level.

However, if the authorities take the necessary measures, the situation will not be serious. If prices are displayed in both currencies (leu and euro) for a sufficiently long period of time, if the authorities monitor their evolution and apply sanctions, the impact on consumer prices will be small and short-lived. In previous cases of euro adoption, the impact was negligible: between 0.2 and 0.4 percentage points. Even in Croatia – which adopted the euro at a time when inflation was high – the effect on prices was around 0.4 percentage points, and then it quickly subsided.

The literature shows that public perceptions of euro adoption follow a certain pattern. In the period before the introduction of the euro, uncertainty is natural. However, once the population and businesses start using the new currency in their daily activities and see that a credible central bank (ECB) protects price stability, confidence increases. In all countries that adopted the euro after joining the EU, public support increased significantly in the following six months. And now, support for the European currency is unprecedented, both in the EU (74%) and in the euro area (83%) [here].

The experience of countries that adopted the euro later than they joined the EU shows that the biggest risks are not the loss of sovereignty and rising prices. The major risk is that, after joining the euro area, reforms – already stagnant in Romania – will cease completely, which would lead to the loss of the advantages of the European currency. However, if Romania continues to align its institutions and economic policy with European standards, and Romanian companies continue to integrate into cross-border supply chains within the EU, the advantages of adopting the euro will prevail.

EU countries that have become more integrated into inter-European supply networks have recorded a GDP per capita that is almost 10 percentage points higher than those that have remained isolated. The reforms in Romania, as many and as they have been carried out, have already had notable effects. The stakes are to continue the reforms after the moment of euro adoption, when the conditions for financing economic activity will improve and external pressures will subside. Until then, in order to create the necessary conditions for the adoption of the euro (fulfilling the Maastricht criteria), it is necessary, among other things, to significantly and sustainably strengthen fiscal policy and continue the relatively restrictive monetary policy [here].

The adoption of the euro is both an opportunity and a challenge for Romania, as it is equivalent to the definitive return of this country to Western civilization, from which it was isolated by the communist regime for almost half a century. In addition to the current comparative advantages (lower labour costs and lower prices of agricultural land), by adopting the euro, Romania would have numerous other gains, which would allow it to become a centre of economic growth of European importance, based on productivity and innovation.

Photo source: PxHere.com.