REER – Romania in a Decent European Position
Romania occupies a depreciating but relatively decent position in the regional context in terms of the Real Effective Exchange Rate (REER), an indicator that summarizes the evolution of the exchange rate and consumer prices in relation to the main actors in international trade. The indicator is critical for the chronic and growing trade deficit, reaching at over 18 billion euros in the first 7 months of this year.
The Nominal Effective Exchange Rate (NEER) or, equivalently, the “trade-weighted currency index”, describes changes in the average value of a currency with reference to a given base period and a given group of foreign countries. It is calculated as a weighted geometric average of the bilateral exchange rates against the currencies of a panel of the most important trading partners, where a rise in the index means a strengthening of the currency. The Real Effective Exchange Rate (REER) or, equivalently, the “relative price and cost indicator”, results from deflating the NEER by consumer price index deflators. The REER measures a country’s price or cost competitiveness relative to its principal competitors in international markets.
The MIP scoreboard indicator is the Real Effective Exchange Rate (42 trading partners, based on HICP/CPI), 3-year % change. The indicative thresholds are +/-5% for euro area and +/-11% for non-euro area countries. An increase in a nation’s REER is an indication that its exports are becoming more expensive and its imports are becoming cheaper, reducing its trade competitiveness.
Trading partners: the specific REER for the MIP is deflated by the consumer price indices relative to a panel of 42 countries. The panel of 42 countries includes: 27 EU Member States plus UK and 14 other industrial countries – Australia, Canada, United States, Japan, Norway, New Zealand, Mexico, Switzerland, Turkey, Russia, China, Brazil, South Korea and Hong Kong.
Real Effective Exchange Rate evolution in Romania (2015-2023)
The evolution of the REER for Romania shows a clear growth spurt in 2023 (more than 5 percentage points). Far from the previous relative stability, with the minimum value in 2017 (97.1), the return during the 2020 pandemic period marginally above the threshold of 100 and only a small advance in 2022. However, the position in the regional context does not look bad at all.
The data officially recorded by Eurostat place our country in third place among the former states of the Eastern bloc that joined the EU, after Slovenia (103.1) and Croatia (106.6 but still with about 5 percentage points added in the last year), slightly better than Hungary (107.5, advance of 14 pp between 2022 and 2023!) and Poland (109.5, +10 pp), closely followed by Slovakia (113.6) and Bulgaria (116.2).
Real Effective Exchange Rate in some EU member states
It should be noticed that we are very far from the Czech Republic (also outside the Eurozone and with a floating regime of the national currency like us), which is facing a major overvaluation of the national currency. The Czechs are catching up with actually high REER values and exponential increases (1 pp in 2020, 4 pp in 2021, 10 pp in 2022 and 13 pp in 2023).
For reference, we mention that the value of 139.5 in the case of the Czech Republic is the highest in the EU, but there are other states with significantly increased levels such as the Baltics, which have relatively recently joined the Eurozone (Estonia – 125.1, Lithuania – 123.3 and Latvia – 118.8). Interestingly, developed Western countries have similar values to us (Belgium – 107.1, Germany – 107.2, Austria – 107.9), the only ones below the threshold of 100 being Sweden – 88.2 and Ireland – 98.8.
The conclusion of the data presented is “when I look in the mirror I hate myself, when I look at others I admire myself”. Because everything is relative and the influencing factors in the international environment are the same. The difference is given by developments in national economies, public policies and exchange rate management, which must take into account the relative position in the region.
Photo source: Ryutaro Tsukata (pexels.com).
