TheMarketForIdeas

The Romanian leu was much more stable during the pandemic than the currencies of Central European countries with a similar exchange rate regime – the Czech Republic, Poland and Hungary. Data published by the National Bank of Romania shows a much lower devaluation of our national currency against the euro, of only 1.95% between January and October, well below the levels ​​recorded by Czech koruna (-7.38%), Polish zloty (-6.44%) or Hungarian forint (-7.78%). 

As a result, the Romanian leu significantly strengthened against those currencies that are currently maintained for now by the countries outside the Eurozone which have not announced a date for the adoption of the single currency. Here is the comparative evolution of exchange rates against the euro, at the average values ​​recorded last month compared to the first month of the year: 

Basically, the purchasing power of Romanian leu increased against the koruna, zloty and forint, and the relative value of one Romanian monetary unit is higher now than at the beginning of the year when the effects of the pandemic-induced crisis had not emerged. With the remark that the graph presented reveals a small appreciation against the forint and the zloty even in the first two months of 2020. 

The positive effects of this situation have been seen in the payment of interest rates on loans in foreign currency, the modest increase in the prices of some products and services traditionally denominated in euro (i.e. houses, cars or holidays abroad) and in the inflation level maintained close to the median value of the target range announced by the Central Bank (2.45% at present, compared to 2.5% +/- 1%).

The important negative effect was the relative price decrease for goods coming from countries mentioned, already competitive on our market through the quality/price ratio and adequate for the income growth dynamics to which we have engaged over recent years. This has also resulted to a large extent in a trade deficit increase, caused in a significant proportion (about two-fifths) just by Hungary, Poland and the Czech Republic. We must also remember that Romania is unlike these other countries for not having frequent trade surpluses – the post-1989 history of Romania has seen few years of commercial surpluses, whereas Hungary, for instance, has seen only a few years of trade deficits. In the long run, Romania’s permanent and high trade deficits (like its budget deficits) will cause macroeconomic trouble for it and guarantees downward pressure on the leu. Even the post-accession history of Romania is marked by an over 30% depreciation of the leu compared to the euro, which was one of the reasons why Romania stayed somewhat competitive.

The depreciation of the currencies of these countries with little “sound and fury” can thus be seen as a strategy of those countries to gain a competitive advantage over countries which have not experienced such a decline, or have engaged in active measures to prevent it. Their exports become more competitive, and their imports become more expensive, spurring import substitution. Their labor becomes relatively cheaper for foreign investors in real terms, without divisive nominal salary cuts. This increase in competitiveness comes at the cost of the living standards of their citizens, but all Central and Eastern European countries are used to such sacrifices, which are accepted by their populations with much less rancor than would have taken place in the West before the currency union. Now, of course, the inability of some Eurozone nations to devalue their currency to become competitive again in the absence of other measures and trends to increase competitiveness has condemned them to stagnant economic growth rates that had previously been masked by credit fueled consumption and state spending.