Preparation for the euro requires a long-term strategy

BUCHAREST – Romania should take its time in preparing to adopt the euro after it joins the European Union in order to avoid shocks that could damage the emerging economy, central bank chief economist Valentin Lazea said yesterday. Speaking just weeks ahead of a decision by the European Commission on whether to admit Romania next year or in 2008, Lazea reiterated earlier signals from the central bank that the poor Black Sea state should not rush to shed the leu currency. «The timetable which the central bank is advocating is neither ambitious nor too relaxed,» Lazea told Reuters in an interview. «We should not hurry.» «Without your own monetary policy, you can have much higher unemployment, a reduction in GDP and a widening of the current account deficit in time of adverse shocks… Romania needs a few more years to grow very quickly and be able to appreciate its currency.» Euro adoption timetables have slipped across Central Europe owing to the difficulty of meeting the tough inflation criterion and because of political ambivalence toward early adoption coupled with the challenge of painful fiscal retrenchment. Romania’s biggest difficulty in terms of meeting the criteria for eurozone membership is its stubborn inflation, driven by rampant domestic consumption, high energy prices and ongoing rises in administrative prices. The EU candidate, whose GDP per capita is about a third of EU average, has already brought annual price growth to just over 6 percent from about 40 percent several years ago but faces an uphill battle to score new declines. Lazea said the central bank and the Finance Ministry were discussing a convergence plan to outline euro membership plans, and would submit it to Brussels in January if Romania joins the bloc then. Other than inflation, Romania already meets euro entry criteria in terms of maximum debt to GDP ratios, public deficit levels and currency stability. Its debt market is too illiquid to judge long-term interest rates, the remaining euro entry measuring stick. Lazea said the best policy mix for Romania, including interest rates and the government’s fiscal stance, would involve fighting inflation aggressively in the near term, in order to bring annual price growth to below 5 percent. «A mixture of four policies (including fiscal policy, wages, administered prices and monetary policy) is needed to be more aggressive in the short run.»