|  04.04.2013

Since the burst of debt crisis in Euro Zone, the real convergence criteria came to the fore

An economy living under the horizon of a new IMF agreement seems to get a double-edged feeling. Besides the sentiment of confidence, it may raise quite an uncomfortable question on how many agreements a country may need to enter in, in order to fix its social and economic problems?




Q1. How badly do we need a new agreement with the IMF? And why?


Romania has difficulties in successfully finalizing the current IMF agreement, as authorities are lagging in implementing major structural reforms in health and education systems, as well as in recalibrating the pension’s law in a sustainable manner. The poor development in the situation of the state-owned enterprises denotes a lack of political will and a new agreement with IMF would be possible only if the government manages to conclude this one successfully. The necessity of a new agreement with IMF has subdued lately, as the sentiment of foreign investors towards Romania has improved since the formation of a new majority government, which determined a substantial decrease in our funding costs. Romania can easily get finance on external markets and the authorities seem committed to cap the budget deficit below 3% of GDP, which were the main advantages of the previous agreements with IMF. Therefore there are limited benefits for a new financing agreement with the IMF, if the political parties are still reluctant in radical structural reforms.


Q2. Dreams of the euro-denominated Romanian economy. Are we ever going to be ready? Pros & Cons


Since the burst of debt crisis in Euro Zone, the real convergence criteria came to the fore, as the fulfillment of the nominal criteria was not a guarantee for the competitiveness of an economy. Romania has difficulties even in meeting all the nominal targets such as the inflation rate and long term interest rates, due to the structural rigidities of the economy, as consumer prices continued to rise despite the persistence of a negative output gap. The authorities must stimulate all the growth channels of the economy to fasten up GDP advance above 1-2 % y/y growth rates, as otherwise Romania would never be ready to join the European Monetary Union. Given the rhythm of reforms in the public sector and the low living standards of Romanians, as the purchasing power parity of Romanians is half the EU27 average, it is unlikely that Romania will be ready to adopt euro before 2020.


Q3. Inflation swings vs. currency swings. Which one should be seen as worse? And why?


Inflation swings are worse than the volatility of the exchange rate, as a stable and low rate of CPI is one of the premises of a competitive economy. Elevated inflation rates erode real GDP dynamics and could exert negative pressures over economic growth, as the Central Bank usually tempers inflationary pressures by tightening the monetary policy. The swings of the national currency aren’t necessary harmful, as the exchange rate can reduce macroeconomic imbalances, as the Forex market is one of the most sensitive indicators to the health of the economy. However, sharp volatility of the national currency could induce significant damages to an economy with a high degree of Euroization, like in the case of Romania, inducing mainly a rise in inflation rate and the deceleration of private consumption.


  • Kevin
    17.06.13 ora 05:16

    Hello Mr Harris,I am just wondering how could I iunlfence in any way our politicians to leave their dispute aside and concentrate on country's economic and social problems I mean how can we escape of this nightmare when the leaders are blind and they neglect the essential interest of the entire community in Romania for the mean interests they have There must be a way to amend/protest against this weakness and lack of vision/patriotism these people prove It's not possible not to have a way to stop a few horribly selfish people(who, God knows by what merits arrived in power) to ruin the chances of an entire nation I refuse to believe that every population has the leaders they deserve, this is not true. I think the democracy should contain a mechanism of meritocracy put in place which should not allow people without genuine value to arrive in power. This could correct enormously the imperfection of democracy.In case you can do anything to suggest this idea, you could help us very much. Otherwise, the powerful countries will always take profit of the precarious democracy application in newly created democracies(in the sense that weak economies provide them with intelligence and young work force leaving those countries, plus other resources of those countries) , but the unhappiness of so many people left at the discretion of low quality leaders comes back as negative energies which will affect everyone on the planet it's a natural low of compensation I hope I didn't bother you with this text.All my consideration, Adriana Negruti

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