The budget deficit and inflation represent the greatest threats
- Romania’s situation is similar to Hungary’s: Most people support euro adoption and all mainstream political parties back it.
- The recently updated convergence plan sent to Brussels sets the target date for euro entry at 2015. This may be feasible, but it is increasingly likely that the country will have to delay it. The government won political cover from IMF chief Dominique Strauss-Kahn, who said Romania should not insist on a 2015 entry date because the country could use an extra year or two. The European Commission (EC) reacted cautiously to Romania’s updated convergence plan and pointed out several inherent risks. First and foremost, the EC criticized the lack of measures to bring down the budget deficit in 2011 and 2012. Romania will have to present deficit-lowering proposals to EU officials by mid-May. Romania also received negative comments for its failure to enact a fiscal responsibility law, which lowers the credibility of the government’s pledges to consolidate state finances, the EC opined.
- Inflation remains relatively high, registering 4.5% in February. But while consumer price increases are expected to cool off, the budget deficit is expected to top 5.9% this year. Given Romania’s track record, skepticism is justified when it comes to Romania’s ability to reduce its deficit. The European Commission has flexed its muscle on the issue, ordering Romania to bring its budget deficit below 3% in 2012.
- Political factors could also hinder the introduction of the euro. The Romanian government’s resolve in bringing down the budget deficit may not be strong enough. Many of the conditions of its IMF loan remain unfulfilled a year after the contract was signed. The government should have made sizeable reductions in the state workforce by now. The administration is also still debating IMF-mandated laws that should have been passed already, including the fiscal responsibility law, pension reform and the unitary wage law. The government has reaffirmed its commitment to passing these painful measures on multiple occasions, but has always failed to follow up. The political outlook does not favor a multi-year consolidation plan, as the electorate goes to the polls again in 2012, making it almost impossible for the administration to follow a prudent fiscal policy. 2015 is therefore not a realistic entry date. 2016 is more reasonable if we take the political reality into account.