DEVELOPING AN OPTIMUM MODEL OF ROMANIA`S MONETARY INTEGRATION THROUGH CREATING A SYSTEM OF INDICATORS FOR MONITORING REAL CONVERGENCE AND SIMULATING THE COSTS AND BENEFITS OF EURO ADOPTION
Proiect CNCSIS AT nr. 8/2007
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The research project with theme "Developing an optimum model of Romania`s monetary integration through creating a system of indicators for monitoring real convergence and simulating the costs and benefits of euro adoption" is aim at identification of the moment when Romania will be ready to adopt the euro, based on optimistic and pessimistic scenarios....
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Since there is no ECB strategy regarding the monetary integration of the new EU member states into the euro zone, much less that of Romania, The European Council of Nice (December 2000) recommended that candidate countries should adopt that monetary policy which best matches the economic conditions in every country and corresponds to the general economic policy....
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THE SCIENTIFIC IMPORTANCE OF THE PROJECT
     Since there is no ECB strategy regarding the monetary integration of the new EU member states into the euro zone, much less that of Romania, The European Council of Nice (December 2000) recommended that candidate countries should adopt that monetary policy which best matches the economic conditions in every country and corresponds to the general economic policy.
     The way to the euro presupposes the achievement of a high and sustained level of nominal convergence according to the Maastricht criteria, the independence of the central bank and its participation for at least two years in the ERM 2 with the lowest fluctuation margins.
     The agreement of participation in the ERM 2 of the currencies of these countries is based on a firm commitment by the national authorities, to continue tax policies in order to reduce the current account deficit and to insure the sustainability of the convergence process. On the other hand the national authorities have to monitor the macroeconomic development, together with the EU bodies.
     The subject approached is extremely important as it proposes a model of Romania's optimum monetary integration, taking into consideration a complex of indicators of nominal and real convergence. The identification of the moment when Romania will be ready to adopt the euro is a bold attempt of which we are aware, but which is not impossible to realize, especially as it is based on a series of optimistic and pessimistic scenarios.
     The results of the research are examined by researchers from the country and from abroad during workshops organized on different thematic areas, in order to disseminate knowledge and validate it. At the same time, the aim of the project is to inform the population and the economic agents about the possible costs and benefits brought by the introduction of the euro. Thus, the premises will be created for a possible growth in the competitiveness of the economic agents, in a society based on knowledge and in order to deal with the new challenges.
     The particularities of the research reside in its object and its specificity, in the objectives it sets, in the way it defines its scope, gathers data and finds solutions. The mechanism of the scientific research has in view a large and adequate range of methods and techniques, which include:
      - documentary analysis of the evolution of subjects, phenomena and processes which make the object of the study: The Maastricht Treaty and its possible alterations, the EU Accession Agreements, the Agreements between the European Central Bank and the National Central Banks regarding the adoption of the Exchange Rate Mechanism 2; Reports published regularly by the European Central Bank and the National Central Banks, including Convergence Reports; books, brochures, articles and studies by specialists in the field;
      - modelling - the identification, induction and scientific formulation of the problem: the optimum model of monetary integration for Romania, from the point of view of stages, terms, concrete steps to take;
      - formulation of the research questions - sesizarea, inducerea și formularea științifică a problemei: conturarea modelului optim al integrării monetare pentru România, din punctul de vedere al etapelor, termenelor, acțiunilor concrete de întreprins;
      - fundamental investigation, aimed at the discovery and study of some new phenomena/processes: the analysis of the existing models, their comparison, the identification of the specific conditions and the development of the optimum model for Romania; and applicative investigation, oriented towards finding the means to use scientific methods in order to obtain the instruments and ways to improve the integration process;
      - forecasting - the comparison forecast as well as the extrapolation forecast, the association and the analogy forecast will be used, meaning that there will be forecast models for the indicators of nominal and real convergence, with the help of the Markov chains or of the method of the smallest squares; the purpose of this forecast is to identify scenarios for Romania, in order to choose the optimum variant according to the economic characteristics;
      - logic - appealing to, using and formulating inductive and deductive notions, judgments and reasoning; the realization of comparisons, the identification of maximum generality elements as well as of those of strict specificity; the analytical as well as the synthetic approach to processes and phenomena; abstracting - with a view to finding the general - and particularization - in order to define the particular as regards the models of monetary integration;
      - statistics - the present research will appeal to it in stages, which group: the observation (gathering the information and data necessary for the analysis, as well as defining, in broad lines, the trend for the indicators of real and nominal convergence); formulating the hypotheses (building the scenarios of monetary integration for Romania and choosing the most plausible and real one); forecasting (representing new knowledge elements derived from the possibility of unpredictable elements that can trigger solutions accordingly); checking (the post-factum analysis meant to find the causes which have led to the achievement or failure of the forecasts, based on the experience of the countries who set out to adopt the single currency).
     After analyzing the present stage of knowledge we consider that, today, the specialized literature in Romania is extremely scarce as regards works dealing with the problems of the European Monetary Union enlargement and its implications for the new members.
     In this framework, it is necessary to bring arguments in favour of the existing limits in the following directions:
      - lack of correlation of the Romanian economic policies at a macroeconomic level;
      - lack of a concrete strategy of the NBR for the adoption of the single currency;
      - the purely theoretical presentation of some indicators, without pointing out the ways and the costs their achievement involves (for example, the inflation targeting was reflected in a figure, without indicating the costs and the benefits required for achievement the target proposed);
      - Romania's impossibility to adopt a model of monetary integration from other EU member states as the economic policies are not convergent, they are rather divergent.
     The conclusions drawn from the current knowledge, lead us towards the identification of some elements of originality about:
  1. the comparative analysis of the models of monetary integration at the level of the first member countries of the euro zone;
  2. determining the similarities and the differences between the scenarios of monetary integration for the 10 new member countries;
  3. grouping the identified scenarios on different categories, according to the period of time they refer to;
  4. evaluating the impact the achievement of nominal convergence has over real convergence, starting from the monetary, financial and institutional particularities of every country;
  5. finding an optimal correlation between nominal and real convergence from the point of view of a dualist approach, meaning that there are opinions according to which nominal convergence (by the formal meeting of the Maastricht criteria) must be carried out before real convergence, or on the contrary, that real convergence has positive effects on nominal convergence;
  6. identifying the extent to which the indicators of nominal convergence reflect the reality of the Romanian economy, that is:
    1. The long-term interest rate is the interest rate on long-term government bonds, but these bonds do not exist or are very little used considering the still reduced level of development of the Romanian capital market;
    2. Romania's budget deficit is calculated differently from the methodology employed in the EU countries;
    3. The low level of the gross foreign debt in the GDP is not favourable, its main cause lying in the credit terms offered by the international financial and banking institutions, as well as in the restrictions of the international capital markets;
    4. Although the inflation targets set by the NBR are aimed at bringing the average inflation rate close to that in the EU, they couldn't be reached taking into account objective or subjective causes. In addition the NBR sets its target as an inflation rate at the end of the period and not as an annual average; on the other hand, the calculation methodology differs from the EU one: firstly, a Harmonized Index of Consumption Prices is not calculated, but a simple Index of Consumption Prices; secondly, there are differences as regards the constitution of the consumer goods basket on which the calculations are based;
    5. The current Euro/Leu exchange rate is not a real one, which takes into account all the factors that influence the evolution of a currency.
  7. the analysis of the achievement of the classical indicators of real convergence - GDP per capita, unemployment rate, work productivity;
  8. defining new indicators of real convergence that should reflect the economic reality as well as possible, that is: per capita income, employment rate, labour cost, civilization degree, business competitiveness, the degree and structure of Romania's trade with EU countries, the development stage of the financial market;
  9. identifying the most representative qualitative and quantitative variables for the model of monetary integration we wish to build;
  10. the short, medium and long term forecasting for the evolution of nominal and real convergence indicators;
  11. sensitivity analyses based on scenarios and taking into account the possibility to change the criteria for nominal convergence applied for the EU-12, as a result of not meeting the conditions of optimum currency area in the EU-27 variant;
  12. assessing the possible costs and benefits regarding the introduction of the euro in Romania - by building a model of their simulation - and quantifying their impact on:
    1. the business environment, from the perspective of company competitiveness;
    2. the banking, currency, capital and insurance market;
    3. the population, that is the development of an awareness of the costs and benefits involved in giving up the national currency;
    4. the National Bank of Romania, from the perspective of losing its autonomy as regards the credit, monetary and foreign exchange policy and its right to issue money.
     Taking into considerations all these elements of originality we consider that the proposed subject brings an important contribution to the development of knowledge by:
  1. Adapting some already existing methods, to be used in new applications:
    1. Adopting a model of monetary integration for Romania, based on the results obtained from the comparative analysis of the models for the new EU member countries.
    2. The harmonization of the calculation methodology for the convergence indicators with the EU standards in the field, in order to reflect correctly the economic reality.
    3. The adjustment of the NIGEM model - which measures the impact of the euro introduction on the nominal economic rigidities, by different variables (domestic demand, the volume of imports and exports, GDP, the price index, the current account, net assets) - to the characteristics of the Romanian economy.
  2. Working out new experimental models::
    1. The conceptualization of an econometrical model which should establish a connection between as many variables as possible and the parameters of real and nominal convergence.
    2. The building of the octagon of real convergence with the following variables: the rate of economic growth, employment rate, inflation rate, the budget deficit in the GDP, the current balance in the GDP, the long-term interest rate, the real exchange rate, the labor cost in the GDP.
    3. The building of a model of cost and benefit simulation for the adoption of the euro in Romania having as variables: of price - the price of production sold on the domestic market, the price of Romanian imports in the national currency, the price of Romanian imports in foreign currency, the price of Romanian exports in the national currency, the price of Romanian exports in foreign currency, the index of consumption prices, the price of production factors, the exchange rate, the GDP deflator, the labour cost, the nominal interest rate; of production, factors of production and foreign trade - the real production, the sold production, the real production sold on the domestic market, the real exports, the real imports, the real demand for fixed capital, the labour demand, the labour supply, the total productivity; of income - the total labour cost, the gross capital income, the gross income of the population, the gross company income, the public sector income, export subsidies, population savings, company savings, total savings; of expenditure - the real consumption of the population, the real public sector consumption, the real investment demand, the nominal investment expenditure; the GDP - the gross added value, the GDP volume.