How to reach a political and policy consensus that could bring Romania closer to the Eurozone
Gabriela Mihailovici
The analysis presented in Chapter 2 serves as a call to consider political and policy compromises as a crucial mechanism for unlocking future strategic prospects, a topic that could be of use in the current shifting approach about the euro adoption process by non-Eurozone member states. This opportunity unfolds along two dimensions. The “European dimension” highlights the limitations of political and policy compromise when striving for a rapid accession to the Eurozone, emphasizing the challenges of pursuing such a goal regardless of preparedness. Meanwhile, the “national dimension” calls on policymakers to embrace compromise to build political and policy consensus on designing and implementing economic policies that bring Romania closer to the Eurozone.
Assuming that merely meeting the convergence criteria guarantees entry into the Eurozone, secures the long-term competitiveness of Romania’s economy, or prevents it from becoming a liability for the Eurozone is overly simplistic. Without addressing several prerequisites, Romania cannot currently pursue rapid euro adoption. This requires ensuring “a formal commitment supported by a detailed roadmap with explicit fiscal backing”[1] along with “adequate institutional capacity and a convergence plan fostering a shared culture of stability”. Such efforts must be complemented by those economic policies aimed at resolving “significant macroeconomic imbalances that, if adjusted within the Eurozone, would result in high social costs and slower economic recovery compared to remaining outside the Eurozone.”[2]
Chapter 2 presents five arguments in support of this thesis. The research focuses on the experiences of the nine candidate countries that joined the Eurozone: Greece (2001), Slovenia (2007), Malta and Cyprus (2008), Slovakia (2009), Estonia (2011), Latvia (2014), Lithuania (2015), and Croatia (2023). The analysis draws on key national strategic documents related to euro accession to identify common themes of compromise that facilitated national consensus. Two working hypotheses underpin the analysis: political and policy consensus is essential, yet its effectiveness is limited. The findings point to a common conclusion: the decision to join the Eurozone was primarily influenced by technocratic economic policy fundamentals rather than political considerations. In ordinary circumstances, economic rationale outweighed political reasoning; however, during critical periods, political factors took precedence. This dynamic was evident in the cases of Lithuania and Latvia, where, amid the negotiation process, both countries experienced significant contagion effects from the financial crisis. In these instances, strong political determination played a crucial role in restoring their macroeconomic stability.
The first argument emphasizes the value of political compromise in avoiding rigid and inflexible stances when consensualizing the country’s medium- and long-term strategic development objectives. Persistence lies at the heart of this argument. The nuances between “joining the Eurozone” versus “adopting the euro” successfully interfered. How so? The term “joining the Eurozone” was employed to emphasize the need for greater political and geographical integration and alignment with Eurozone policies. On the other hand, “adopting the euro” was used to highlight the economic reasoning behind the process. In all previous cases, both nuances worked as complementary elements, intertwining the state’s political commitment to keeping the European direction.
The second argument advocates for the use of political compromise to foster dialogue and negotiate agreements for consensualizing the implementation of those economic policies essential to achieving sustainable and durable economic growth. Without such policies, a credible roadmap toward Eurozone accession cannot be developed. Credibility is the cornerstone of this argument. The experiences of all former Eurozone candidate member states reveal that authorities undertook five types of decisions:
A] Deciding the Approach to Evaluate Economic Performance
The economic performance analysis of the nine candidate states exposed differing approaches. Before the 2008 global financial crisis, reaching a consensus on the Eurozone enlargement was relatively straightforward. However, the situation changed significantly after 2009, as the process of preparing for euro adoption became more complex. This complexity arose primarily from a shift in the narrative around convergence. As the contagion effects of the financial crisis increasingly affected candidate states economies, a new understanding emerged, adopting the euro did not guarantee automatic convergence with the Eurozone member states. In some instances, divergence trends even became evident. While there were positive examples of nominal convergence increasing within the Eurozone (such as Slovakia and Estonia) as well as outside it (Sweden and Denmark both of which weathered the 2008 crisis without external assistance or participation in the Exchange Rate Mechanism II), real convergence told a different story. Between 1999 and 2007, steady progress was observed, particularly within the Eurozone, but this trend slowed afterward (Diaz del Hoyo et al., 2017)[3]. As a result, economic performance and competitiveness gaps emerged between Eurozone countries and those outside it. These structural divergences contributed to significant macroeconomic imbalances[4]. In light of these challenges, attention shifted toward a more comprehensive risk analysis. This included evaluating additional factors highlighted in Protocol No. 13 of the Treaty on the Functioning of the European Union, which emphasized the sustainability and durability of the convergence process. From 2010 onward, assessments began incorporating the capacity to coordinate economic policies[5], focusing on an economy’s resilience to significant shocks.
B] Deciding the Approach to Evaluate Economic Policies Related to Economic Convergence Criteria and Other Relevant Factors
Prior to the 2008 global financial crisis, the architects of the Eurozone anticipated that the budget deficit and sovereign debt limits outlined in the Stability and Growth Pact[6] would not be reached too quickly. They believed that fiscal rules and the independence of the European Central Bank (would provide sufficient safeguards against potential crises. However, this perspective shifted after 2009. During the global crisis and their Eurozone accession negotiations, the two Baltic states of Lithuania and Latvia faced severe macroeconomic challenges. With limited options for correction, they resorted to internal devaluation, implementing drastic measures such as significant cuts to income, workforce reductions, and scaling back production to manage budgetary expenditures. Consequently, new concessions and political compromises became essential to rebalancing the macroeconomic policy mix and alleviating tensions between monetary and fiscal policies.
C] Deciding on the Approach to Address Legal Convergence Criteria
The groundwork of this challenging decision lies on the specific scheduling of amending the National Central Bank’s Law. While EU accession required adapting, transposing, and implementing the acquis communautaire related to the Economic and Monetary Union negotiation chapter, Eurozone accession demands additional explicit legal guarantees to ensure that the national central bank could fully meet the rigorous requirements of the Eurosistem, achieving complete legal integration into it.
D] Deciding Political Commitments to Ensure National Macroeconomic Stability
This decision involved forward-looking political commitments that provided assurances about the candidate state’s ability to implement the necessary economic, monetary, and financial policy measures, along with the necessary structural reforms. This economic policy package aimed to create sufficient fiscal buffer and safety net that could mitigate the impact of potential economic shocks or crises.
E] Deciding Strategies for Establishing Trustworthy Institutional Governance
In all former Eurozone candidate member states analyzed in Chapter 2, political concessions and compromises regarding institutional governance focused on three key functional areas: (i) managing the institutions responsible for preparing negotiation files (the highest hierarchical level); (ii) appointing technocratic negotiators tasked with interfacing with European institutions and playing a role in the national decision-making chain (the intermediate level); (iii) selecting„ and retaining experts responsible for drafting the negotiation files (the third hierarchical level). In some countries, achieving consensus on making hierarchical levels 1 and 2 permanent proved particularly difficult.
The third argument underlines the importance of political compromise in consensualizing national inter-institutional coordination and cooperation with European institutions. The foundation of this argument is the principle of the “3Cs” (Coordination, Complementarity, and Coherence). Chapter 2 provides two illustrative examples. While most Member States regard the European Semester coordination exercise as a partial success, it holds particular relevance for Romania. The Country-Specific Recommendations issued through this process highlight the structural weaknesses of Romania’s economy. Equally significant for Romania is the rigorous implementation of reform and investment commitments outlined in its national medium-term fiscal-structural plan. This plan consolidates specific fiscal policy measures, structural reforms, and investment priorities to sustainably and durably support the extension of the fiscal adjustment period from four to seven years.
The fourth argument encourages the practice of the political compromise that would facilitate the construction of a pro-euro consensus and a culture of stability within the EU. Political wisdom is the root of this argument. Even in the most difficult periods, such as those experienced by the Baltic States during the global crisis, political consensus was needed for each public message; this is how public trust in national and European authorities was strengthened, message by message, stage by stage. Where communication campaigns and public education projects were started early, the fruits were harvested in times of crisis, when public solidarity was needed. Chapter 2 provides some examples of communication campaigns that had greater or less traction with the public.
The fifth argument promotes the requirement to reach an earlier up-front political consensus, by compromising on those economic policies that allow a room for maneuver that would guarantee the sustainability and durability of fulfilling the convergence criteria in the medium and long term. It is argued that this prerequisite should be politically assumed by the government and parliament as an integrated part into a national economic policy program and should not be considered an exogenous and mandatory target just because it was inherited through the EU Accession Treaty. At the core of this argument is the political ability to preserve enough negotiation space and flexibility to balance national interests with European concerns.
Currently, the most important guarantee that Romania can offer to its European negotiating partners is the ability to maintain a fiscal buffer space that is as accommodating as possible (with explicit reference to the output gap) to cope with the succession of economic shocks but also the large amount of political and geopolitical uncertainties. Keeping the budget deficit under control is not only a legally and economically justifiable obligation, but also politically necessary, as a guarantee to the European authorities that the accession of a candidate state with macroeconomic imbalances and problems does not destabilize or even endanger the Eurozone, especially after the pandemic crisis. Additionally, the main lesson of the crisis in Greece and the Baltic states should not be forgotten: the adjustment of imbalances within the Eurozone is done with much higher and more difficult costs from a social, political and economic point of view than if the adjustment were to take place before entering the Eurozone.
Romania is at a crossroads in the current extraordinary political and geopolitical context. It depends on how it decides to act: either aligning and coordinating national economic objectives and policies with European priorities and policies; or, on the contrary, choosing to advocate for the supremacy of national interests.
In the context of a European-oriented approach, Chapter 2 concludes by presenting five suggestions for compromise aimed at fostering political and policy consensus to “set things right” (‘’putting the house in order’’) and ensure the country’s macroeconomic stability:
- Building a politically and institutionally credible national case for euro adoption.
- Maintaining an independent National Bank of Romania that stays as aligned as possible with Eurosystem standards; any politicization of the central bank heightens the risk of prolonged financial repression, which could undermine the country’s economic health and financial stability.
- Preserving institutional structures that closely align with Eurozone standards to support the coordination of national economic policies and enhance dialogue with EU institutions.
- Strengthening financial ties with the Eurosystem to enhance the country’s economic and financial stability.
- Diversifying the sources financing the real economy and optimizing the country’s access to European public goods (keeping up with European reforms as outlined in the Letta and Draghi reports).
[1] Isărescu M. (2013). ‘’România și zona euro’’. Prezentare Conferința Espera. Academia Română, 11 decembrie. URL: http://www.bnro.ro/PublicationDocuments.aspx?icid=6885
[2] Dăianu D. (Ed). (2014). The Eurozone Crisis and the Future of Europe – The Political Economy of Further Integration and Governance. Palgrave – Macmillan.
[3] Diaz del Hoyo, J.L., Dorrucci, E., Heinz, F. and Muzikarova, S. (2017). ’’Real convergence in the euro area: a long-term perspective’’. No 203, Occasional Paper Series, European Central Bank.
[4] Creel, J. (2017). ‘’Convergence in EMU: What and How?’’. Econ Paper, PE 614.504, April 2018, URL: https://www.europarl.europa.eu/RegData/etudes/IDAN/2018/614504/IPOL_IDA(2018)614504_EN.pdf
[5] Under European Semester mechanism (precisely, the Specific Country’s Recommendations).
[6] It is known that Portugal, Italy, and Belgium had high levels of sovereign debt when they adopted the euro.