The tough Leu

The exchange rate has been over 3.9 lei/euro for three days, showing a change in the fluctuation band to 3.7 - 4 lei/euro or to 3.8 - 4.1 lei/euro.

The exchange rate has been over 3.9 lei/euro for three days, showing a change in the fluctuation band to 3.7 - 4 lei/euro or to 3.8 - 4.1 lei/euro. I say it is probably because the National Bank has a disproportionate capacity of intervention in comparison to the volume of the market, making it extremely difficult to foresee the intervals of variation or the levels of exchange rate. Certainly, however, Governor Isarescu was right when he said that the flexible rate allows the correction of the super-appreciation of the national currency. Temporarily, the central bank cannot intervene significantly because its sales of foreign currency would make the banks lack in liquidity in a critical time.

Now, the huge current account deficit of Romania is very likely to be corrected. But, as far as the economic theory says that the external deficit is just a form of postponing the inflation, there is a risk for the inflation to return to two digits next year. During the current economic cycle I showed my concern about the fact that the most money of the foreigners went to the money market, stock exchange, and real estate, but not in industry or agriculture, making the inflation go down due to the appreciation of the national currency. Now it is time for the non-residents’ money to leave with the risk for the inflation to return to its initial point. If inflation fell in the years that have passed due to structural changes made by serious foreign capital, an appreciation of 20% accompanied by a depreciation in a similar percentage wouldn’t have been such a big thing, because the economy would have been competitive enough. Since we simply hid the inflation behind the currency appreciation, it is highly probable for our next year’s external deficit, exchange rate and inflation to place around the levels of 2004: 8.4% of the GDP - the current account deficit, 4.05 RON / euro – the average exchange rate, 11.9% - the average annual inflation.

In the interview a month ago, in which he admitted that the depreciation corrects the super-evaluation of the national currency, Isarescu did not forget to congratulate himself for the fact that Romania does not work in a regime of monetary council like Estonia, Lithuania and Bulgaria, which leads to the fact that the economic vehicle can be driven with two pedals – the fiscal and monetary policy - instead of only one: the budgetary policy. I will not comment on the advantages or disadvantages of such a scheme, which links the currencies of the respective countries through a fixed rate for the euro, but I will simply remind that, at a certain point, we will have to get to the European currency. And, if this moment is delayed it means that the restructuring of the economy is delayed. There is already a large number of Romanian companies that compute their budgets in euro and this happens not only as a result of the dependence on imports, but on the firm commitment that Romania will join the euro zone. The only current winner in this "business" is the political class, which, in the absence of the help given by the monetary policy, should restrict the public expenditure massively to keep an attractive economic environment.

Let us go back and look at the other side of the story. A devaluation of the national currency will make the consumer goods more expensive, but will cheapen the capital goods. An increase in interest rates stimulates the deposits. A lowering of taxes would allow the people to invest in shares, bonds, insurances, private pensions. Without an increase in the prices of houses and land, the economy would probably go into recession, but subsequently the economic growth and disinflation would resume at a higher level of quality. With a business environment and an attractive capital market with instruments, we could bring the real investors in Romania, not just the volatile capital. Do we have the courage to follow this path?