Reflections and recommendations in the context of the complicated and risky times we are going through


What is the status and concrete situation regarding Romania? We are a member of the E.U., but we are not yet a member of the Eurozone, and it will probably be several years before we meet the conditions required for this integration, unless it is quite likely that a political decision at European level will require all EU member countries to join the Euro, regardless of their stage of membership.

This current status is also materialised by receiving EU regulations for implementation and often, exercising our characteristic zeal, we not only rush to implement those regulations quickly, but also to apply simple recommendations from many EU institutions in a binding way. The costs are obvious, and the risks and their effects are soon apparent in the absence of analysis based on the concrete situation of the country at each stage. Let’s not forget that we do not yet benefit from Eurozone facilities and umbrella programmes.

I give a concrete and very recent example. The Transmission Protection Instrument (TPI) has been launched to ensure that monetary policy impulse is transmitted simultaneously to all euro area countries so that normalisation does not disproportionately affect households and firms in the most vulnerable euro area countries and regions. Such an instrument can strengthen confidence in the Euro and the Eurozone and is likely to help bring inflation in line with the desired targets. The TPI is intended to reduce the risk of the current crisis deepening further in the Eurozone. I believe that this instrument will foster and trigger the launch of structural reforms, maintaining a stable environment for financing projects dedicated to government and private sector areas, ultimately supporting the “shift” of fiscal policies towards the medium and long-term sustainability target, while strengthening the efficiency and effectiveness of the European Central Bank’s monetary policy decisions.

The complicated period we are going through makes the mission and the interrelated involvement of Romanian institutions at all levels increasingly complex and difficult. Someone recently revived one of Albert Einstein’s sayings: ‘We cannot solve our problems with the same thinking with which we created them’. In the current context, we have started to pay more attention to the signals from central banks, commercial banks and fiscal policy, where we expect solutions to stop or tame the trend of unsustainable economic growth in a hostile environment due to the soaring inflation rate. Monetary policy is designed to reduce inflation in the medium term. At the same time, fiscal policy must become proactive, dynamic and targeted. Putting fiscal and budgetary policies in order and harmonising them will strengthen the national economy, which will be better able to face the challenges of the current crisis (source of a long list of complex risks). Here I am also considering the scenario in which we manage to significantly reduce the costs of new borrowing and servicing public debt.

Various views were expressed on monetary policy. Some criticised the delay in central bank intervention. Others criticised the insufficient frequency and magnitude of changes in the level of monetary policy interest rates. I think we need clarification before expressing certain opinions in public. Monetary policy ends with staged decisions to keep inflation expectations anchored and discourage the potential development of a wage-price spiral that would require immediate, tougher and more costly intervention. In order to decide the steps and the magnitude of the dynamics of the monetary policy interest rate, the central bank needs to analyse and practice good risk management. At the same time, fiscal policy must reflect and be based on national realities at each stage, aiming to achieve macroeconomic stabilisation within a specific period. In such a scenario, the impact of monetary policy decisions becomes increasingly effective and obvious.

The much-desired structural reforms should generate sustainable economic growth based on policies and solutions that include energy security and a phased green transformation of the economy. For now, rising energy prices and the continuing disruption of all sides of global supply are the main causes leading to the sharp rise in inflation and an increasingly evident decline in real incomes.

Romania therefore needs a long-term plan to implement structural reforms to support economic recovery and better exploit its potential. This plan needs to be accompanied by a serious fiscal stabilisation programme that maximises fiscal space and thus reduces pressure on monetary policy (a phenomenon that has been quite common in recent years). Moving to a phase characterised by a strong and sustainable economic growth trend is essential. Increasing long-term growth potential requires structural reforms, appropriate remuneration of investments (especially those in high-risk areas) and sustainable fiscal policy. In this way, we can move closer to the long-desired goal of a competitive and flexible economy that can better cope with current and future crises. The unsustainable increase in public debt and national debt to GDP must be immediately weighted by greater budgetary discipline and a reduction in unproductive, inefficient public spending, accompanied by adequate allocations to education and health. Let us not forget that supply-side shocks, primarily unprecedented increases in energy prices, produce massive cross-border outflows of funds with negative effects on public and private revenues.

The central bank has a key role and almost exclusive responsibility in keeping inflation under control. National and international circumstances call for a further increase in the monetary policy interest rate. Such decisions, including their “dosage” and frequency, cannot be taken without monitoring all domestic and international market signals, such as the evolution of the Euro/US Dollar exchange rate or inflation expectations. But much of the upward pressure on inflation comes from the supply side, both domestic and especially cross-border, and in this area monetary policy decisions cannot have an obvious leverage effect. I believe that a monetary policy that accelerates the level of specific interest rates towards and even above the level of inflation, in order to ‘curb’ demand, cannot be considered an effective policy. The central bank’s analyses and decisions must be gradual and flexible, permanently aligned with developments in the national and international economy. We can no longer rely almost exclusively on rigid economic models and forecasts resulting from such calculations.

The central bank’s decisions to address the inflationary phenomenon are currently taken in a general context of negative real interest rates. I am of the opinion that a steeper and faster decision on monetary policy interest may destabilize the transmission mechanism and even many sides of the national economy, making the task of achieving certain inflation targets in the medium term increasingly difficult. In the face of often unpredictable shocks on the supply side, monetary policy should remain calm, but with careful attention to the context. Let’s not forget that we still have a residual problem to take into account, namely that we have still only partially recovered from the effects of the pandemic, which seems to have “fallen in love with us” and does not want to leave us any time soon. And this situation keeps the central bank on constant alert. Sometimes we tend to overlook the fact that inflation targets are to be achieved over a medium-term period and mistakenly call for their immediate achievement. It is no less true that we cannot keep inflationary expectations firmly anchored in all circumstances and under all circumstances. A change that foreshadows a major and immediate impact with destabilising effects on these expectations requires a prompt and convincing response from the central bank. In fact, there are many sources of risk that require attention and appropriate decisions. Just to mention a few:

  • Continuing disorderly asset price adjustments (systemic risk)
  • The inflationary phenomenon, which reduces the purchasing power of the population and puts pressure on the financial results of firms, including their ability to borrow or service debt
  • High interest rates reduce the prospects for economic growth and business development; it is true, however, that for some banks there are some positive sides to the phenomenon
  • Public and private debt on the rise
  • High cost of refinancing
  • Climate change
  • Cyber risk
  • Chasing speculative gains
  • Declining productive investment

It is well known that real interest rates are set as the difference between nominal interest rates and inflation expectations (and not taking into account the current level of inflation) and, in this period, on both variables the levels are rising and, as is normal, markets expect monetary policy to lead to a moderate increase in interest rates in the economy. However, under current domestic and international conditions, forward guidance in monetary policy has its limits. The Central Bank tries, through various channels of communication, to explain to the population and the market the domestic and international changes that are having an effect and that will determine a certain course of monetary policy. The persistence of inflation, its upward trend, together with policy decisions to increase wages or pensions (the policy of achieving social balances) are elements that determine a certain trend and frequency of monetary policy decisions. Insufficiently calibrated fiscal policy and a deterioration in macroeconomic fundamentals call for a readjustment of interest rates. Depositors and investors are entitled to more substantial compensation. I am referring to bank deposits, but also to sovereign financing.

After the previous period characterised by low, even negative, interest rates, the central bank has no easy task in deciding to change the direction of the cycle without ruling out vulnerabilities. However, some major changes in monetary policy have been made rather quickly in a complex environment characterised by declining purchasing power of the population, declining labour productivity and competitiveness, amplified by major geopolitical risks. Everyone expects the central bank to be overburdened and over-involved in coming up with solutions to address dysfunctions in the economy and to mitigate associated risks in order to maintain and strengthen financial stability. The current financial difficulties require the central bank to take monetary policy measures that under normal circumstances should focus mainly on protecting the purchasing power of the population in the fight against inflation. The current juncture, characterised by risks that may lead to higher inflation, calls for more frequent monetary policy decisions, primarily to raise the specific interest rate.

There are views that higher inflation “dilutes” the value of the debt stock. Consumption falls with rising prices and reduced purchasing power of the population and negative real interest rates remain high. Income indexation policies can offset some of the negative effects of rising inflation, but those who will suffer as inflation rises are financial investors with low interest maturities outstanding. How can we talk about financial investments and savings (necessary in a normal economy) if they are subject to significant “taxes” on a certain trend of inflation and interest rates? Low-income earners prefer cash, while a large group of high-income earners seek substantial and immediate gains from speculative transactions. The tasks of a central bank remain complex in such a challenging climate.

The central bank’s mandate on price stability does not imply a direct link between monetary policy interest and prices. The transmission mechanism is complex, involving the financial system, firms, consumers and public entities and authorities. A central bank tries to strike an efficient and effective balance between keeping inflation expectations anchored and the realities of the financial sector and the ability of the national economy to adjust to the upward shift in interest rates. Policies to reduce inflation and inflationary expectations by taking decisions to raise monetary policy interest rates are essential elements that characterise and demonstrate the independent status of a central bank.

A few references to commercial banks, important partners of the central bank and the government in the implementation of programmes and plans to achieve and strengthen sustainable macro stabilisation and development.

Commercial banks are now well capitalised and manage to make significant profits even in the challenging and complex conditions of these years. At EU level, more than €300 billion of funding is needed annually for transition and structural change, and Romania is no exception. We need productive cooperation between the private sector (banks and capital markets) and the public sector. Banks are called upon to find solutions to increase the allocation of bank balance sheets to the current transformational challenges of digitisation and the green economy. The strengthening of these efforts will be even more evident if there is a deepening of the collaboration between banks and capital market players (in this way private capital held by firms and households can be productively attracted and channelled). Digital transformation and resilience protects the national economy by implementing solutions that reduce the risks associated with digital access to financial services for citizens and businesses. This increases confidence in the financial infrastructure and its security and strengthens financial stability. The digitisation strategy in the financial sector is vital, enhancing the capabilities of banking and capital market institutions to increase the efficiency and sustainability of attracting and channelling financial flows while increasing financial inclusion. It is necessary to achieve a sustainable balance between all sides of the banking business, a balance that takes into account the interests and protection of all stakeholders (I will just mention bank interest rates on both sides, support for viable businesses, involvement in financing productive projects of national interest or support for efforts to attract European funds).

I would like to conclude by referring to two issues that are or will be affecting the financial market and the national economy, generating potential risks and costs at public and private level:

  • The Romanian banking sector is characterized by a significant share of banks with total or majority foreign capital (subsidiaries). In recent years, at the European meetings I have attended (including a very recent one), a situation that I personally publicly anticipated has begun to re-emerge in the debate. These are in-depth studies and analyses that conclude that contractual commitments between parent banks and subsidiaries in other countries are not sufficiently effective and will be enforced poorly or not at all during crises. Such a situation significantly reduces the protection that host countries should enjoy. There seems to be a growing trend towards a decision at EU level that subsidiaries should be converted into branches, which would substantially change the status and cross-border involvement of a foreign parent bank.
  • The case of cross-border financial investment: some countries maintain restrictions and regulations that contradict bilateral double taxation arrangements. The problem becomes more complicated when paying dividends or interest on deposits. Their payment procedures provide for a higher percentage to be withheld at source, exceeding the agreed level of taxation under the double taxation agreement. For example: the double taxation agreement provides for a 5% tax rate; the tax authorities in the paying country retain 27.5% of the dividends in a first stage. Next, the investor will have to go through an arduous and complex road to recover the 22.5% difference (documentation, involvement of the bank holding the transactions in custody, as well as the tax authorities in the beneficiary’s country). At best, the difference is recovered one year after the actual payment of dividends or interest. There is a growing demand at European level to remove such a situation which hampers or discourages cross-border financial investment.
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Academia Oamenilor de Știință din România este continuatorul și unicul legatar al Academiei de Știinte din România (1935 – 1948) și al Asociației Oamenilor de Știință din România înființată prin HCM nr. 1012/30 mai 1956, care în 1996 și-a schimbat titulatura în Academia Oamenilor de Știință din România. În anul 2007 a fost adoptată Legea nr. 31-15 ianuarie 2007 privind reorganizarea și funcţionarea AOSR. Printre membrii de onoare ai ASR s-au numărat următorii laureați ai premiului Nobel (conform Buletinului nr 11 din 1943 al ASR): Louis de Broglie, Jean Perrin (fizicieni francezi), Max Born, Werner-Karl Heisenberg (fizicieni germani), Paul Sabatier (chimist francez), Hans Fischer , Friedrich Bergius (chimisti germani), Paul Karrer (chimist elveţian) şi George Emil Palade (medic român ), membru al AOSR. Conform evaluării instituționale Scimago/ ELSEVIER , bazată pe vizibilitatea științifică internațională a membrilor săi, AOSR ocupă locul 22/Romania și 775/lume în clasamentul instituțiilor de cercetare și învățământ superior.