In the fall, the German-Romanian Chamber of Commerce reported a weakening desire for investment, gloomy economic expectations and employment prospects, as well as complaints about the poor political framework conditions. Since then, the situation in the largest economy in Southeast Europe has worsened even further. The government has already presented a large-scale austerity program to parliament, but there are serious doubts that it will be implemented, writes Andreas Mim in the “Frankfurter Allgemeine Zeitung“ (FAZ).
Decline in confidence
Surveys at the beginning of the year showed that another decline in the confidence of the 19 million Romanian consumers was registered, production decreased as in the previous two years, only inflation and unemployment are increasing, the German publication reports. Analysts estimate that growth in 2024 was below one percent of GDP. At the same time, political confusion was caused by the postponement of the canceled presidential elections after alleged Russian interference via social media, as well as the rightward turn in the parliamentary elections in December.
Romania's budget deficit for 2024 exceeded 8.7 percent of GDP, not only exceeding the three percent threshold allowed in the EU, but even exceeding it almost threefold. This indicator is far beyond the optimistic financial plans of the government, which initially promised a deficit of 5 percent, the FACS points out. The German publication emphasizes that Romania's budget deficit of 8.7 percent is the highest among all countries in the EU. Public debts amount to 50 percent of GDP. The maximum debt limit set for the Community is 60 percent, but even here the Romanian indicator remains among the highest in Eastern Europe.
A worrying signal for investors
For this reason, rating agencies such as Fitch and Standard & Poor's lowered their assessments of the country at the end of last year, and this is a worrying signal especially for institutional investors, writes FACS. The new government, which has largely remained unchanged, assured the EU that within seven years it will reduce debts below three percent. Seven are planned for this year, after which they will fall even further. Experts from Standard & Poor's, however, are skeptical and predict that if additional measures are not taken, the deficit will not fall below six percent of GDP before 2028“.
The Romanian Fiscal Council even doubts that the deficit will fall to 7% this year – its members, who are independent experts, expect a minus of 7.7 percent. And the government's projected growth of 2.5 percent will not lead to a sufficiently high increase in revenues, including because tax rates in Romania are among the lowest in Europe.
“Additional measures are needed“, economist Ciprian Dascalu also told the FACS. According to him, after the presidential elections, the government will probably try other fiscal measures to achieve a balance between revenues and expenditures, while supporting economic growth.
Savings rate
As the FACS notes, the Central Bank currently maintains the key interest rates unchanged at 6.5 percent. It seems to focus less on inflation than on the government's fiscal policy. Finance Minister Barna Tancoş is seeking to consolidate the budget by freezing civil servants' salaries and pensions, cutting the budgets of the presidency, parliament and some ministries, cutting subsidies and raising taxes for companies, and distributing 90 percent of profits to state-owned companies.
According to the unions, the austerity plan also includes measures that are detrimental to education in Romania. “The fact that Romania ranks second after countries like Uganda, Zambia and Benin in the share of GDP spent on education should make the government think seriously”, they say.
Gábor Hunya, a Romania expert at the Vienna Institute for International Economic Studies, is more skeptical. He told the FACE that Romania's recent history is an example of “inconsistent adherence to fiscal rules” and highlights the main political risks associated with the fragile parliamentary support for the new coalition government in Bucharest and the looming rightward turn in the presidential elections - in an atmosphere of sentiment that is increasingly critical of the EU and NATO.