Romania’s economy under scrutiny by the European Commission
The European Commission has published in-depth economic reviews for six member states, including Romania.
Corina Cristea, 26.03.2024, 14:00
Romania is among the six states for which the European Commission published in-depth reviews on Monday, the aim being to assess whether the respective states are facing macroeconomic imbalances in the context of the European Semester. The other states are Cyprus, the Netherlands, Slovakia, Spain and Sweden, which are part of the group of 12 member states selected in the Alert Mechanism Report 2024. Based on a set of indicators, the report was adopted last November in the framework of the autumn package of the European Semester – the EU framework for the coordination and supervision of economic and social policies. The other six in-depth reports, for France, Germany, Greece, Hungary, Italy and Portugal, will be published in the coming weeks.
As for Romania, the in-depth review shows that it continues to face vulnerabilities related to the accounts of public finances and the external balance. “Large public and current account deficits, as well as the high inflation rate, which are all above pre-pandemic levels, make the economy potentially vulnerable to shocks. There was some progress in narrowing the current account deficit in 2023, mainly on the back of monetary policy tightening and weaker private consumption. However, if the policies remain unchanged, the risks related to the external position are to remain high in the coming years, the European Commission warned. The document states that pursuing a credible fiscal consolidation strategy is the key priority of the policies aimed at mitigating the risks to the stability of the economy. This strategy will require the full implementation of the fiscal-structural reforms included in the National Recovery and Resilience Plan, especially those aimed at a structural increase in government revenues and a much stricter budget execution than in recent years.
The Commission believes that Romania’s macroeconomic vulnerabilities have expanded following the pandemic, in a context in which an extremely solid growth was recorded. The strong post-pandemic recovery in the economic activity, supported by the easing of the monetary policy and financial conditions, as well as the supportive fiscal stance led to a GDP growth of over 4% in both 2021 and 2022, higher than Romania’s potential growth rate. Inflation averaged 12% in 2022 and the current account deficit continued to grow to over 9% of the GDP, reflecting the energy price shock. Despite the extremely solid economic expansion and rising government revenues, the public deficit remained high at 6.3% of the GDP in 2022, down only slightly from 7.2% in 2021, following the rapid advance of government spending. So far, the review also shows, Romania has not faced difficulties in covering its financing needs, and its foreign exchange reserves seem generally adequate, covering almost 5 months of imports and more than 100% of the short- term external debt at the end of 2023. (LS)
