Romania on the brink

Politics - August 7, 2023

Romania is on the brink of default. At least that is what the current coalition government of social democrats and liberals in Bucharest says in the preamble to a yet-to-be-adopted piece of legislation that has already been given a name: the “emergency austerity ordinance”. 

In their explanatory memorandum, the current government justifies the new administrative and fiscal “reforms” on the grounds that there is no more money in the budget and that there is a risk that Brussels will “turn off the tap” on European funds. Unfortunately, however, Romania has been on the brink of the same precipice for the last three decades, and no prime minister or finance minister has ever given a satisfactory explanation either for the measures taken or for the situation that has arisen. At first, they all cited the disastrous ‘legacy’, and more recently that ‘so recommends the IMF’ or ‘so demands the European Commission’.

Romania risks penalties from the European Commission

The ordinance of PSD Prime Minister Marcel Ciolacu, discussed in recent weeks, which has been leaked in the Romanian press, comes exactly 13 years after another resounding “reform” by the then Democratic government in Romania led by long-serving President (Democrat and later Liberal Democrat) Traian Băsescu. Although hundreds of thousands of people working in the budget sector in 2010 were humiliated with 25% pay cuts, and unemployment reached record levels as a result of tax measures (including VAT increases, for example) that the private sector was subjected to, all leading to a significant drop in consumption, the main problems – as we can see today – were not solved. The “Hole” in the state budget – which the current Romanian Prime Minister is still talking about today – has only increased, after the short-term “savings” made. The budgeters got their money back in the courts, the VAT was cut back. And Romania continues to roll over huge debts that probably not even the grandchildren of the current generation running the country will be able to pay.

The Ciolacu government’s draft Emergency Austerity Ordinance would see the abolition of 200,000 administrative positions, the disappearance of some positions and the merger of some public institutions. Other savings and fiscal measures would target the entire budgetary system, namely its salary system, by capping or eliminating bonuses, a re-taxation of certain facilities (for example holiday vouchers), but these measures have not been confirmed by the holder of the position of Ministry of Finance, who claims that the version of the ordinance is not final and has so far refused to comment on these. 

For Prime Minister Marcel Ciolacu, it is the first “real reform of the budgetary system” and, without it, Romania is risking penalties from the European Commission.

“There are more than 50 measures (…) they were also discussed within the coalition. In fact, and in law, in my view, we are talking about the first real reform of the budgetary system. It is the first time that a Romanian government has taken such an approach. (…) There are many measures that are being taken and I would have liked them to have been taken earlier, since there were clear elements that it is very unlikely that we will meet the deficit target for this year (…) we are talking about stability in Romania, we are not talking about a recession, we are simply talking about things that we have taken on”, Marcel Ciolacu said recently.

According to the government document in the preamble of the austerity GEO, the “hole” in the state budget in the first six months of 2023 is 37 billion lei [Romanian currency], which corresponds to a budget deficit at the end of June of 2.32% of GDP.

Thus, according to government specialists’ estimates, at the current pace, by the end of the year Romania will have a budget deficit of 6.84% of GDP, which exceeds the European Commission’s requirements and thus exposes Romania to the risk that its representatives will cut European funds.

Considering the difficult financial situation of Romania according to the budget implementation account, in which as of 30.06.2023 the budget deficit was recorded at 2.32% of GDP, i.e. the amount of approximately 37 billion lei in public expenditure higher than the evolution of public revenues collected to the general consolidated budget;

Taking into account the fact that according to the budget implementation account, the achieved revenues of the general consolidated budget amounted to 242.7 billion lei [Romanian currency] while the recorded expenditures of the general consolidated budget amounted to 279.9 billion lei [Romanian currency], resulting in a budget deficit of 37 billion lei [Romanian currency] with a share in GDP of 2.32% and the commitment to reduce the budget deficit in relation to the European Commission was 4.4 of GDP in 2023, so that from 2024 the budget deficit target will be 3% of GDP.

Whereas from the forecast of the budget deficit until the end of 2024, in the absence of fiscal-budgetary measures both for the efficient management of budget revenues and for the efficient use of funds allocated to finance public expenditure, the projected level of the budget deficit is about 6.84% of GDP, which in absolute value represents 109.44 billion lei [Romanian currency] with immediate consequences on the increase in the cost of financing the budget deficit but also on the funds allocated for investment under the Cohesion Policy with an allocated budget of 46 billion euro and on the funds allocated under the National Recovery and Resilience Plan with an allocated budget of 29.33 billion euro;

As the budget deficit forecast until the end of 2024 of 6.84% of GDP is not in line with the commitment to the European Commission that the budget deficit level should be 4.4% of GDP, the Commission can therefore implement the provisions of the Regulation for the Recovery and Resilience Mechanism as well as the specific Regulation for the Cohesion Policy according to which measures can be taken to suspend the allocation of European funds or even reduce the funds allocated to Romania under both the Cohesion Policy and the Recovery and Resilience Mechanism;

Given that the national strategic priorities are determined by the implementation of the volume of investments allocated from European funds both through the Cohesion Policy for road infrastructure, rail infrastructure, education infrastructure, health infrastructure but also the implementation through the National Recovery and Resilience Plan of the reforms on special pensions, reforms on the general pension system, the single wage reform but also the reform of the tax system and the concomitant implementation of public investment projects in transport infrastructure, health infrastructure, education infrastructure and the implementation of energy efficiency measures;

Whereas from the situation described above, in order to solve the problem of budget deficit but also to avoid the risk of suspending of funds allocated through the NRRP and Cohesion Policy or increase in the cost of financing for refinancing public debt and financing the budget deficit, measures are needed that have the overall objective of fiscal-budgetary consolidation of Romania through efficient management of public revenue but also for the efficient use of resources allocated to finance public expenditure, including measures to tackle tax evasion but also for the efficient management of the heritage and mineral and natural resources owned by the Romanian State;

Since the above-mentioned problems concern Romania’s public and strategic interest in ensuring the sustainability of public finances, the management of European funds and constitute an extraordinary situation that cannot be postponed, immediate measures must be adopted by means of an emergency ordinance, justifies the austerity plan.

In 2021, the same austerity prime minister accused PNL of wanting to repeat the 2010 schematics in vain

Financial crises, budget holes and possible austerity measures have been talked about since 2020, but Romanians, like the rest of humanity, hoped that, after the end of the pandemic, the economic crisis would pass sooner or later. The author of today’s austerity ordinance, in opposition in 2021, criticized the then liberal government – now coalition partners – for possible wage cuts.

“Mrs. Turcan (editor’s note: the PNL Minister of Labor, Raluca Turcan) made these cuts in 2010, when she was in the PDL. She was not the Labor Minister. She was an MP and she voted for the 25% cut. The calculations will come tomorrow (…) and you will see that the cuts will reach 25%. They don’t know how to do anything else. They don’t know how to balance economy, they don’t know how to create income, how to create consumption and how to make investments,” Marcel Ciolacu said in April 2021, in a broadcast on the national TV station in Bucharest.

At the time, he was also advancing an economic theory as a lesson and accusing the then Minister of Finance of not using Romania’s loans efficiently (the same minister who was accused of not repaying the loans he had drawn in his personal name while studying abroad).

“You have to create income. Where is the 100 billion that Cîțu (Finance Minister Florin Cîțu) borrowed? I asked him 100 times. He never answers. If he doesn’t create income, where does he get the money? If he has frozen everything, there is no more consumption, where is the income coming from? If you don’t have investments…(…) You haven’t started any new investment,” the social-democrat leader said.

Previous governments didn’t know what to do with international loans

Also in 2021, the same Social Democrat leader spoke of a “wage freeze” at a time when Romania’s public debt was approaching 50% of GDP. 

Marcel Ciolacu, like all opposition parties in pre-election moments, also raised the issue of the country’s public debt, describing the situation as a “widespread robbery”, referring to the legislation which stipulates that if the public debt exceeds 50% of GDP, the government is obliged to take measures, including “freezing salaries”. Ironically, Romania’s public debt has remained at the threatening level of almost half of GDP for two years now. According to Eurostat data, Romania recorded a debt of 49% of GDP in the first quarter of 2023, compared to a level of 47.3% of GDP in the previous three months and 48.3% in the first three months of 2022. It is in the second half of Europe, among the countries that recorded increases last year. 

But, as economists quoted by Free Europe point out, it’s not the figures that need to worry.

“Things have to be looked at differently for rich and less rich countries. Because if you look at the public debt of the US or the UK, it is comparatively much higher than that of Romania. But those two countries can always meet the payments. In the case of Romania, we see that the public debt is increasing because we don’t have the capacity to pay our maturing debts and then we roll them over and inflate them,” said a source quoted by Free Europe.

Remember (and conclude) 2010: the worst year for the labor market

In 2010 – the time of the most famous “reform” of the Romanian budget system – Romania and Hungary were the countries in Central and Eastern Europe with the largest borrowings from international institutions, €20 billion each, followed by Ukraine with €11.7 billion and Latvia with €7.5 billion. However, since then, these debts have increased through other loans taken out on more or less advantageous terms, with much of the money going to the functioning of the state instead of investment, a fact that has even been recognized by the governments that have been in power in Romania for the last three decades. 

According to economic analysts 2010 was the “worst year for the labor market”. It was a year in which unemployment reached a record high, 260,000 employees disappeared from the economy at the fastest pace of private sector layoffs and a quarter of employees – those in the budget system – lost 25% of their salaries. At the same time, the government led by liberal-democrat Prime Minister Emil Boc raised the VAT rate from 19% to 24% in a shock decision that took the business world by surprise. The unemployment rate in March 2010 reached its highest level since 2003 – almost 8.4% – when more than 765,000 unemployed people were registered with the employment agencies. It was only in September 2018, nine years on, that unemployment fell to 3.4% and the number of unemployed people fell to less than 300,000.

2010 was also the second year in which the private sector displayed massive layoffs, with 4.1 million employees left in the economy at the end of the year, more than 260,000 fewer than the previous year. On top of that, the economy officially surpassed its pre-2008 crisis level in terms of employment only in May 2017.