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Reading Between the Lines

Reading Between the Lines

The macroeconomic situation of Romania is a subject of considerable debate inside the country. The important development of the country is, nevertheless, marred by imbalances and underwhelming reforms, constantly raising the specter of outsized impact of crises both internal and external. What follows is a selection of quotes from the Council Recommendation on the 2020 National Reform Programme of Romania and delivering a Council opinion on the 2020 Convergence Programme of Romania. The document was published on May 20th in 2020 and contains interesting tidbits, despite the Brussels language that may lead to readers’ eyes glazing over. 

(2) The Commission’s analysis led it to conclude that Romania is experiencing macroeconomic imbalances. In particular, vulnerabilities are linked to cost-competitiveness and a widening current account deficit in a context of an expansionary fiscal policy and an unpredictable business environment.

(11) Romania is currently in the corrective arm of the Stability and Growth Pact.

This following section is what the Americans would call “the money shot”.

(13) The long-term sustainability of Romania’s public finances was already at risk prior to the COVID-19 outbreak, as a result of high budget deficits and the projected significant rise in ageing costs, in particular pensions. Old-age pensions were increased by 15% in September 2019 and, based on a pension law adopted in summer 2019, are due to increase by 40% in September 2020 and be additionally recalculated upward in September 2021. Pension spending would thus increase substantially over the period 2020 to 2022. Fiscal sustainability risks are further heightened by the impact of the COVID-19 pandemic on economic activity and the fiscal effort required to cushion it. Prior fiscal policy decisions have left Romania with small fiscal buffers to deal with the outcome of the COVID-19 outbreak.

The pension saga is more of a chronicle of a crisis foretold. The combination of populism in electoral seasons and lack of overall vision for the good of the country from one electoral cycle to the next leads to extreme short-termism and an unwillingness to face up to harsh realities.

(18) The pandemic has put the health system under unprecedented pressure. The crisis hit a system characterised by structural weaknesses, such as low spending and unequal access to healthcare. In this context, improving the resilience of the health system and its capacity to respond to shocks represents a key challenge.

They are, of course, preaching to the choir. The pandemic exposed the underlying weakness of Romanian systems of all kinds, not just health.

(24) Reform of the public administration is stalling. There is no effective framework in place for strategic and budgetary planning, which has a knock-on effect on the strategic vision for long-term development of the country, the prioritisation of actions and policy coordination at the central and local level.

(25) Predictability of decision-making remains a major issue. Before the crisis, only around a third of the annual government plan was respected. The number of emergency ordinances passed remained very high, creating uncertainty and likely hampering investment.

This is all very true, though one should note the growing trend worldwide of the use of executive power in governance, such as the uptick of Executive Orders in the US over the past decade.

(8) The Union legislator has already amended the relevant legislative frameworks to allow Member States to mobilise all unused resources from the European Structural and Investment Funds so they can address the exceptional effects of the COVID-19 pandemic. Those amendments will provide additional flexibility, as well as simplified and streamlined procedures. To alleviate cash flow pressures, Member States can also benefit from a 100% co-financing rate from the Union budget in the 2020-2021 accounting year. Romania is encouraged to make full use of those possibilities to help the individuals and sectors most affected by the challenges.

This last bit is very important. A large part of Romania’s inability to absorb EU funding stems from the lethargy of its institutions and administrative processes, which end up overshooting the allocation period for important resources. The government must prioritize attracting these funds with alacrity, through workable and competent projects.

The Commission recommends that Romania take certain actions in 2020 and 2021, regardless of which party will be in power:

(1) Pursue fiscal policies in line with the Council’s recommendation of 3 April 2020, while taking all necessary measures to effectively address the pandemic, sustain the economy and support the ensuing recovery. Avoid the implementation of permanent measures that would endanger fiscal sustainability. Strengthen the resilience of the health system, including in the areas of health workers and medical products, and improve access to health services.

This recommendation in effect warns that the budget deficit needs to go back under 3% of GDP by 2022, irrespective of the other financial obligations of the state, including those pertaining to economic recovery and reform. The implementation of permanent measures endangering fiscal sustainability is a direct allusion to the pension saga.

(2) Provide adequate income replacement and extend social protection measures and access to essential services for all. Mitigate the employment impact of the crisis by developing flexible working arrangements and activation measures. Strengthen skills and digital learning and ensure equal access to education.

This section addresses the extensive inequality in Romania and the consequent vulnerability of large portions of the population. Social protection measures to be extended could include increasing the minimum income. In the long-term, the issue of the division of added value between labor and capital owners, where Romania is very much behind almost all other EU states, must be addressed through systemic reform, not just better social safety nets.

(3) Ensure liquidity support to the economy benefitting businesses and households, particularly small and medium-sized enterprises and the self-employed. Front-load mature public investment projects and promote private investment to foster the economic recovery.

This is another shot across the bow, as it references the tendency to neglect investment in favor of consumption. This has to change.

(4) Improve the quality and effectiveness of public administration and the predictability of decision-making, including through an adequate involvement of social partners.

At first glance, this recommendation is either trivial or bureaucratic cant. However, it references an important reality of the governance apparatus of Romania, which is its lack of cohesion.

Romania is in a vulnerable position due to events outside the scope of its control, but amplified by years of neglect, government indolence and malinvestment. The current situation must provide the necessary wake-up call for Romanian elites to change some of their ways and work towards sustainability and competitiveness.

 

 
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OEconomica No. 1, 2016