“This is a moment for Europe and Romania to unlock sources of growth internally,” EBRD Chief Economist Beata Javorcik on the economic challenges facing Romania
<p>EBRD Chief Economist Beata Javorcik, present in Bucharest on February 5, 2025 to discuss the 2024-2025 Transition Report for Romania, told Romania Insider that the global and regional economic problems, such as high energy prices, economic slowdown in Germany and US tariffs, should create an imperative for change in Europe and Romania. </p>
<p>The European Bank for Reconstruction and Development was established in 1991 to help Central and Eastern European countries transition from communist-era economies. In 2024, it invested EUR 707 million in 44 projects across Romania. 83% of the money went to the private sector, with a particular goal of encouraging Romania’s green transition. </p>
<p>EBRD Chief Economist Beata Javorcik, who holds a Statutory Professorship in Economics at Oxford University, sits on the Bank’s Executive Committee and advises the President and other senior members of the management team on economic issues of strategic or operational relevance to the EBRD regions. She is also responsible for macroeconomic forecasting.</p>
<p>The EBRD official was in Bucharest on February 5, 2025, to present the 2024-2025 Transition Report for Romania. The document outlines the main challenges facing the economy, as well as possible trajectories and necessary reforms. According to the report, GDP growth decelerated despite strong real wage growth and consumption. The public deficit rose, while traditional economic motors like the construction and IT sectors, along with the industry, slowed significantly. </p>
<p>The report also touches on pension reform, the more difficult disinflationary path of Romania compared to regional peers, and developing infrastructure projects. According to the EBRD, Romania should create a more efficient, fair and transparent tax system and administration aimed at increasing fiscal revenues and controlling spending. Meanwhile, the efficient implementation of the Recovery and Resilience facility (RRP or PNRR) is facing accumulated delays. </p>
<p>Romania Insider sat down with EBRD Chief Economist Javorcik for more insight on possible pathways out of Romania’s financial hurdles. </p>
<p><strong>Romania Insider: What are EBRD’s estimates regarding growth in Romania and how does it measure up against other countries in the region?</strong></p>
<p><strong>Beata Javorcik</strong>: In our September forecasts, we were expecting growth in Romania to be 2.6% this year, though this figure may be revised down when we release our new forecast later this month. It's important to keep the regional context in mind. The last three years have been very challenging for Europe. Europe has faced high energy costs -- the price of natural gas in Europe is four times as high as in the US. And if you believe the futures markets and projections done by other organizations like the IMF, in 2025 we are likely to see an increase in prices, even though the gap with the US will close somewhat. Still, a substantial gap will remain even at the end of this decade. The higher energy costs in Europe are eroding European competitiveness. This has translated into weakness of the German economy, which is seeing some de-industrialization. Germany is a very important export market for Romania with 20% of Romanian exports being sent there. Germany is also an important export market for other Eastern European countries. Thus, the weakness of the Germany economy translates into slower growth in Eastern Europe. In the Romanian context, this means lower demand in, for instance, for exports of IT services. </p>
<p><strong>What are the main external factors impacting economic growth in Romania? Is it the war in Ukraine, the US tariffs on the EU?</strong></p>
<p>Aside from high energy costs and German economic slowdown, there is a threat of American tariffs affecting European exports. The US is the largest market for the EU, and about a fifth of German car exports go to the US. If these tariffs are introduced, they are going to hit the German economy hard and will in turn affect the growth prospects of Eastern Europe. So at the moment the situation is not rosy. Romania is also facing the additional challenge of twin deficits, namely a substantial budget deficit, and substantial current account deficit. Growth in the last few years has been fueled by private consumption, to a large extent driven by increases in wages. As this wage trajectory normalizes, this is also going to affect growth. This is a moment for Europe to actually focus on its internal reforms and look at sources of growth internally. And this is a moment for Romania to deepen structural reforms, to do more to unlock sources of growth internally.</p>
<p><strong>Despite strong wage growth and consumption, Romania’s economic growth has slowed significantly, with key sectors like construction and IT experiencing downturns. How do we reverse the trend?</strong></p>
<p>There is no magic bullet, but the difficult economic situation tends to focus minds and create an imperative for change. The Draghi report has started this process by being a wake-up call for Europe. Everybody knew that Europe may be falling behind the US in terms of productivity and innovation, but nobody saw all the facts put together in one place and presented by someone as respected as Mario Draghi. The Draghi report has shaken up the European establishment and made the situation difficult to ignore, and it has started a discussion in European capitals about what to do. </p>
<p>The headwinds Romania is facing should focus the minds of Romanian policymakers. Some things that need to be done are obvious - better predictability of regulations, improvements to the business climate, deeper implementation of the single market rules. In our last Transition Report, when we looked at what factors help countries export services, one of the drivers that emerged was openness of the sector to trade and FDI. Liberalization of the services industry is what exposes firms to competition and allows them to improve themselves and become more competitive.</p>
<p>The RRF funding can also help. What is special about European financing is that it is not just money. It is very difficult for any government to invest in something that bears fruit long-term, in 5-10 years, because every government wants to show something to the electorate before the next election. The beauty of the RRF funding is that it ties the hands of governments and forces them to invest into foundations for long-term growth. The RRF gives governments the political feasibility, the political space, to invest in something that's long term. This is a unique opportunity, a commitment device that allows for investing funds into future growth. It is not trivial to do so in aging societies, as those we see in the region. The electorate is becoming older, and we know that older people tend to vote more frequently than young people. And older voters may be interested more in redistribution, because they care about what's happening today, not in 10 years, especially if their children have emigrated. The RRF solves this problem so it is beneficial in the long-term for the country and for the EU as whole. </p>
<p>Reforms are difficult to implement for any government, even if they are beneficial for the country as a whole, because they create winners and losers and those who lose tend to be more vocal. Therefore, reforms always require spending political capital. The experience of Eastern European EU member states clearly illustrates this. These countries introduced a lot of reforms up till the point of their EU accession as they were forced to do so in order to join the EU. But once that happened, their enthusiasm for reform evaporated. If there exists a commitment device, like the RRF, that governments can use to do things that are good in the long term, it's very wise to utilize it.</p>
<p><strong>Fiscal challenges remain a major concern, with Romania’s planned budget deficit still above 7% of GDP and a recent downgrade in credit outlook. How do you view the government’s fiscal consolidation efforts, and what key tax and spending reforms would you recommend to ensure stability?</strong></p>
<p>As far as I understand the situation, the ratio of revenues and spending over GDP in Romania is one of the lowest in Europe. In that sense, the issue is not the volume, but the imbalance between the revenues and the spending. If one wants to improve the fiscal balance, it is prudent to make adjustments on both sides. These adjustments are never easy because cutting spending is always very unpopular politically. However, the excessive deficit procedure that Romania is under allows the government to explain that there is very serious external pressure that requires adjustment, and this pressure can serve as a commitment device. </p>
<p>Governments are always under pressure to help industries that find themselves in a difficult situation. But fiscal assistance should be thought about as something that builds up long term competitiveness, rather than something that is designed to help a sector through a temporary downturn.</p>
<p><strong>Given Romania’s political volatility and delays in implementing the Recovery and Resilience Plan (RRP), how concerned are you about the country’s ability to meet EU deadlines? </strong></p>
<p>The RRP is a window of opportunity for Romania, and I think it's incredibly important for the country to take advantage of this opportunity. There should be a lot of public pressure on the authorities to utilize these funds. Again, there is no magic solution here. Taking advantage of the RRP is not easy. There are rules to be complied with, and it requires political will to do so. I can only hope that the authorities will take advantage of it.</p>
<p><strong>Do the upcoming presidential elections feature among the risks taken into consideration by investors?</strong></p>
<p>Any instability creates uncertainty, and uncertainty is bad for investment. It discourages investment. Of course, we need to keep things in perspective. There is a lot of uncertainty at the global level. But having more turbulence at the national level is not helpful.</p>
<p><strong>Do you think that Romania is dependent on the regional context? Is it the master of its own destiny, economically speaking, or is it dependent on Germany and bigger economies around it?</strong></p>
<p>Nobody is an island. We live in an age where the global value chain span, not only continents, but the globe. What gives you resilience is not focusing on being tied to one national market but diversification, buying from multiple markets and selling to multiple markets. If you are reliant on just the Romanian market, then you are very vulnerable. But if your main market is just Germany, then you are also very much tied to the business cycle of the German economy. Diversification is a way of insuring yourself against the risk of a downturn in Germany. But such  diversification does not come for free because entering many export markets is very costly. </p>
<p>We looked at the question of how vulnerable countries in the region are, for instance, to US tariffs. Romania is not among the most vulnerable countries because it has a much more diversified economy than Slovakia, which relies very heavily on the automotive sector. So yes, there are risks, but they are not insurmountable.</p>
<p><em><a href="mailto:radu@romania-insider.com">radu@romania-insider.com</a></em></p>
<p><em>(Photo source: Ksenia Yakustidi on LinkedIn)</em></p>