In early January 2015, I published an article about the economic and political outlook for the year in Romania, incorporating the tumultuous regional and European context at that time.
The article that I stumbled upon and revised today outlined some key challenges for Romania and the global economy in 2015:
- Regional and Global Turmoil: The Ukrainian crisis and Russia’s involvement, coupled with mild Western sanctions, create instability. Oil prices will be crucial in shaping the year.
- Romanian Security: The Deveselu anti-missile base will boost Romania’s security amidst Russia’s influence in Eastern Europe.
- EU Instability: Greece’s potential exit from the Eurozone, political unrest, and tensions between older and newer EU members could impact Romania.
- Romania’s Challenges: Accession to the Schengen Area seems unlikely, and relations with major EU members need improvement.
- Economic Outlook: Modest GDP growth (above 2%), wage increases, outsourcing potential, and challenges in the banking and energy sectors are expected. The auto and construction sectors may grow, while sectors like insurance, construction and tourism show promise.
Looking back, almost after ten years, I realize that things haven’t changed much, or at least, not for the better.
The Ukrainian crisis, prompted by Russia’s annexation of Crimea, turned into a real war, with Russia utterly attacking the entire territory of Ukraine, a war which has been lingering for two years and a half and which had turned the world upside down from all perspectives, political, geopolitical and mainly economic, throwing Europe into a deep, unprecedented crisis.
With Romania in the vicinity of the first long-term armed conflict on the European soil since the WWII, things have been on the ropes for us, too, with escalating prices due to the Ukrainian refugees’ influxes and the energy challenges. In terms of security, the Deveselu anti-missile base did boost Romania’s security, and prompted further boosting of NATO’s eastern flank on our territory.
In terms of EU, the 2015’s biggest challenge, Greece, did not leave Eurozone nor the EU, as feared. On the contrary, due to some mitigating factors like Germany’s help and the Greeks’ screeching, by selling some islands and some port key points, rolling up their sleeves and getting to work after putting their finance in order somehow and roaring engines on tourism, Greece sort of recovered, getting in line.
The surprise on the EU matters came from farther west in the summer of 2016 with the exit of UK from the European Union, the high-sounding Brexit, which dragged Europe into another crisis, with effects for many years.
And most of all, amid his turmoil in the past 4 years, when we have been seriously shaken by an unprecedented pandemic and a real, conventional war in the side of EU and NATO, Europe appears to be heading towards a recession, as its largest economies, Germany and France, grapple with internal political and economic challenges, all intensified by the far-right skyrocketing in many other European states.
As Europe grapples with the risk of a looming recession, its two largest economies—Germany and France—are at the center of attention, battling internal political and economic crises. Recent data highlights a significant slowdown in both countries’ business activity, suggesting that the economic challenges faced by these nations are deepening.
According to reports by CNBC, the business activity in the manufacturing and services sectors of both Germany and France declined more sharply than expected in September. These industries represent the backbone of Europe’s economic engine, and their underperformance is setting off alarm bells across the continent.
Germany’s economic troubles are far from new. Once a symbol of European growth, driven by its powerful export-oriented economy, the country has been teetering on the brink of recession for over a year. Recent PMI data has further fueled concerns that Germany is facing a technical recession. Economists had already revised down their growth expectations for the German economy, with predictions from the Bundesbank suggesting the economy would grow by just 0.3% in 2024. Meanwhile, the European Commission’s spring forecast was even more pessimistic, predicting a mere 0.1% growth for Germany in 2024.
France, Europe’s second-largest economy, has also been hit hard by political and economic uncertainty. After months of political gridlock following inconclusive elections earlier this year, the country has recently formed a new government under Prime Minister Michel Barnier. However, Barnier, a seasoned conservative and former Brexit negotiator, faces a daunting task. He has inherited a “poisoned chalice” in the form of fiscal challenges that require immediate attention.
France’s political landscape remains volatile, with the far-right National Rally (RN), led by Jordan Bardella and Marine Le Pen, posing a significant threat.
During this period of political uncertainty, it is unlikely that any major reforms will take place, further weakening France’s economic outlook. The growing influence of the far-right also represents a significant concern in Germany, where the Alternative for Germany (AfD) party has gained ground in recent elections. Rising immigration, integration challenges, and a deepening economic recession have fueled public discontent, providing fertile ground for the AfD’s populist agenda.
The AfD’s growing popularity has raised alarm bells across Europe, with some analysts warning that Germany’s political landscape could be shifting toward the far-right. If the AfD continues to gain ground, it could have significant implications for the future of Germany’s leadership and its policies on issues such as immigration, European integration, and fiscal discipline.
While Germany and France struggle with their respective challenges, the broader European economy is also showing signs of strain. The eurozone as a whole saw business activity decline in September, marking the first contraction in seven months. The region is grappling with a combination of factors, including slowing global demand, inflationary pressures, and geopolitical tensions stemming from the war in Ukraine.
As for Romania’s challenges, the risk of recession has increased substantially in Romania, as well, for 2025.
The figures don’t look great in Bucharest either, starting with an economic growth of only 0.7% in the first half of 2024, coupled with an unhealthy increase in consumption and followed by a decline in key industries vital to Romania, such as the tertiary sector and IT. On top of that, we are in the midst of the whirlwind of an election year, paved by the ruling PSD-PNL coalition with numerous electoral handouts, unsustainable pension increases, social aid, political instability, tax amnesties and corruption scandals pulled out of the hat in a style reminiscent of political infighting.
Adrian Codirlașu, Vice President of CFA Romania, summarized: “I believe we have an overheated consumption in Romania, and we will experience a base effect. It will no longer grow at the same pace. The fiscal impulse will be close to zero, if not slightly negative due to certain tax increases. The EU economy is stagnating. We might decelerate into negative growth. The risk of recession has substantially increased in Romania for next year.”
What drove this small growth this year? Consumption, which increased by over 9%. What helped maintain the level was public investment in infrastructure. Looking at construction, residential projects have dropped by over 20%, but there was a 9% increase in the public sector,” Codirlașu explained.
Aside from these two factors, he noted that everything else is in decline. “The IT sector has turned negative, as have services and high-frequency corporate transactions,” said the Vice President of CFA Romania.
And this whole pre-election rollercoaster could explode at the beginning of 2025 with tax hikes, although the current government vehemently denies it. But how would they cut the branch they’re sitting on right before elections? 2025 is expected to be a painful year from a fiscal perspective, with significant spending cuts and higher taxes, as union leaders are also warning.
“The increase in spending due to the deficit will lead to significant rises in interest expenses in the coming years, especially since today we are paying over 600 million euros in interest each month—the equivalent of what Romania earned from selling Petrom. The way the budget adjustment has been made reveals two things: the 2024 budget was poorly and unrealistically planned, with the budget deficit nearly doubling compared to the same period in 2023—71 billion lei in 2024 versus 38 billion lei in the first seven months of 2023. Without this adjustment, many institutions would have run out of money for salaries.
The way this adjustment was handled shows that, fiscally speaking, 2025 will be a tough year, with significant spending cuts and higher taxes and duties. The reckoning will definitely come. The question is, who will pay for these measures, and how severe will it be?” said Dumitru Costin, President of the National Trade Union Bloc (BNS).
As for the EU matters or Schengen accession, Romania’s issues remain the same. Poor EU fund absorption and impossibility after ten years, of becoming a fully-fledged member of Schengen area.
According to some government sources, Romania risks losing 1 billion euros, for all unfulfilled milestones, from the National Resilience and Recovery Plan funds, of which approximately 500 million euros risk being lost due to the appointment of incompatible persons to the management of state energy companies. So, the government, however, prefers to lose a few hundred million euros rather than change incompatible bosses from state-owned companies.
The European Commission has raised concerns about the appointments of individuals to the boards of several companies, including Hidroelectrica, Nuclearelectrica, Romgaz, and Transelectrica, citing conflicts of interest and a lack of transparency in the selection processes. One specific example of incompatibility involves the appointment of individuals who are part of the nomination and remuneration committee to lead these state-owned enterprises. If these incompatible individuals were dismissed, the compensation amounts they would receive would be significantly lower—around €5-6 million—compared to the hundreds of millions of euros that Romania stands to lose. However, due to strong political backing for these appointments, there is a reluctance to terminate the problematic contracts.
Regarding Schengen and Romania’s admission, including its land borders—not just air and rail borders—Austria has once again patted us on the back today on the eve of JHA council in Brussels. The Minister of the Interior of Austria, Gerhard Karner, declared on Thursday, before the meeting with his EU counterparts, that the time has not yet come for the full admission of Romania and Bulgaria to the Schengen area, following a year of delays and denials.
In conclusion, while awaiting the results of the presidential and parliamentary elections in Romania this November and December, as well as those in the U.S. in November, and keeping an eye on the political, economic, and immigration developments in Europe, and hoping that Schengen will still exist in 2025, we can only remain vigilant, as there is no time for relaxing amid dark clouds on the horizon.
Excellent article.
My takeaway: Grexit never happened! Both parties had too much to loose. Romania is more simple and can move faster than Greece. 1) Just absorb all the EU funds and build the infrastructure 2) Boycott all Austrian products and services. Its all about the money in the Calvinist sphere. Get Moldova in Romania now!