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We are closer than we think to an adjustment or to recession, central bank official says

Romanian economy is overloading the engine, as in Formula 1, central bank official says

The country must grow in line with its potential, not as in Formula 1, where the engine cannot be used for more than two races, Lucian Croitoru, adviser to the Governor of the National Bank of Romania (BNR), said on Tuesday during a press conference.

“In order to advance from the penultimate position, in terms of living standard (in the EU – our note), to a higher position, we should accelerate economic growth. You might ask me if it is not high enough. Yes, it is too high and this is the problem.  A country should grow in line with its potential. It can’t do more than this. Do you know for how many times can a Formula 1 engine be used? Not more than two races. It cannot work more. When a country grows its economy far beyond its potential, as Formula 1 cars do, it overpowers the engine,” Croitoru said.

The central bank official said the economy must grow sustainably, and if we grow so much, imbalances accumulate.

“The first condition is to grow sustainably. The unsustainable rise in wages, speeding up consumption and an economic growth of 7% do not mean that we can reduce the gap that separates us from developed countries. If there is an external imbalance, we see a deteriorated current account or it will be reflected in an internal imbalance, as higher inflation. After a period of such thrust of the acceleration on economic growth, both imbalances will coexist,” Croitoru said.

According to him, the average economic growth during 1990-2016 was 1.22%, although we are an emerging country.

“During 1990-2016, because of the pro-cyclical policies, the economy grew at an average rate of 1.22%, while the United States grew at a pace of 1.23% .Where is the trap of these figures? A small and emerging country as Romania should have a higher pace of growth. When you grow up, like when you’re aboard a plane, you pull the handle and climb, at some point you are told that you have fuel to go from 5,000 meters to 10,000 meters or to land safely. A too daring pilot will say he wants to see how it is at 10,000 meters and then to have an uncontrolled fall, instead of coming back from 5,000 metres for a controlled landing,” Croitoru explained.

About Valeriu Lazar