From Roaring Economy to Recession, Romania Confronts New Reality

The country used to be one of the most dynamic in the region. Now it’s faced with some of the worst metrics in Europe.Author of the article:You can save this article by registering for free here. Or sign-in if you have an account.(Bloomberg) — It was one of Europe’s fastest growing economies a few years ago, but the fact that Romania is in recession comes as little surprise to Bucharest restaurant owner Adrian Selareanu.Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.To keep afloat, Selareanu, 50, changed suppliers and reduced staff, serving his customers himself alongside his wife. That wasn’t enough, though. After 15 years, he’s closing the doors, tipped over the edge by rising energy bills, higher taxes and an exodus of customers.“People just can’t afford to come to the restaurant anymore and I cannot afford to lower prices without going into loss,” Selareanu said. “I’m a very resilient entrepreneur and I have overcome many difficult periods, including the pandemic, but this time it’s just too much all at once.”Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.Romania was giving Poland a run for its money as the most dynamic economy in Eastern Europe not long ago. Yet the nation is facing a painful reckoning after years of government largesse wrecked its finances, with a war in the Middle East now spooking investors and pushing up energy prices again.In the 27-member European Union over the past two years, Romania sits bottom of multiple rankings. It has the widest trade and budget deficits, the highest inflation rate and steepest borrowing costs along with neighboring Hungary.Its bruised political establishment is flailing to find palatable fixes. A debate last week ahead of a crucial budget vote descended into a trading of barbs between parties in the governing coalition as the unwieldy alliance struggles to agree on necessary spending cuts.Austerity measures have reduced the budget gap, but they helped cause the $400 billion economy to shrink for a second consecutive quarter at the end of last year, the statistical office said on Feb. 13. More details are due on Friday. Romania’s dollar bonds were some of the worst performers among emerging-market peers earlier this week. The yield on securities due in 2053 surged 17 basis points to 6.61% on Wednesday after reaching the lowest in two years.“Romania is extremely vulnerable to external shocks as the cost of funding its budget deficit is the highest in the region,” economists at the Concordia business association, which represents more than 4,000 companies in Romania, said on March 3. “This limits the government’s room to maneuver in supporting investments and economic growth.”Selareanu’s eatery, which is located in a Bucharest suburb and served burgers and pizzas along with local Romanian fare, is one of thousands of consumer-facing businesses that have run aground. In January alone, at least 5,000 companies were closed, suspended or entered insolvency, with most of them being in the consumer service business, according to a study by Sierra Quadrant, a consultancy firm.The declining internal demand is also impacting large international players, such as Carrefour, which was the first foreign supermarket chain to come to Romania after the collapse of the regime of dictator Nicolae Ceausescu.The French retail giant is now selling its Romanian unit after almost 25 years, albeit as part of a broader strategic plan to strengthen its business in higher-performing markets. The Romanian unit reported a net loss of €21 million ($24.4 million) last year. Carrefour declined to comment on the impact of the economic downturn when contacted by Bloomberg.(Sign up to the Eastern Europe Edition newsletter, delivered every Friday.)Romania’s per-capita gross domestic product quadrupled since joining the EU in 2007. Rather than investment in infrastructure and manufacturing, Romania’s boom was driven by consumer spending thanks to government-led wage increases and tax cuts. That’s now changing, according to Finance Minister Alexandru Nazare.The government plans to boost its investments to a record 100 billion lei ($23 billion), Nazare said this week, a 28% increase from last year. Most of it will come from EU funding provided the country can overcome a poor track record and deploy the money before it expires. Romania is also the second-biggest beneficiary of the EU’s new defense spending facility.“For far too long, our growth model has been based on consumption, fueled by ever-increasing external deficits,” Nazare said. “This fiscal model has been the illusion of prosperity, eroding our economic fundamentals. We have chosen to correct this direction, and the correction comes with transition cost.”In the past, politicians used the budget to keep voters happy. But the unexpected surge of the far right, in part with Russian backing, triggered the worst political crisis since the collapse of communism and made global headlines.Now, Prime Minister Ilie Bolojan, who is leading an uneasy coalition made up of four parties with divergent political and economic views, is tasked with bringing down a budget deficit that exceeded 9% of economic output in 2024.The government increased consumer tax and excise duties, helping narrow the budget deficit and even produce a small surplus in January for the first time in seven years. But pushing through more difficult reforms, such as reversing some social handouts and tax cuts, have led to tension both within the electorate and the government. The far right is leading opinion polls.The ruling coalition now has a two-year window to engineer the turnaround and win back the electorate before the next general election in late 2028. Romania has to seize the opportunity to reshape the economy with a “supply-side revolution,” according to Radu Burnete, an adviser to the president. “We no longer have time to debate whether to do administrative reforms or not,” he said.Economists are concerned Romania is caught in what’s known as the middle-income trap: A country with rapid economic development based on cheap workforce that’s struggling to boost competitiveness with higher quality manufacturing.Romania’s flagship export, Renault’s low-cost Dacia car, has managed to weather the decline in the auto industry with growth of 3% in European sales last year. But neither of Renault’s two new affordable electric and hybrid models will be produced at the Mioveni factory in central Romania after the company picked a facility in Turkey instead.“The need for companies in Romania to improve their efficiency in all sectors is more important than ever,” said Ionut Dumitru, chief economist at Raiffeisen and honorary economic adviser to Bolojan, the prime minister. “Consumer oriented businesses and the hospitality industry will not disappear, but entrepreneurs can no longer stay complacent and wait for government-funded stimulus to boost their profits.”Selareanu, the restaurant owner, does have a back-up plan. He’s going back to the construction business he closed a decade ago because, at the time, the restaurant was doing well enough to provide for him and his family. “Let’s see if this sector is a better option now,” he said.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. 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