COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Romania in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy
Date: 2021-06-02
Institutions: European Commission, Secretariat-General
Subjects: EU employment policy, European Semester, Romania, coronavirus disease, economic recovery, epidemic, fiscal policy, investment policy, macroeconomics, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 2.6.2021  SWD(2021) 411 final  COMMISSION STAFF WORKING DOCUMENT In-Depth Review for Romania                  in accordance with Article 5 of Regulation (EU) No 1176/2011 on the prevention and correction of macroeconomic imbalances  Accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE, THE COMMITTEE OF THE REGIONS AND THE EUROPEAN INVESTMENT BANK  Economic policy coordination in 2021: overcoming COVID-19, supporting the recovery and modernising our economy  {COM(2021) 500 final} - {SWD(2021) 401 final} - {SWD(2021) 402 final} - {SWD(2021) 403 final} - {SWD(2021) 404 final} - {SWD(2021) 405 final} - {SWD(2021) 406 final} - {SWD(2021) 407 final} - {SWD(2021) 408 final} - {SWD(2021) 409 final} - {SWD(2021) 410 final} - {SWD(2021) 412 final}  
 
 
CONTENTS 

Executive summary 

1.  Assessment of Macroeconomic Imbalances 

2.  Thematic Issue: External Position 

3.  Thematic Issue: Competitiveness 

LIST OF TABLES 

Table 1.1: 

Assessment of Macroeconomic Imbalances Matrix - Romania 

Table 1.2: 

Selected economic and financial indicators, Romania 

Table 2.1: 

Selected external sector indicators, Romania 

Table 3.1: 

Selected cost competitiveness indicators, Romania 

Table 3.2: 

Selected trade performance indicators, Romania 

LIST OF GRAPHS 

Graph 2.1: 

Thematic Graphs: External position 

Graph 3.1: 

Thematic Graphs: Competitiveness 

1 

2 

9 

14 

6 

8 

13 

17 

17 

12 

16 

 
 
 
 
 
 
 
EXECUTIVE SUMMARY 

The  2021  Alert  Mechanism  Report  concluded  that  an  in-depth  review  should  be  undertaken  for 
Romania  to  examine  further  the  persistence  of  imbalances  or  their  unwinding.  In  February  2020, 
under  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic  Imbalances  Procedure,  the 
Commission  identified  “macroeconomic  imbalances”  in  Romania.  These  imbalances  related  to  risks  of 
cost competitiveness losses, a deteriorating external position and a widening current account deficit, in a 
context of expansionary fiscal policy and an unpredictable business environment. The analysis shows that 
these vulnerabilities remain. It should be noted that the context of the assessment of vulnerabilities in this 
year’s in-depth review (IDR) for Romania is markedly different from last year. Also, the evolution of the 
COVID-19 pandemic, the strength of the recovery, and possible structural implications of the crisis are all 
still surrounded by high  uncertainty, requiring caution in the assessment. In general, policy action over 
the past year focused on cushioning the impact of the COVID-19 shock and facilitating the recovery. This 
has  added  to  indebtedness  but  should  support  adjustment  in  the  medium-term.  Looking  forward,  the 
Recovery  and  Resilience  Plan  provides  an  opportunity  to  address  imbalances,  investment  and  reforms 
needs.  

Main observations and findings of this IDR analysis are: 

  This IDR is informed by the 2021 spring forecast, which expects a recovery in economic activity 
in Romania with the easing of the COVID-19 crisis. After the steep drop of 3.9% in 2020, real GDP 
is  projected  to  increase  by  5.1%  this  year  and  4.9%  next  year,  allowing  the  economy  to  recover  its 
pre-pandemic level already in 2021.  

  The external position remains weak. The current account deficit deteriorated  marginally to 5% of 
GDP in 2020, and is forecast to remain close to that elevated level in 2021 and 2022. The negative net 
international investment position (NIIP) worsened somewhat to -47% of GDP in 2020 and is projected 
to slightly worsen again this year and next. The composition of the NIIP is favourable, as it consists 
mostly of foreign direct investment. Yet net external debt has increased more recently. 

  The fiscal position has continued to deteriorate and accounts for a significant part of the large 
external financing needs. The fiscal stance was already clearly expansionary in the years of marked 
economic growth before the COVID-19 pandemic. The government deficit increased in 2020 to 9.2% 
of GDP but it is forecast to improve this year and next, largely on account of the economic recovery 
and reflecting also some reining in of spending. The government plans to bring the deficit below 3% 
of GDP by 2024. Government debt is still contained at some 47% of GDP in 2020 but is expected to 
increase until at least 2022, and a significant share of it is expected to continue to be financed from 
abroad and in foreign currency.  

  Cost  competitiveness  pressures  seem  to  be  dissipating.  Those  pressures  originated  mostly  from 
double-digit  wage  growth  in  the  pre-COVID-19-crisis  years  of  strong  economic  growth  and  of  low 
and  falling  unemployment.  Unit  labour  costs  still  grew  markedly  in  2020,  reflecting  the  impact  of 
reduced productivity against a backdrop of a drop in output. However, unit labour costs are forecast to 
grow markedly less in 2021 and 2022 than in the years before the COVID-19 crisis. That reflects an 
upsurge in productivity on the back of the recovery in activity and a moderation in wage growth that 
started  in  2020  and  that  is  getting  more  visible.  Other  competitiveness  measures  also  suggest  that 
further losses may occur in 2021 and 2022 but are likely to be small.  

  The  banking  sector  remains  well  capitalised,  liquid  and  profitable  but  some  challenges  going 
forward  cannot  be  excluded,  while  legislative  unpredictability  persists.  Private  sector  debts  are 
very  contained,  but  part  of  those  debts,  especially  on  the  corporate  side,  is  denominated  in  foreign 
currency, which makes debt service dependent also of the evolution of the domestic currency. Non-
performing  loans  decreased  slightly  in  2020  from  already  moderate  levels  but  may  increase  once 
measures  to  support  corporates  and  households  in  light  of  the  COVID-19  crisis  are  phased  out. 
Threats to financial stability and investment from past legislative initiatives have abated, but overall 
legislative unpredictability persists. 

1 

 
1.  ASSESSMENT OF MACROECONOMIC IMBALANCES 

Introduction  

In  February  2020,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalances Procedure, the Commission identified “macroeconomic imbalances” in Romania. These 
imbalances related to risks of cost competitiveness losses, a deteriorating external position and a widening 
current  account  deficit,  in  a  context  of  expansionary  fiscal  policy  and  an  unpredictable  business 
environment. The 2021 Alert Mechanism Report published in November 2020 concluded that a new in-
depth review (IDR) should be undertaken for Romania with a view to assess the persistence or unwinding 
of imbalances.  

The  context  of  the  assessment  of  vulnerabilities  this  year  is  markedly  different  from  last  year's 
IDRs, which took place before the COVID-19 pandemic. The evolution of the pandemic, the strength 
of the recovery, and possible structural implications of the crisis are still surrounded by high uncertainty 
requiring caution in the assessment. Policy action over the past year focused on cushioning the impact of 
the COVID-19 shock and on facilitating the recovery. While this supports adjustment in the medium-term 
through  stronger  fundamentals,  it  also  has  added  to  indebtedness.  Follow-up  to  country-specific 
recommendations  from  2019  and  2020,  including  those  that  are  MIP-relevant,  is  taking  place  in  the 
context of the assessment of the Recovery and Resilience Plans (RRPs). The analysis of policies in the 
present  report  was  finalised  before  the  formal  submission  of  RRPs  and  does  not  draw  on  information 
included  in  RRPs.  It  is  therefore  without  prejudice  to  the  Commission’s  assessment  of  RRPs,  which  is 
ongoing at the time of publication of this report. 

The assessment follows a similar structure as the IDRs that were included in Country Reports in 
recent  annual  cycles.  This  chapter  presents  the  main  findings  for  the  assessment  of  imbalances,  also 
summarised in the MIP assessment matrix. The assessment is backed by selected thematic chapters that 
look more at length at the external position and competitiveness developments. Spillovers and systemic 
cross-border  implications  of  imbalances  are  also  taken  into  account.  In  addition,  also  assessments  of 
structural issues made in previous IDRs and in the context of fiscal assessments are considered if relevant.  

Macroeconomic context  

In 2020, the recession in Romania was milder than in most other EU economies. GDP contracted by 
3.9% in real terms, with private consumption collapsing during the spring lockdown and external demand 
shocks and supply chain disruptions hurting exports. The strict lockdown measures introduced in the first 
half of the year to contain the COVID-19 pandemic were particularly damaging for consumer spending, 
the economy’s main growth driver in recent years, which for the year as a whole declined by less than in 
most other countries. Investment, by contrast, made a significant contribution to GDP, due to the strong 
performance  of  construction  activity  through  the  year.  A  smaller  decline  in  imports  than  in  exports 
resulted  in  a  further  deterioration  of  the  trade  balance,  and  the  current  account  deficit  also  worsened. 
Despite  the  milder  recession  and  a  moderately  sized  emergency  support  package,  the  budget  deficit 
deteriorated significantly. The government deficit increased to 9.2% of GDP in 2020 from 4.4% of GDP 
in  2019.  Much  of  this  deterioration  was  driven  by  pre-existing  expansionary  measures,  especially 
increases in pensions (by 15% as of September 2019 and by a further 14% as  of September 2020). The 
fiscal situation was inevitably affected also by the combined impact of the economic downturn and of the 
measures  to  tackle  the  COVID-19  pandemic  and  its  economic  and  social  consequences  (including 
employment  support  schemes,  support  to  the  health  sector  and  some  tax  incentives).  The  Commission 
Spring  2021  forecast  expects  the  fiscal  deficit  to  improve  slightly  to  8%  of  GDP  in  2021  and  7.1%  of 
GDP in 2022. 

The economy is expected to grow above its 2019 levels already in 2021. Real GDP growth is forecast 
to be  around 5%  in both 2021 and 2022,  which  means that economic activity is expected to exceed its 
pre-COVID-19  level  in  the  current  year.  Private  consumption  is  expected  to  recover  as  the  vaccination 

2 

 
1. Assessment of Macroeconomic Imbalances 

roll-out progresses and social distancing measures are gradually lifted. The phasing-in of projects under 
the RRP is set to lend new impetus to investment growth. After a sharp contraction in 2020, exports are 
expected to rebound in 2021, supported by the gradual recovery of global trade, while higher consumer 
spending should spur import growth. Overall, the contribution of net exports to growth over the forecast 
period is set to remain negative. The current account deficit is expected to decline slightly in both 2021 
and 2022. In 2020, policy  measures to limit job losses  helped containing the  rise in the unemployment 
rate to only 5% from 3.9% in 2019. Unemployment is projected to slightly increase in 2021 as headcount 
employment  is  likely  to  be  almost  stagnant  while  the  labour  force  is  growing,  while  in  2022,  the 
unemployment rate is expected to decline on the back of a rise in employment. Nominal wage growth is 
projected to be relatively steady over the  forecast  horizon,  but clearly lower than the double-digit rates 
seen in recent years. 

Imbalances and their gravity  

Romania's current account deficit has been large and widened continuously since the middle of the 
past decade. The current account deficit reached 4.7% of GDP in 2019 and increased to 5% of GDP in 
2020 (figures based on national accounts). Romania’s current account deficit therefore continues to be the 
one of the highest in the EU and significantly worse than fundamentals-based benchmarks, which suggest 
a small surplus. This evolution was mainly the result of an increasing deficit in the trade in goods, spurred 
by a consumer boom in times of high GDP growth over the past half decade. That higher demand partly 
leaked  into  higher  imports,  leading  to  the  large  current  account  deficits.  The  financing  of  that  growing 
current  account  deficit  through  the  net  income  balance  (notably  flows  linked  to  FDI)  and  the  capital 
account has declined markedly in recent years and debt financing has become more relevant. At the same 
time, after almost a decade of uninterrupted improvement, the net international investment position (NIIP) 
started  deteriorating  in  2020  reaching  -47.3%  of  GDP  at  the  end  of  2020,  which  is  worse  than  what 
fundamentals-based measures would have predicted and close to prudential levels. Past improvements in 
the NIIP were mainly due to very strong nominal GDP growth more than offsetting the growing current 
account deficits.  

Continuously high fiscal deficits have worsened Romania's external position. For a number of years 
already before the outbreak of the  COVID-19 crisis, the  government run expansionary fiscal policies in 
times  of  strong  GDP  growth,  leading  to  high  government  deficits  that  had  to  be  increasingly  financed 
from abroad. Those expansionary policies contributed also to the high demand and in that way reinforced 
the  consumer  spending  boom  and  the  worsening  of  the  current  account.  The  external  debt  of  the 
government increased from almost 18% of GDP at the end of 2019 to 26% of GDP at the end of 2020. 
While the bulk of it consists of long-term loans and debt securities, the financing of a high debt stock is a 
potential  source  of  risk  that  deserves  monitoring,  also  in  light  of  Romania’s  comparatively  high 
government bond yields.  

The  pre-COVID-19  years  were  marked  by  very  strong  unit  labour  cost  growth  that  led  to  cost 
competitiveness  pressures.  Most  of  the  second  half  of  the  last  decade  was  marked  by  strong  wage 
increases significantly outpacing productivity growth and leading to a marked acceleration of unit labour 
costs.  Private  sector  wages  increased  markedly  in  a  very  tight  labour  market,  on  the  back  of  repeated 
minimum wage hikes and possible spillovers from strong public sector wage increases. Those large cost 
competitiveness pressures eased somewhat in 2019 but in 2020 unit labour costs increased again as major 
output  losses  dented  headline  productivity  while  employment  was  broadly  preserved,  also  thanks  to 
government-financed  support  schemes.  Both  public  and  minimum  wage  increases,  which  in  the  past 
fuelled the economy-wide strong  wage increases, moderated in 2020.  In a longer-term perspective non-
cost factors such as skills shortages and the high share of the labour force with low skill levels, the quality 
of 
the  perceived  unpredictability  of  policymaking  have  prevented  non-cost 
competitiveness gains.  

infrastructure  or 

Legislative  unpredictability  remains  a  concern  for  the  business  environment.  The  lack  of  clarity 
about  the  direction  of  certain  public  policies,  if  protracted,  may  heighten  the  perception  of  an  unstable 
business environment and have negative repercussions on the country’s financing costs, whilst relatively 
strong  GDP  growth  rates  have  helped  to  counterbalance  investor’s  concerns.  A  number  of  legislative 
initiatives  in  recent  years  may  have  dented  the  confidence  of  international  investors.  Among  others, 
measures concerning the banking sector, if not subsequently corrected, could have had a negative impact 

3 

1. Assessment of Macroeconomic Imbalances 

on bank profits and balance sheets. Moreover, the uncertainty surrounding the 40% increase of pensions 
which was due to be legislated as of September 2020 and the associated implications for the fiscal outlook 
of  Romania  also  had  potential  repercussions  for  credit  ratings.  Overall,  while  policy-driven  risks  were 
largely  mitigated by subsequent corrective policy action, legislative  unpredictability continues to  weigh 
on the broader business environment, the fiscal outlook, and on the perceptions of investors.  

Evolution, prospects and policy responses 

The current account deficit is expected to remain large. The COVID-19 pandemic seems to be leading 
to  only  marginal  changes  to  the  external  financing  needs  of  Romania,  with  the  current  account  deficit 
increasing  from  4.7%  of  GDP  in  2019  to  5%  of  GDP  in  2020.  According  to  the  Commission’s  2021 
spring  forecast,  the  current  account  deficit  is  expected  to  slightly  decline  to  4.9%  of  GDP  in  2021  and 
4.6% of GDP 2022, as on the one hand the gradual opening  up of the economies in trading partners is 
expected to stimulate exports, while on the other hand the recovery of consumption at home is set to give 
a new impetus to imports. At the same time, the fiscal deficit is projected to start narrowing but to remain 
significant at 8% of GDP in 2021 and 7.1% of GDP in 2022. The persistence of a current account deficit 
of sizeable magnitude could also imply a further increase in the NIIP as a share of GDP in absence of a 
sufficiently strong recovery in nominal GDP growth. 

High  fiscal  deficits  continue  increasing  government  debt  and  external  financing  needs.  The  high 
fiscal  deficit  pre-dating  the  COVID-19  crisis  coupled  with  the  fiscal  effort  required  to  respond  to  the 
health crisis and support the economy have resulted in a sharp increase in the economy’s external debt. 
Government debt has been rising fast even if remaining moderate, from 35.3% of GDP in 2019 to 47.3% 
of  GDP  in  2020  and  is  set  to  further  increase,  reaching  almost  50%  of  GDP  in  2021,  and  adding  to 
external financing needs. Moreover, the latest debt sustainability risk analysis confirms that the country is 
at high risk in the medium-term (1). Government financing needs stood at around 15% of GDP in 2020. 
The budget deficit is projected by the  Commission to decline this year and next,  while the Government 
aims to reduce it to below 3% of GDP by 2024. Government bond yields remain among the highest in the 
region. In spring 2020, and in a context of heightened risk aversion and a flight to safety in international 
financial  markets,  a  sudden  jump  in  government  bond  yields  (to  about  6%)  coupled  with  a  few  failed 
bond  auctions  have  raised  concerns  about  Romania’s  ability  to  finance  its  growing  deficit (2).  The 
National Bank of Romania (NBR) started intervening on secondary markets in April 2020 bringing about 
a relative easing of funding conditions against a backdrop of lowering tensions in international markets 
following the support by major central banks across the world, including the ECB. 

Cost  competitiveness  losses  are  expected  to  halt  in  the  aftermath  of  the  crisis.  In  particular,  unit 
labour costs growth is expected to be subdued in 2021 and 2022. The growth rate of unit labour costs is 
forecast  to  decline  significantly  compared  to  the  pre-crisis  situation,  mainly  as  a  result  of  clearly  more 
moderate wage growth. That reflects also policy actions, namely, a freeze in public sector wages in 2021 
and  minimum  wage  increases  only  in  line  with  inflation.  After  the  decline  in  2020,  productivity  is 
expected  to  recover  in  2021 and  beyond  as  economy  activity  gradually  recovers.  However,  some  long-
term  productivity  growth  bottlenecks  are  expected  to  remain  a  challenge.  Notably,  skills  shortages  in  a 
context of rapid demographic decline, combined with weaknesses in the education and training sector are 
an  important  factor  that  could  limit  future  growth.  The  country  also  continues  to  be  affected  by  the 
limited  availability  of  infrastructure,  both  in  quantitative  and  qualitative  terms,  the  low  innovative 
capacity and a cumbersome business environment. 

The  financial  sector  has  remained  resilient  during  the  COVID-19  pandemic.  The  banking  sector 
remained well capitalised and liquid, with the total banking sector capitalisation increasing from 19.2% in 
March  2020  to  21.4%  in  September  2020. Bank  profitability  declined  somewhat  from  13.8%  in  March 
2020  to  11%  in  September  of  the  same  year  while  remaining  at  comfortable  levels.  The  controversial 

(1)  See  SWD(2021)  530  accompanying  the  Commission  recommendation  for  a  Council  recommendation  under  the  excessive 
deficit procedure and “Debt Sustainability Monitor 2020” available at https://ec.europa.eu/info/publications/debt-sustainability-
monitor-2020_en for detailed methodological aspects. 

(2)  By spring 2020, all the three main rating agencies had revised the outlook to negative, linking the revision of their rating to the 
evolution of the country’s fiscal policy. In mid-April 2021, S&P revised the outlook from negative to stable, as it considered 
that short-term fiscal risks in Romania had abated. Fitch on the other hand maintained the negative outlook citing the country’s 
poor track record of fiscal consolidation as well as the very high budget rigidities.  

4 

                                                           
1. Assessment of Macroeconomic Imbalances 

bank tax introduced by Government Emergency Ordinance 144 at the end of 2018 was abolished in early 
2020.  The  sovereign-bank  nexus  has  remained  significant,  with  local  banks’  government  exposure 
remaining around 20% of their assets, one of the highest shares in the EU. After an increase to 4.4% in 
the second quarter of 2020, non-performing loans (NPLs) declined somewhat to 4.1% in September 2020. 
However,  the  withdrawal  of  government  support  to  companies  and  individuals  in  the  aftermath  of  the 
COVID-19  pandemic  could  result  in  an  increase  of  NPLs  and  would  require  a  solid  insolvency 
framework to effectively deal with them. Private sector debts are very contained, but part of those debts, 
especially  on  the  corporate  side,  are  denominated  in  foreign  currency,  which  makes  debt  service 
dependent also of the evolution of the domestic currency.  

Overall assessment  

Romania’s  external  position  deteriorated  in  the  pandemic  crisis  and  remains  a  vulnerability.  The 
COVID-19 crisis does not seem to have fundamentally changed the external sector dynamics. The current 
account deficit is forecast to remain elevated in 2021 and 2022 and beyond what would be suggested by 
economic fundamentals. The main factor behind the increase of the current account deficit in recent years 
has been the  expansionary  fiscal policy,  stimulating an already  fast growing economy through repeated 
wage  and pension increases.  The recent fiscal consolidation  measures adopted in 2021 are going in the 
right direction, but concrete measures for future years (for example the pension reform) would have to be 
implemented in order to bring the fiscal and current account deficits on a sustainable path. The NIIP is set 
to  deteriorate  further,  under  the  current  forecast  assumptions.  External  financing  of  the  Romanian 
economy has become reliant on debt accumulation. That happens against a backdrop where that external 
borrowing for public and private sector can become more costly in case of exchange rate movements. 

High  government  financing  needs  from  abroad  remain  a  possible  source  of  risk.  A  long-awaited 
fiscal  consolidation  started  with  the  adoption  of  the  2021 budget.  Yet  government  deficits  are  likely  to 
remain high over the next couple of years, implying a rising government debt burden. It is also expect that 
domestic savings will continue to be insufficient to finance those continued high deficits, implying a need 
to borrow significant amounts from abroad and raising Romania’s external debt. While financial market 
tensions  and  external  financing  risks  have  quickly  declined  after  the  COVID-19  crisis  outbreak,  the 
financing  of  a  growing  stock  of  debt  against  the  background  of  Romania’s  relatively  high  and  volatile 
borrowing costs raises concerns and warrants close monitoring.  

Cost  competitiveness  pressures  are  set  to  ease  in  the  aftermath  of  the  COVID-19  crisis.  Going 
forward, unit labour costs are forecast to grow much less compared to years before the COVID-19 crisis 
in 2021 and 2022 (around 1.35% on average over the two years) amid a recovery in labour productivity 
and a moderation in wage growth, well below the double-digit growth of pre-crisis years. The extent to 
which past cost competitiveness losses will affect future export and investment performance remains to 
be seen. Moreover, some non-cost factors hampering competitiveness may remain an issue at least in the 
near term. 

5 

 
Table 1.1: 

Assessment of Macroeconomic Imbalances Matrix - Romania 

1. Assessment of Macroeconomic Imbalances 

Table (continued) 

(Continued on the next page) 

6 

   Gravity of the challenge Evolution and prospects Policy response Imbalances (unsustainable trends, vulnerabilities and associated risks) External balance   The current account deficit has deteriorated from a nearly balanced position in 2014 to 4.7% of GDP in 2019 and 5% of GDP in 2020. The widening deficit has been driven mainly by a worsening trade deficit in goods, which rose from 4.3% of GDP in 2014 to 7.8% in 2019 and 8.6% in 2020. The current account norm suggests a small surplus of 0.3% of GDP for Romania. The current account deficit is largely accounted for by the large government deficit, with private sector net lending mitigating it only partially.  The financing of the  government debt requires external borrowing. Romanian sovereign debt is currently rated at the lowest investment grade by the main rating agencies and borrowing costs are comparatively high, raising concerns about the financing of a growing stock of debt. The current account deficit is expected to remain elevated at 4.9% of GDP in 2021 and 4.6% of GDP in 2022, driven by a persistent trade deficit. The coverage of the growing current account deficit by foreign direct investment and the capital account continued to decline in 2020 and relying more on portfolio investment. NIIP improved gradually over several years to -41% of GDP in Q1-2020 but subsequently started reversing to -47% of GDP in Q4-2020, which is worse than what fundamentals would suggest. Romania’s external debt increased significantly in 2020 to 41.5% of GDP, pushed up mainly by the government sector.  The widening of the current account deficit has been in large part linked to a consumption boom, fostered by a persistently expansionary fiscal policy in times of strong GDP growth, through successive indirect tax cuts and substantial pay increases.  Heavy net borrowing by the government sector, already before the COVID-19 crisis, has indeed been a major contributor to the large and persistent current account deficit. The government deficit has continously deteriorated in recent years reaching 9.2% of GDP in 2020. However, the 2021 budget includes a number of fiscal consolidation measures. The government targets a deficit of around 7% of GDP in 2021 and 3% of GDP by 2024 (cash terms). According to the Commission spring 2021 forecast, the government deficit is expected to decline somewhat to 8% of GDP in 2021 and 7.1% in 2022.  Competitiveness   Between 2016 and 2019, economy-wide unit labour costs grew by an annual average of about 8%. That marked ULC growh was driven by wage growth, with productivity continuing to improve at significant rates. Nominal compensation per employee increased by an average of 13.5% between 2016 and 2019.   Non-cost factors such as skills shortages, deficient infrastructure, particularly in poorer regions, and a cumbersome business environment, fuelled by political and legislative uncertainty and unpredictability continue to negatively impact Romania’s competitiveness.  In 2020, unit labour costs accelerated again by 8.8%, due to the temporay productivity deterioration associated with faling economic activity while keeping employment. As a result, the unit labour costs based real effective exchange rate started appreciating in 2020. In 2021 and 2022, unit labour costs are expected to decelerate visibly, growing only by an average of less than 1½% per year, notably in light of more moderate wage growth compared with the years before the COVID-19 crisis and due to higher labour productivity thanks to the recovery in activity.  Repeated ad-hoc public wage and minimum wage increases drove the strong wage growth in the overall economy until 2020. The gross minimum wage more than doubled between July 2015 and January 2020. However, the increase in the minimum wage adopted in January 2021 was much more limited, with the 3% growth rate broadly in line with inflation. Wages in the public sector grew by more than 75% between 2015 and 2018, significantly outpacing the private sector. However, public-sector wage increases moderated in 2019 and 2020 and were frozen in 2021.   
        
 
 
 
1. Assessment of Macroeconomic Imbalances 

Source: European Commission Services 

7 

   Gravity of the challenge Evolution and prospects Policy response Business environment   The lack of clarity about important legislative changes impacts negatively the business environment and the perception of international investors. In recent years, a number of policy measures contributed to the lack of predictability of policy action. This concerned inter alia measures affecting the banking sector, even if largely reversed afterwards, and measures affecting the growth of government spending.    Legislative unpredictability persisted in 2020. Notably, the reversal of certain fiscally unsustainable measures was marred by delays and uncertainty even as sovereign debt credit rating downgrades were looming and bond yields were under pressure. The banking sector remained well capitalised throughout 2020. Its profitability declined somewhat but remained at comfortable levels. The sovereign-bank nexus remains significant, with local banks’ government exposure remaining around 20% of their assets, one of the highest in the EU. The share of non-performing loans fell to around 4% after several years of strong economic growth and thanks to support measures adopted during the pendemic but are likely to increase again after the expiration of these measures. In January 2020, the government cancelled the most damaging provisions of Government Emergency Ordinance 114/2018 (tax on banks’ assets, higher minimum capital requirements for second pension pillar funds, the possibility to opt out of the second pillar after 5 years - with the exception of the construction sector). In the aftermath of a marked recession, an increase in the number of bankruptcies can be expected. In that context, the ability of the insolvency regime to efficiently deal with that can have implications for the allocation of credit in the economy and ultimately for investment.  Main takeaways  The current account deficit has been large and continued to deteriorate in 2020. The high fiscal deficit has significantly contributed to the current account deficit as well as increased government debt, while borrowing costs have remained relatively high, also when compared with countries in the region. Cost competitiveness pressures accumulated over the pre-COVID-19 crisis in a context of strong GDP growth. Threats to financial stability and investment from past legislative initiatives have abated, but overall legislative unpredictability persists.   The current account deficit is expected to remain elevated in the medium term, reflecting the continued stronger performance of imports as private consumption is expected to recover markedly. The financing of increasing external borrowing needs could become more uncertain, as illustrated by the sudden, but mostly temporary, spike in government bond yields in March 2020, with the government borrowing costs receding afterwards following central bank interventions. Lower wage growth is expected to ease pressure on cost competitiveness. However, non-cost factors could continue to hamper competitiveness. The unwinding of the COVID-19 crisis could see the number of insolvencies increase sharply. That may also affect the banking sector, which is also marked by a significant exposure to the sovereign.  Recent policy action could start addressing the accumulated vulnerabilities for the Romanian economy. After several years of expansionary fiscal policy leading to large and widening government and current account deficits, fiscal consolidation is underway in 2021. The freezing of public sector wages and a very limited increase in the minimum wage in 2021 should help easing cost competitiveness pressures too. Legislative unpredictability continues to weigh on the broader business environment and may impact confidence and risk premia demanded by creditors and international investors.          
 
 
 
 
 
Table 1.2: 

Selected economic and financial indicators, Romania 

1. Assessment of Macroeconomic Imbalances 

(1) NIIP excluding direct investment and portfolio equity shares 
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation 
(4) Defined as the income tax on gross wage earnings plus the employee's social security contributions less universal cash 
benefits, expressed as a percentage of gross wage earnings 
Source: Eurostat and ECB as of 2021-05-05, where available; European Commission for forecast figures (Spring forecast 2021) 

8 

2004-072008-122013-182019202020212022Real GDP (y-o-y)7.60.63.24.1-3.95.14.9Potential growth (y-o-y)6.22.32.44.62.72.62.7Private consumption (y-o-y)12.8-0.16.14.1-5.26.15.9Public consumption (y-o-y)1.91.22.06.92.03.52.4Gross fixed capital formation (y-o-y)23.6-3.71.113.06.85.87.5Exports of goods and services (y-o-y)13.97.010.44.6-9.79.88.7Imports of goods and services (y-o-y) 27.91.310.56.8-5.111.410.1Contribution to GDP growth:Domestic demand (y-o-y)15.2-1.22.66.5-1.35.85.9Inventories (y-o-y)-1.40.00.5-1.2-0.90.40.0Net exports (y-o-y)-6.41.40.0-1.2-1.6-1.1-1.0Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.8-1.1-0.2-0.2-0.5-0.5-0.6Capital accumulation (y-o-y)2.12.30.61.70.90.91.0Total factor productivity (y-o-y)4.81.11.93.12.32.22.3Output gap4.9-0.8-0.11.6-5.3-3.6-2.1Unemployment rate7.36.75.83.95.05.24.8GDP deflator (y-o-y)13.46.13.66.83.83.22.7Harmonised index of consumer prices (HICP, y-o-y)8.15.71.63.92.32.92.7Nominal compensation per employee (y-o-y)15.87.96.310.87.35.86.1Labour productivity (real, person employed, y-o-y)7.82.52.84.2-2.1..Unit labour costs (ULC, whole economy, y-o-y)7.45.24.56.39.60.91.9Real unit labour costs (y-o-y)-5.3-0.80.9-0.45.6-2.2-0.8Real effective exchange rate (ULC, y-o-y)9.1-3.03.01.2...Real effective exchange rate (HICP, y-o-y)8.5-2.90.3-0.21.40.20.4Net savings rate of households (net saving as percentage of net disposable income).......Private credit flow, consolidated (% of GDP)14.03.00.02.0...Private sector debt, consolidated (% of GDP)43.770.756.846.8...of which household debt, consolidated (% of GDP)12.021.417.315.5...of which non-financial corporate debt, consolidated (% of GDP)31.849.339.531.3...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)1.4.10.73.3...Corporations, net lending (+) or net borrowing (-) (% of GDP)-2.78.011.78.98.38.78.9Corporations, gross operating surplus (% of GDP)26.631.730.729.828.028.929.7Households, net lending (+) or net borrowing (-) (% of GDP)...-7.8-2.1-3.8-5.1Deflated house price index (y-o-y)..2.6-1.62.3..Residential investment (% of GDP)2.02.92.42.32.6..Current account balance (% of GDP), balance of payments-10.3-6.3-2.2-4.9-5.2-5.1-4.9Trade balance (% of GDP), balance of payments-11.4-7.5-1.8-4.1-4.5..Terms of trade of goods and services (y-o-y)7.50.90.60.23.40.70.0Capital account balance (% of GDP)0.50.61.81.31.9..Net international investment position (% of GDP)-37.4-61.7-52.9-43.6-47.2..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (1)-5.0-22.2-11.1-4.1-7.5..IIP liabilities excluding non-defaultable instruments (% of GDP) (1)36.157.844.333.742.3..Export performance vs. advanced countries (% change over 5 years)84.169.125.715.826.7..Export market share, goods and services (y-o-y)13.92.34.71.62.71.83.2Net FDI flows (% of GDP)-7.1-2.8-2.2-2.2-0.8..General government balance (% of GDP)-1.7-6.1-2.2-4.4-9.2-8.0-7.1Structural budget balance (% of GDP)..-2.1-4.7-7.5-6.9-6.4General government gross debt (% of GDP)14.827.036.635.347.349.752.7Tax-to-GDP ratio (%) (3)28.827.326.926.826.726.526.4Tax rate for a single person earning the average wage (%) (4).28.528.536.936.9..Tax rate for a single person earning 50% of the average wage (%) (4).25.425.735.135.9..forecast 
    
 
2.  THEMATIC ISSUE: EXTERNAL POSITION 

Output, demand and sectoral net lending/borrowing 

In 2020, the fall in output was somewhat stronger than the decline in aggregate demand, leading to 
a small widening of the already large trade deficit. After a period of fairly aligned output and demand 
between 2013 and 2016, aggregate demand started expanding at considerably faster pace amid a context 
of  fast  economic  growth  and  the  trade  deficit  gradually  widened  over  recent  years  (Graph  2.1(a)). The 
COVID-19  shock  caused  a  contraction  of  both  demand  and  output,  with  the  latter  shrinking  somewhat 
more strongly than the former, leading to a further small increase in the trade deficit in 2020. The fall in 
domestic  demand  was  driven  by  a  decline  in  private  consumption  amounting  to  5.2%. Lower  domestic 
demand led to a decline in imports,  which  was however less pronounced than the drop in exports. The 
trade deficit is forecast to slightly worsen by 2022. 

The fiscal deficit increased strongly in 2020, contributing to the large net external borrowing needs 
of the Romanian economy. The  government deficit reached 9.2% of GDP last  year, pushed up by the 
fiscal  effort  needed  to  fight  the  COVID-19  pandemic  but  also  by  past  legislated  measures  leading  to 
strong expenditure growth. However, Romania’s fiscal position had started deteriorating before 2020, due 
to  an  expansionary  fiscal  policy  unrelated  to  the  COVID-19  crisis,  and  the  2019  budget  deficit  outturn 
amounted to 4.4% of GDP. At the same time, the position of households is estimated to have improved 
somewhat, although it remained negative,  while the estimated net lending of corporations  moved down 
only slightly in 2020. The government’s deficit position  is expected to improve somewhat in 2021 and 
2022. Thus, the fiscal deficit is forecast by the Commission to slightly narrow to 8.0% of GDP in 2021, 
supported  by  expenditure  cuts  and  a  recovery  in  economic  activity,  and  to  improve  further  to  7.1%  of 
GDP in 2022. The budget adopted by the government was built on a deficit of 7.16% of GDP for 2021. 

External flows dynamics 

While the net borrowing position of the Romanian economy recorded a small improvement in 2020, 
the current account and trade balances slightly declined. From the Balance of Payments perspective 
(Graph  2.1(b)),  the  improvement  in  net  borrowing  position  was  brought  about  by  the  higher  capital 
account balance in 2020, as the current account deficit marginally worsened, in accordance with the trade 
balance  developments.  While  the  long-standing  surplus  in  services  trade  (mainly  transport  services, 
computer services, and manufacturing services on physical inputs owned by others) increased by around 
11%,  due  mainly  to  a  significant  reduction  of  the  deficit  in  travel  services  brought  about  by  the  travel 
restrictions, the downward trend in trade in goods deficit continued leading to a marginally larger overall 
trade deficit. Energy prices slightly cushioned the worsening of the trade balance as the deficit in energy 
goods trade improved (3). The surplus of the secondary income balance increased from 0.7% of GDP in 
2019 to 0.9% of GDP in 2020 on the back of a strong increase in EU transfers that more than offset the 
decline in remittances, but was countervailed by a deterioration of the primary income balance. 

The  current  account  balance  remains  well  below  the  levels  explained  by  economic  fundamentals. 
The ‘current account norm’ suggested by the economic fundamentals amounts to a small surplus, while 
considerable  current  account  deficits  have  been  recorded  over  the  last  three  years,  both  in  headline,  as 
well  as  in  cyclically-adjusted  terms  (Table  1) (4).  Out  of  the  non-fundamental  variables  that  affect  the 
current  account,  it  was  mainly  the  negative  contribution  from  the  net  international  investment  position 
(NIIP) that has been keeping the current account below the norm over the last decade.  

(3)  The statistics on international trade in goods show a small deterioration of balance of trade in goods in 2020, driven by a decline 
in  exports  (as  a  share  in  GDP)  that  slightly  exceeded  the  fall  in  imports,  mainly  of  intermediate  goods,  which  is  the  largest 
category of imported goods.  

(4)  Current account norm is the current account balance that can be explained by fundamentals. It is based on the empirical setup 
similar to IMF’s EBA. Fundamentals are slow-moving variables including: demographics, relative income, natural resources, 
manufacturing intensity, and reserve currency status. See Coutinho et al. (2018) "Methodologies for the assessment of current 
account benchmarks", European Economy, Discussion Paper 86/2018, for the description of the methodology. 

9 

 
                                                           
2. Thematic Issue: External Position 

The  coverage  of  the  current  account  balance  by  non-debt  generating  flows  has  been  declining. 
While  in  2017,  foreign  direct  investment  (equity  component)  and  the  capital  account  together  covered 
more than 100% of the current account deficit, this ratio declined to around 73% in both 2019 and 2020. 
Going  forward,  the  current  account  is  forecast  to  marginally  improve  but  remain  nevertheless  elevated 
reflecting both the strong projected economic recovery in trading partners as well as at home. The capital 
account  surplus  is  projected  to  continue  offsetting  around  one-third  of  the  current  account  deficit.  The 
large inflows of EU funds expected in the coming years could help finance the current account deficit.  

In 2020, the net external financing needs were mostly met by increases in the government’s external 
debt liabilities amid the high government financing needs, after years of reliance on foreign direct 
investment.  The  Romanian  economy  has  long  been  receiving  significant  foreign  direct  investment 
(Graph  2.1(c)).  Partly  in  parallel,  especially  during  the  period  between  2013  and  2016,  substantial  net 
debt outflows were recorded, which largely included reduction in external liabilities by the monetary and 
financial  institutions  and  the  central  bank.  This  trend  weakened  by  2019  as  net  debt  inflows  were 
recorded  in  the  later  part  of  the  year,  along  the  still  considerable  direct  investment.  In  2020,  however, 
incurrence  of  portfolio  debt  liabilities  increased  significantly  to  around  6.5%  of  GDP,  mainly  by  the 
government, which more than compensated for a decline in the net direct investment inflows (partly due 
to reduction in inter-company debt liabilities).  

Throughout 2020, the government was able to meet its external financing needs despite increased 
uncertainty right after the COVID-19 shock and temporary financial market tensions. The external 
debt  of  the  general  government  reached  EUR  57.8  billion  in  December  2020,  up  45.6%  from  one  year 
earlier, the bulk of it consisting of long-term debt securities, with external liabilities accounting for 50.9% 
of  the  total  government  debt.  To  cover  the  increasing  financing  needs,  the  government  tapped  foreign 
markets  for  a  total  of  EUR  8.8  billion  and  USD  3.3  billion  last  year.  The  COVID-19  outbreak  was 
followed by external borrowing tensions also for Romania amid higher risk aversion in global financial 
markets  and  capital  flights.  After  the  10-year  yields  on  Romanian  sovereign  bonds  increased  in  March 
2020  to  above  6%,  the  National  Bank  of  Romania  started  intervening  on  secondary  markets.  That 
happened also against a backdrop of lowering tensions in international markets following the support by 
major central banks across the world, including the ECB. Over one third of the debt issued in 2020 was 
used  to  refinance  maturing  external  government  debt.  Funding  conditions  eased  somewhat  after  the 
National  Bank  of  Romania  intervention,  with  yields  at  around  4%  by  the  end  of  June  and  declining 
further to 3.1% towards the end of the year. In 2020, reserve asset flows amounted to 2.6% of GDP. 

Romanian sovereign debt is currently rated at the lowest investment grade with a negative outlook 
by two of the three major rating agencies. By spring 2020 all three major rating agencies had revised 
their outlook from ‘stable’ to ‘negative’, citing concerns about fiscal sustainability and in particular the 
40%  pension  increase  that  was  due  to  take  place  in  September  2020.  However,  downgrade  risk  was 
averted  in  2020  as  pensions  were  increased  by  only  14%  following  the  budget  amendment  adopted  in 
August.  The  government  is  currently  working  on  modifying  the  pension  law.  In  April  2021,  S&P 
improved  the  outlook  for  the  Romanian  sovereign  from  ‘negative’  to  ‘stable’,  while  maintaining  the 
investment grade, on account of a reduction in short-term fiscal risks, following the adoption of the first 
fiscal  consolidation  measures  by  the  government.  Fitch  however  maintained  the  ‘negative’  outlook  on 
account of Romania’s poor track record of fiscal consolidation and high share of rigid expenditure in the 
budget. The general government debt increased from 35.3% of GDP in 2019 to 47.3% of GDP in 2020 
and it is forecast to reach 49.7% of GDP in 2021 and 52.7% of GDP in 2022. Despite the still relatively 
low government debt-to-GDP ratio, Romania faces substantial fiscal sustainability risks in the  short and 
medium term. Moreover, there are risks stemming from the high share of government debt held in foreign 
currency (about 46%) and from the high share held by non-residents (41%). 

Developments in external stock positions 

The negative net international investment position of Romania worsened in 2020, for the first time 
in  seven  years.  After  reaching  a  trough  in  2012  of  nearly  -68%  of  GDP,  the  NIIP  gradually  improved 
afterwards  to  -44%  in  2019  (Graph  2.1(d)).  While  the  economy  as  a  whole  was  a  net  lender  over  the 
2013-2016 period, the NIIP improvement was mainly driven by nominal GDP growth. The importance of 
GDP growth in improving the NIIP became even stronger in recent years, notably after 2016, when the 
Romanian  economy  turned  into  a  clear  net  borrower  from  abroad.  It  was  monetary  and  financial 

10 

2. Thematic Issue: External Position 

institutions and the rest of the private sector which managed to improve their positions the most over this 
period (Graph 2.1(e)). In 2020, the NIIP worsened to  -47.3% of GDP by the end of 2020 driven by the 
declining position of general government, which deteriorated by around 9 percentage points of GDP. The 
decline in the  NIIP during 2020 has almost exclusively been driven by  negative current account  flows, 
while  the  contribution  from  the  nominal  GDP  growth  and  the  valuation  effects  turned  only  slightly 
negative.  The  NIIP  is  now  mildly  lower  than  the  prudential  threshold,  but  considerably  worse  than  the 
‘NIIP norm’, which currently is at -11% of GDP (Table 1). In addition, both the recent and the forecast 
current account balances are considerably below those required to halve the gap to the ‘NIIP norm’ in ten 
years  (Table  1) (5).  Given  the  large  inward  direct  investment  stock,  the  NIIP  excluding  the  non-
defaultable instruments (NENDI) is much more favourable at -7.5% of GDP.  

During 2020, the foreign exchange reserves increased. This holds true both as a share of GDP, from 
slightly less than 17% at the end of 2019 to 19.5% of GDP end of 2020, as well as in terms of months of 
goods and services imports coverage (5.6 months at the end of 2020 versus 4.5 months end of 2019). The 
increase has mainly been driven by reserve assets flows (around 2.6% of GDP), but was also supported by 
higher gold price. Short-term external debt assets exceeded short-term external debt liabilities by 2.9% of 
GDP at the end of 2020 (up from 0.6% end of 2019).  

Relatively high shares of both domestic and external debt assets and liabilities are denominated in 
foreign  currencies.  As  for  the  most  sizeable  positions,  the  share  of  government  debt  denominated  in 
foreign  currency  amounted  to  46%  at  the  end  of  2020 (6),  while  for  bank’s  loan  assets  and  deposit 
liabilities concerning the domestic private sector, it equalled 30% and almost 40%, respectively. As for 
the  external  liabilities,  84.6%  of  external  debt  liabilities  was  denominated  in  foreign  currency  in  2019. 
The nominal effective exchange rate of the Romanian Leu remained rather stable during 2020, which is 
relevant given those exposures to foreign currencies. 

Outlook 

Latest  forecasts  point  to  continuous  large  external  financing  needs  going  forward,  driven  by  the 
significant  net  borrowing  by  the  general  government.  Fiscal  deficits  are  forecast  to  remain  sizeable 
going  forward,  being  estimated  at  8%  of  GDP  in  2021  and  7.1%  of  GDP  in  2022  in  the  Commission 
spring 2021 forecast. On the other hand, the private sector should maintain a positive net lending position, 
thus  partly  attenuating  the  external  financing  needs  of  the  economy.  For  2021,  the  government’s  total 
financing needs are estimated at RON 130.8 billion (7) (EUR 26.8 billion) or around 11% of GDP. The 
government plans to raise funds both on the internal and the external market, with external issuances so 
far in 2021 amounting to EUR 3.5 billion. The next significant debt repayments are due on 11 June 2021 
and 27 October 2021 (each above RON 9 billion, around EUR 2 billion).  

Under currently forecast external flows and GDP growth, the net international investment position 
is set to deteriorate going forward. This is depicted under the baseline  scenario (Graph  2.1(f)), where 
the  NIIP  is  projected  to  decline  to  below  -60%  of  GDP  by  2030. (8)  Alternative  scenarios  presented 
therein  are  based  on  more  optimistic  assumptions,  especially  Scenario  1,  where  the  current  account 
balance is assumed to converge to its norm by 2030 through improvements in the trade balance. Scenario 
2 describes a hypothetical situation in which capital account balance is 1 percentage point of GDP higher 
in  the  period  2021-2026  than  in  the  baseline.  In  parallel,  real  GDP  growth  is  higher  by  0.5  percentage 
point, while the trade balance is lower by only 0.1 percentage point of GDP over the same period.  

(5)  The country-specific prudential benchmark denotes the NIIP level beyond which the probability of an international economic 
and financial crisis becomes higher. The NIIP level explained by fundamentals (‘NIIP norm’) represents the NIIP that would 
result if a country had run its current account in line with fundamentals since 1995. For details see Turrini and Zeugner (2019), 
"Benchmarks for Net International Investment Positions", European Economy, Discussion Paper 097/2019. 
Finance 

data: 
Ministry 
https://www.mfinante.gov.ro/trezor/pagina.html?luna=02&anul=2021&method.arhiva=submit&c=trezordatorieguvernamentala 

(6)  According 

the 

of 

to 

(7)  According to the Ministry of Finance 
(8)  The  baseline  scenario  is  based  on the  Commission  services’  spring  forecast  for 2021  and 2022,  and  on the  DG  ECFIN  t+10 

forecast framework as well as debt sustainability monitor for subsequent years. 

11 

 
                                                           
Graph 2.1: 

Thematic Graphs: External position 

2. Thematic Issue: External Position 

Source: European Commission Services 

12 

60065070075080085090095010000809101112131415161718192021*22*Constant 2015 EUR mn(a) Demand, Output, Trade BalanceTrade balanceAgg. demandOutput (GDP)Source: Ameco-120-100-80-60-40-200204008091011121314151617181920% of GDP(d) Decomposition of NIIP by instrumentDirect investmentPortfolio inv, equityPortfolio inv, debtOther investmentFin derivatives and ESOReserve assetsNENDINIIPNIIP normSource: Eurostat-100-80-60-40-200204013Q113Q314Q114Q315Q115Q316Q116Q317Q117Q318Q118Q319Q119Q320Q120Q3% of GDP(e) Decomposition of NIIP by sectorCentral bank (incl reserves)MFI (excl central bank)Private sectorGeneral governmentPrivate sector incl MFINet int'l investment position (NIIP)Target2 balancesSource: EurostatNote: for the period between 2017Q1 and 2018Q2, and after 2020Q2, separate data for Private sector and MFI is not available.-8-6-4-2024681314151617181920% of GDP(c) Financial FlowsNet errors and omissionsReserve assetsNet debt flows (NENDI excl reserves)Net portfolio investment, equityNet direct investmentNet lending/borrowingSource: Eurostat-70-60-50-40-30-20-100192021*22*23*24*25*26*27*28*29*30*Net IIP, % of GDP(f) NIIP scenariosNet IIP for RO, BaselineNet IIP for RO, Scenario 1Net IIP for RO, Scenario 2Source: ECFIN staff calculations. Scenario 1: trade balance improves after 2022 so that the current account reaches the current account norm in 2030.Scenario 2: higher capital account balance (by 1pp of GDP), real GDP growth (by 0.5pp) and lower trade balance (by 0.1pp) in 2021-2026 than in the baseline. -15-10-5051013141516171819202122% of GDP(b) Current account decompositionGoods, fcstServices, fcstGoods excl energyEnergy balanceServices excl travelTravel balancePrimary inc balanceSecondary inc balanceCurrent account balanceNet lending/borrowingSource: Eurostat and Ameco   
 
Table 2.1: 

Selected external sector indicators, Romania 

2. Thematic Issue: External Position 

(1) NA=National Accounts, BoP=Balance of Payments, CA=Current Account, NENDI= NIIP excluding non-defaultable 
instruments, TB= Trade Balance.  
(1) Flow data refer to national account concept, unless indicated otherwise.  
(2) Cyclically adjusted CA is the CA adjusted for the domestic and foreign output gaps, taking into account trade openness. 
(3) The average CA needed in order to stabilise the NIIP in 20 years is based on T+10 Ecfin projections.  
(4) Current account norm is the current account balance that can be explained by fundamentals. It is based on the 
empirical setup similar to IMF’s EBA. Fundamentals are slow-moving variables including: demographics, relative income, 
natural resources, manufacturing intensity and reserve currency status. See Coutinho et al. (2018) "Methodologies for the 
assessment of current account benchmarks", European Economy, Discussion Paper 86/2018, for the description of the 
methodology.  
(5) The CA or TB needed either to halve the distance to fund. NIIP benchmark, or to reach the prud. NIIP benchmark in 10Y, 
whichever is higher. Based on T+10 Ecfin projections. 
(6) The country-specific prudential benchmark denotes the NIIP level beyond which the probability of an international 
economic and financial crisis becomes higher. The NIIP level explained by fundamentals (‘NIIP norm’) represents the NIIP that 
would result if a country had run its current account in line with fundamentals since 1995. For details see Turrini and Zeugner 
(2019), "Benchmarks for Net International Investment Positions", European Economy, Discussion Paper 097/2019. 

Sources: (a) Eurostat, (b) Ameco, (c) European Commission calculations. 

13 

2003-072008-122013-172018201920202021f2022fFlows (1)Source:CA balance as % of GDP, NA(b)-9.6-6.3-1.1|-4.4-4.7-5.0-4.9-4.6CA balance as % of GDP, BoP(a)-9.5-6.3-1.3|-4.6-4.9-5.2-5.1-4.9Cyclically adj. CA balance as % of GDP (2)(c)-7.8-6.3-1.2|-4.0-4.4-5.3-5.7-5.9CA req. to stabilize NIIP above -35% (3)(c)-3.3-3.2-4.5|-3.4-3.3-3.2-3.3-3.2CA explained by fundamentals (CA norm) (4)(c)-2.1-1.0-0.5|0.10.20.30.30.4Required CA for specific NIIP target (5)(c)-2.3-1.6-2.4|-1.1-1.0-0.7-0.7-0.5Trade bal. G&S, % of GDP, NA(b)-10.7-7.4-1.1|-3.4-4.1-4.5-5.0-5.7Required TB for specific NIIP target (5)(c)-3.8-2.5-3.4|-1.2-0.8-0.10.30.5Capital account bal. as % of GDP, NA(b)0.70.92.4|1.21.51.61.61.7StocksNIIP as % of GDP(a)-37-62-54|-44-44-47-48-48Prudential NIIP/NENDI benchmark (6) (c)-28-33-36|-42-44-44-44-45Fundamentally expl. NIIP benchmark (NIIP norm) (6) (c)-12-13-15|-12-11-11-9-8NENDI as % of GDP(a)-6-22-12|-4-4-7 
 
 
   
 
 
3.  THEMATIC ISSUE: COMPETITIVENESS 

Romania recorded strong labour cost dynamics in the years before the COVID-19 crisis. Nominal 
unit labour costs (ULC) started increasing strongly in 2016 growing by 7.2% in 2016, by 9.5% in 2017 
and 8.3% in 2018 before slowing down somewhat to 6.5% in 2019. This acceleration was driven entirely 
by  compensation  per  employee,  which  increased  by  double  digits  in  nominal  terms  between  2016  and 
2019 (Graph 3.1(a)), while the evolution of productivity was clearly positive but more muted.  

The  main driver of unit labour costs were  marked wage  increases in pre-crisis years. Besides fast 
growing labour demand, low and falling unemployment and shortages of certain skills, government action 
contributed  to  the  strong  wage  increase.  Notably,  public  wages  more  than  doubled  over  the  past  half 
decade and have significantly outpaced wages in the private sector. ULC in the public sector increased on 
average by more than 20% per year between 2016 and 2018 and slowed down to about 10% in 2019 and 
8% in 2020. In addition, the government-set statutory minimum wage has also doubled over the second 
half of last decade and added to the wage pressures. That happened in the context of Romania having one 
of  the  lowest  wage  levels  in  the  EU  and  a  comparatively  low  labour  share  in  national  income.  Yet  the 
evolution  of  wages  was  well  in  excess  of  that  suggested  by  wage  benchmarks  based  on  inflation, 
productivity growth, and the unemployment,  which suggests that wage dynamics may have evolved out 
of sync with fundamentals and put competitiveness at risk (Graph 3.1(b)). (9) 

Since  2016  and  until  the  start  of  the  COVID-19  crisis,  wage  increases  have  outpaced  significant 
productivity gains. Productivity growth in Romania was among the strongest in the EU in recent years, 
albeit productivity increased from a very low level. Labour productivity per person grew on average by 
5.3%  per  year  between  2016  and  2019.  Nevertheless,  these  productivity  gains  were  insufficient  to 
compensate  for  the  strong  wage  increases  and  avoid  ULC  growing  at  marked  paces  for  several  years. 
ULC grew more strongly in areas less exposed to competition from abroad (non-tradables) but increases 
in  more  tradable sectors  were also significant over the  pre-crisis  years. Thus, ULCs in the construction 
sector  grew  on  average  by  more  than  20%  per  year  between  2017  and  2019,  while  ULCs  in  industry 
advanced on average by 6% per year during the same period (Graph 3.1(c)).  

The cost competitiveness pressures were also visible in the evolution of the real effective exchange 
rate. The strong growth of ULCs between 2016 and 2018 was also reflected in a clear tendency towards 
appreciation of various metrics of the real effective exchange rate (REER) (based on ULC, HICP, GDP 
deflator, or exports prices). This appreciation started moderating already in 2019 and continued in 2020 
(Graph 3.1(d)). A mild nominal depreciation of the Romanian Leu mitigated the real appreciations but did 
not prevent them from being significant. 

Export  performance  remained  relatively  strong  in  recent  years.  Romania’s  export  market  share  for 
goods  and  services  increased  by  8.9%  in  2016,  2.8%  in  2017,  and  a  further  3.6%  in  2018  but  slowed 
down  somewhat  to  1.6%  in  2019  (Graph  3.1(e)).  Exports  of  services  continued  to  be  concentrated  on 
transport  and  telecommunications.  In  2020,  as  a  result  of  lockdown  measures  and  demand  and  supply 
chain  disruptions,  exports  of  goods  and  services  declined  by  9.7%  compared  to  2019.  Double-digit 
declines  in  exports  were  recorded  for  mineral  products  and  textiles  while  the  decline  in  exports  of 
machinery and transport equipment was more moderate.  

(9)  The  growth  rate  of  nominal  compensation  per  employee  is  compared  to  two  benchmarks.  Benchmark  1  (Predicted  nominal 
compensation  growth)  reflects  wage  growth  as  predicted  by  developments  in  inflation,  productivity  growth,  and  the 
unemployment  rate.  The  prediction  is  estimated  through  a  panel  regression  over  the  period  1995  to  2018.  Benchmark  2 
(Compensation per employee growth consistent with constant ULC-based REER) reflects external competitiveness. It predicts 
wage growth consistent with a constant value of the REER, computed on the basis of ULC growth. See European Commission 
(2013),  Benchmarks  for  the  assessment  of  wage  developments,  European  Economy,  Occasional  Papers  146,  May  2013,  for 
more details on these benchmarks. 

14 

 
 
                                                           
3. Thematic Issue: Competitiveness 

Economic sectors potentially more exposed to foreign competition have grown less than the rest of 
the  Romanian  economy.  Unlike  in  many  other  Member  States,  sectors  less  exposed  to  potential 
competition  from  abroad  –  both  in  terms  of  exports  as  well  as  import  penetration  in  Romania  –  have 
grown more than the tradable sectors in the last few years (Graph 3.1(f) and Table 2). 

Cost competitiveness pressures eased before the COVID-19 outbreak but ULCs increased again in 
2020. Already in 2019, ULC moderated somewhat, while remaining above those of most Member States. 
In 2020, ULC posted a 8.8% growth, reflecting a robust albeit slower evolution of average compensation 
per employee and the productivity decline caused by labour hoarding amid the recession. In particular, in 
2020, productivity declined by 1.3% y-o-y as a result of the sharp fall in production coupled with more 
contained job losses. As a result, the ULC-deflated REER, which had been subdued in 2019, picked up 
again.  On  the  other  hand,  the  REERs  based  on  inflation,  export  prices  and  GDP  deflator  remained 
subdued in 2020.  

Wage dynamics slowed visibly in 2020 but remained robust. The fall in productivity was not mitigated 
by a similar wage moderation when the COVID-19 crisis set in. Compensation per employee increased by 
7.3% in 2020, compared to nearly 11% in 2019. The minimum wage was increased by about 7% at the 
beginning  of  2020  and  by  a  further  3%  in  January  2021.  Wages  in  the  public  sector  displayed  more 
moderate  growth  in  2020  than  in  earlier  years,  with  compensation  per  employee  advancing  by  8.6%, 
slightly above that of the total economy. Turning to other sectors, after two years of double-digit growth, 
compensation per employee in construction, a sector that remained very dynamic during the COVID-19 
pandemic, increased in 2020 by 4.3%,  while in industry,  Romania’s  main exporting sector, it remained 
slightly below that of the overall economy. Overall, wage developments often react to changing economic 
conditions with a certain lag, which could also have been the case in Romania in context of the COVID-
19 crisis. Moreover, a significant part of pay may have been agreed or set before the crisis outbreak.  

Cost competitiveness pressures are set to moderate in the aftermath of the COVID-19 crisis. In 2021 
and 2022, the projected gradual recovery in economic activity is expected to imply a rebound in headline 
productivity,  which  should  recover  the  losses  of  2020.  Moreover,  wage  growth  has  already  moderated 
visibly and is expected to remain contained this year and next on the back of lower overheating pressures 
in the labour market and the economy in general. The minimum wage was increased in 2021 only in line 
with  inflation  while  public  sector  wages  were  frozen  at  the  level  of  December  2020.  The  authorities 
announced the intention to prolong the freeze of public sector wages also into 2022.  

Unit labour costs are expected to grow only moderately in 2021 and 2022. ULC growth is forecast at 
just below 1% in 2021 and 2% in 2022. This is much less than in previous years, but still higher than in 
many  other  EU  countries  for  which  declines  in  ULCs  are  forecast  over  these  two  years.  Other  cost 
competitiveness  indicators,  such  as  REERs  and  inflation,  suggest  a  similar  pattern.  Overall,  gains  in 
relation to trading partners are not expected this year or next. Export market shares are projected to still 
increase  somewhat  by  a  cumulative  5%  in  2021  and  2022.  However,  the  contribution  of  net  exports  to 
GDP growth is expected to remain negative in both 2021 and 2022.  

Non-cost factors that could potentially affect Romania’s competitiveness negatively have not been 
addressed.  Public  policy  making  remains  relatively  unpredictable,  affecting  the  business  environment, 
together with persistent inefficiencies in the public administration. Skills shortages and the high share of 
the  labour  force  having  only  low  and  very  low  skill  levels,  against  a  background  of  negative 
demographics,  together  with  weaknesses  in  the  education  sector  are  also  important  factors  potentially 
limiting  Romania’s  growth.  The  state  of  rail  and  road  infrastructure  remains  poor  affecting  businesses 
effectiveness  in  moving  goods  across  borders,  limiting  labour  force  mobility  and  aggravating  regional 
disparities. While less pressing during periods of reduced mobility, the poor quality of the infrastructure 
risks  putting  a  strain  on  the  country’s  recovery  as  more  economic  activities  return  to  a  normal 
functioning. In addition, cumbersome administrative procedures for setting up businesses, as well as high 
regulatory  requirements  imposed  on  service  providers,  including  regulated  professions,  impede  further 
market  development.  The  economy’s  low  innovative  capability  is  another  key  factor  limiting 
competitiveness.  

15 

 
Graph 3.1: 

Thematic Graphs: Competitiveness 

3. Thematic Issue: Competitiveness 

Source: European Commission Services 

16 

-10-50510152025060708091011121314151617181920Rate of change y-o-y (%)(e) Export market share, goods and services, nominalContribution to EMS: goodsContribution to EMS: servicesExport market share growth yoySource: Eurostat-100102030405060708020002002200420062008201020122014201620182020Growth rate (%)(b) Wage benchmarksNominal compensation per employeeBenchmark 1: PredictionBenchmark 2: Constant ULC-based REERSource: DG EMPL-20-15-10-505101507080910111213141516171819202122*Rate of change y-o-y (%)(d) Decomposition of rate of change of REER vs IC37NEER IC-42relative HICP (-)REER (HICP) IC-42REER (ULC) IC-37Source: Ameco-20-15-10-50510152008Q309Q310Q311Q312Q313Q314Q315Q316Q317Q318Q319Q320Q3Growth rate y-o-y (%)(f) Real gross value added in tradable and non tradable sectorsReal GVA, tradables, yoy growth rateReal GVA, non-tradables, yoy growth rateSource: Eurostat-20-1001020304050607080Accumulated growth rate (%)  2015-20(c) ULCs growth per sector and their decompositionLabour CompensationInverse Labour Prod.ULCSource: Ameco-20-1001020304005060708091011121314151617181920*21*22*Rate of change y-o-y (%)(a) Decomposition of rate of change of ULC ( inflation, real compensation per employee and productivity)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costSource: Ameco  
 
Table 3.1: 

Selected cost competitiveness indicators, Romania 

3. Thematic Issue: Competitiveness 

Notes: (1) Labour productivity contributes to ULC with a negative sign (not shown in the table): For instance, high productivity 
growth reduces unit labour cost growth. 
(2) Wage benchmarks: DG EMPL provides two benchmarks for the growth rate of nominal compensation per employee. 
Benchmark 1 (Predicted nominal compensation growth) reflects wage growth as predicted by developments in inflation, 
productivity growth, and the unemployment rate. The prediction is estimated through a panel regression. Benchmark 2 
(Compensation growth consistent w. constant ULC-based REER) reflects external competitiveness and is consistent with a 
constant value of the real effective exchange rate (REER), computed on the basis of unit labour costs (ULC).   
Abbreviations: REER_GDP = Real effective exchange rate based on GDP deflator, Performance relative to the rest of 42 
industrial countries; double export weights (2010=100), REER_ULC = Real effective exchange rate based on ULC, Performance 
relative to the rest of 37 industrial countries; double export weights (2010=100), NEER = Nominal effective exchange rate, 
Performance relative to the rest of 42 industrial countries; double export weights (2010=100).    
Source: REER and ULC: AMECO: wage benchmarks: DG EMPL 

Table 3.2: 

Selected trade performance indicators, Romania 

Source: GVA, Exports and imports, Terms of trade: AMECO; EMS growth and trade balance: Eurostat. 

17 

03-0708-1213-1718192021'22'Nominal ULC, yoy % change10.65.23.88.26.39.60.91.9Labour productivity, yoy % change16.92.74.54.44.2-2.14.94.1Inflation (GDP deflator growth), yoy % change15.36.13.16.26.83.83.22.7Real compensation per employee, yoy % change2.31.75.26.43.73.42.53.3Nominal compensation per employee, yoy % change18.07.98.512.910.87.35.86.1Wage benchmark (nominal compensation growth)214.37.15.46.45.5-2.7 -  - Wage benchmark (constant ULC-based REER)28.910.95.97.49.41.1 -  - REER_GDP, yoy % change11.6-2.12.04.02.21.80.80.5REER_ULC, yoy % change8.0-3.02.65.21.2-  -  -  NEER, yoy % change-0.2-5.40.80.7-1.90.4-0.1-0.103-0708-1213-1718192021'22'Export market share (goods and services), yoy % change13.02.36.73.61.62.71.83.2Export market share (goods and services) - volume,  yoy % change4.44.17.81.63.6-1.6-  -  Exports (goods and services), yoy % change23.516.110.210.57.4-8.113.510.9Exports (goods and services) - volume, yoy % change12.87.011.45.34.6-9.79.88.7Trade balance (services), % of GDP3.81.74.34.1 -  -  -  - Trade balance (goods, except energy products), % of GDP-12.6-4.5-4.7-5.9 -  -  -  - Trade balance (energy products), % of GDP-2.8-2.3-1.2-1.6-1.7 p-1.2 p -  - GVA (Tradables), in % of total GVA57.156.957.456.154.653.0- - GVA (Non-tradables without construction), in % of total GVA36.236.336.937.838.739.7- - GVA (Construction), in % of total GVA6.76.85.76.16.77.3- -