COMMISSION STAFF WORKING DOCUMENT In-depth review for Romania Accompanying the document 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 2023 European Semester – Spring Package
Date: 2023-05-24
Institutions: European Commission, Secretariat-General
Subjects: European Semester, Romania, competitiveness, economic policy, energy policy, fiscal policy, inflation, macroeconomics, public debt

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.5.2023  SWD(2023) 642 final  COMMISSION STAFF WORKING DOCUMENT In-depth review for Romania Accompanying the document 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 2023 European Semester – Spring Package           {COM(2023) 600 final} - {SWD(2023) 628 final} - {SWD(2023) 629 final} - {SWD(2023) 630 final} - {SWD(2023) 631 final} - {SWD(2023) 632 final} - {SWD(2023) 633 final} - {SWD(2023) 634 final} - {SWD(2023) 635 final} - {SWD(2023) 636 final} - {SWD(2023) 637 final} - {SWD(2023) 638 final} - {SWD(2023) 639 final} - {SWD(2023) 640 final} - {SWD(2023) 641 final} - {SWD(2023) 643 final} - {SWD(2023) 644 final}  
 
 
Romania 

In-Depth Review 2023 

 
 
 
 
 
 
 
 
 
 
 
On  the  basis  of  this  in-depth  review  for  Romania  undertaken  under 
Regulation  (EU)  No  1176/2011  on  the  prevention  and  correction  of 
macroeconomic  imbalances,  the  Commission  has  considered  in  its 
Communication “European Semester – 2023 Spring Package” (COM(2023) 
600 final) that: 

Romania  continues  to  experience  imbalances.  Vulnerabilities  relate  to  external 
accounts,  linked  to  large  government  deficits,  while  overheating  pressures  have 
increased.  The  large  current  account  deficit  worsened  considerably  after  the 
pandemic-induced  recession  and  makes  the  economy  vulnerable  to  external 
funding shocks. The continuation of large current account deficit risks driving the 
NIIP  further  into  negative  territory.  Signs  of  overheating  are  clearly  visible,  with 
core inflation uncomfortably high, wage growth well in double digit territory and a 
relatively low unemployment rate. Cost competitiveness indicators are expected to 
stabilise, but structural issues persist. The exchange rate appears to be above the 
level suggested by fundamentals and remains heavily managed. The government 
deficit has been large for several years and has accounted for much of the excess 
of  demand  and  of  the  subsequent  external  deficits;  even  if  improving,  the 
government  deficit  is  forecast  to  remain  significant  this  year  and  next.  The 
narrowing  of  the  government  deficit  in  2022  was  mainly  driven  by  marked 
nominal GDP growth, which in turn rests much on overheating domestic demand. 
Risk premia and sovereign borrowing costs are significantly higher than in the pre-
pandemic years. Given the ongoing tightening in global liquidity conditions, it will 
be  important  to  reverse  ongoing  trends.  Going  forward,  fiscal  adjustment  should 
be  the  preferred  way  to  bring  demand  more  in  line  with  supply  and  to  contain 
domestic  and  external  deficits.  Full  implementation  of  tax  and  pension  reforms 
included  in  the  RRP  as  well  as  adherence  to  fiscal  targets  under  the  excessive 
deficit procedure would go a long way in containing current dynamics. 

 
 
 
 
 
 
 
 
 
 
 
 
CONTENTS 

1.  Introduction 

2.  Assessment of macroeconomic vulnerabilities 

3.  Thematic chapter: The external - fiscal nexus in Romania 

LIST OF TABLES 

Selected economic and financial indicators (Part 1), Romania 
Selected economic and financial indicators (Part 2), Romania 

Table 2.1: 
Table 2.2: 
Table 3.1:  Macro and Fiscal projections over 2021-22 vs. outcomes 
Table 3.2: 

Estimates of fiscal and fiscal stance indicators (assuming return to 3 pct deficit in 2024) 

LIST OF GRAPHS 

Graph 2.1:  Selected graphs, Romania 

Graph 2.2:  Components of gross fixed capital formation deflator growth and consumer price inflation 

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5 

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13 
14 
19 
19 

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12 

 
 
 
 
 
 
 
1. 

INTRODUCTION 

In  2022,  over  the  previous  annual  cycle  of  surveillance  under  the  Macroeconomic 
Imbalance  Procedure  (MIP),  the  Commission  identified  “macroeconomic  imbalances”  in 
Romania (1). These imbalances were related to external accounts, linked to large fiscal deficits and 
to  competitiveness  issues that  were  re-emerging.  The  2023  Alert  Mechanism Report  published in 
November  2022  concluded  that  a  new  in-depth  review  (IDR)  should  be  undertaken  for  Romania 
with a view to assess the persistence of imbalances or their unwinding (2). The AMR concluded that 
in  Romania,  concerns  related  to  external  sustainability  and  the  government  deficit  continue 
increasing.  The  current  account  deficit  widened  in  2021  and  2022.  The  government  deficit  has 
improved  and  is  forecast  to  continue  narrowing  but  remains  high.  Nominal  unit  labour  costs  are 
forecast  to  increase,  in  a  context  of  high  inflation,  labour  shortages  and  strong  nominal  wage 
increases, resulting in some competitiveness concerns. 

Growth  remained  robust  in  2022,  driven  by  strong  domestic  demand,  as  restrictions 
unwound and household consumption reflected pent-up demand. Despite headwinds caused 
by the energy price shock and the global monetary tightening, real GDP increased by 4.7% in 2022. 
Domestic demand was the main growth driver, with private consumption increasing by 5.5% and 
total investment 8%. However, some signs of overheating started to emerge during the year: the 
labour market tightened, the unemployment rate reaching a level close to pre-pandemic lows, core 
inflation increased markedly, and imports grew at a very fast pace leading to a further widening of 
the current account deficit. The general government deficit remained elevated, at 6.2% of GDP in 
2022, significantly contributing to the large current account deficit. The economic growth is set to 
be  resilient  in  2023  and  2024,  albeit  slower  than  last  year.  (3)  Activity  should  be  supported  by 
major  investments  and  reforms  included  in  the  recovery  and  resilience  plan  (RRP)  and  other  EU 
funded projects, notably under Cohesion Policy Funds. Moreover, the impact of the energy shock on 
the  economy  is  expected  to  gradually  recede,  supporting  private  consumption,  also  taking  into 
account the extension of the energy prices cap scheme until 2025. Inflation probably peaked at the 
end of 2022 and is expected to gradually decline in the coming two years, while remaining above 
the National  Bank of Romania’s (NBR)  target interval  (2.5% ±1%)  for most of the time. The high 
inflation coupled with skill and labour force shortages are set to keep wage growth at an elevated 
level.  Going  forward,  the  main  risk  comes  from  unexpected  external  shocks  that  could  adversely 
affect the current account balance. 

This  in-depth  review  presents  the  main  findings  of  macroeconomic  vulnerabilities  for 
Romania.  The  assessment  is  backed  by  a  thematic  section  on  the  fiscal-external  nexus. 
Vulnerabilities related to external balances and competitiveness in Romania are also discussed in 

(1)  European Commission (2022), European Semester Spring Package 2022, COM(2022) 600 final. 

(2)  European Commission (2022), Alert Mechanism Report 2023, COM (2022) 381 final. 

(3)  European Commission (2023), European Economic Forecast: Spring 2023, Institutional Paper 200. 

4 

 
                                                 
 
horizontal thematic notes that were already published (4). The MIP assessment matrix is published 
in the 2023 Country Report for Romania (5). 

1. 

Introduction 

(4)  European Commission (2023), Inflation Differentials in Europe and Implications for Competitiveness: Thematic Note to 
Support In-Depth Reviews, European Economy: Institutional Papers, 198. European Commission (2023), External 
Sustainability Analysis: Thematic Note to Support In-Depth Reviews, European Economy: Institutional Papers, 196. 

(5)  European Commission (2023), Country Report Romania 2023, SWD(2023) 623 final. 

5 

                                                 
2.  ASSESSMENT OF MACROECONOMIC 
VULNERABILITIES 

Gravity, evolution and prospects  

There has been a build-up of vulnerabilities in recent years in Romania. After two years of 
robust  growth,  there  are  signs  that  the  Romanian  economy  could  be  in  the  early  stages  of 
overheating.  The  significant  post  pandemic  rebound  in  private  consumption  and  investment, 
favoured by easy monetary and financial conditions until the start of 2022, together with relatively 
supportive  fiscal  policy,  contributed  to  an  absorption  boom  in  Romania,  with  domestic  demand 
growing  faster  than  GDP over  the  past two  years.  The  economy  has  absorbed  most  of  the  slack 
that emerged during the COVID-19 recession and the output gap is closing rapidly, recent estimates 
(Banca  Națională  a  României,  2023)  already indicating  a  positive  output  gap.  The  unemployment 
rate is gradually closing the gap with the pre-pandemic low (5.6% in 2022 vs. 4.9% in 2019). Wage 
growth, especially in the private sector, is almost keeping up with high inflation and is now well in 
double digit territory, consistent with a strong negotiating position of employees in a relatively tight 
labour market. Core inflation reached 12.1% in December 2022 and is expected to stay high.   

Romania’s  current  account  deficit  is  approaching  10%  of  GDP.  On  5  April  2023  the 
Commission  presented  two  horizontal  thematic  notes  on  competitiveness  and  external  balances, 
which also cover Romania (6). The notes show that Romania’s external position has worsened since 
2015.  The  current  account  deficit  reached  9.3%  of GDP  at  the  end  of  2022 (7),  up  from  7.2%  of 
GDP in 2021 and close to 5% in 2020, as both trade and primary income balances moved further 
into  negative  territory.  In  2022,  the  current  account  widening  partly  reflected  the  impact  of  the 
energy  shock,  which  accounted  for  around  0.8%  of  GDP,  Romania  being  among  the  smallest  net 
importers of energy in the EU. While cost competitiveness indicators stabilized lately, the inflation 
differential  relative  to  the  rest  of  the  EU increased significantly in  2022.  The increasing  inflation 
gap between Romania and the EU is mostly explained by domestic factors, with Romania’s internal 
price dynamics looking firmer and more persistent than in many other countries.   

The  current  account  deficit  is  expected  to  improve  over  the  short  to  medium  term  but 
remain  sizeable.  According  to  the  2023  Commission  Spring  Forecast,  in  2023  and  2024  the 
current  account  deficit  should  remain  around  8%  of  GDP,  as  the  fiscal  balance  is  expected  to 
remain  in  deficit  and  domestic  demand  to  stay  strong,  fuelling  imports.  These  levels  cannot  be 
sustained in the long term – the Commission estimates Romania’s current account “norm”, i.e. the 
current account level implied by economic fundamentals, at around zero. IMF estimates point to a 
current account “norm” of around -2% of GDP, still well above current levels. Against this backdrop, 
the NIIP-to-GDP ratio remained negative in 2022 at –41% of GDP (See Graph 2.1a) and under the 
baseline scenario is expected to continue declining in the coming years (see Graph 2.1.b). 

(6)  European Commission (2023), External Sustainability Analysis: Thematic Note to Support In-Depth Reviews, European 

Economy: Institutional Papers, 196. 

(7)  The horizontal note on external sustainability takes into account the data until Q3 2022. The information here has been 

updated with the observations for the whole 2022, which became available in the meantime. The main messages do not 
change. 

6 

 
                                                 
 
2. 

Assessment of macroeconomic vulnerabilities 

The large current account deficit reflects, to a large extent, a still sizeable fiscal deficit. 
The  deterioration  of  the  external  deficit,  which  started  before  the  pandemic,  is  mainly  rooted  in 
fiscal imbalances. The headline deficit declined in 2022 to a still high 6.2% of GDP, from 7.1% in 
2021  and  9.2%  in  2020,  but  given  the  decent  rebound  in  growth,  high  inflation  and  “tax  rich” 
growth  composition,  the  fiscal  stance  was  only  marginally  restrictive  in  2022.  The  cyclically 
adjusted  balance  improved  by  ½  pps.  of  GDP,  and  probably  even  less  so  when  considering  the 
impact of the growth composition on government revenue (see Section 3). In 2022 the Romanian 
government introduced additional economic and social support measures, including  food vouchers 
to vulnerable households, pensioners and students, partially financed with EU funds, subsidies for 
fuel,  increases in military pensions  and  allocation  for  reimbursement  of  sick leave,  on  top  of  the 
energy  compensation  scheme.  The  latter  was  broadly  financed  by  the  increased  revenues  due  to 
taxation of extra profits and of trading margins in the energy sector, and by the higher profitability 
of energy SOEs. 

There  are  indications  that  the  widening  of  the  current  account  deficit  is  not  just  a 
“fiscal/competitiveness  only”  story.  More  recently,  the  private  sector  contributed  to  the 
widening  of  the  external  deficit.  Savings  –  Investment  balances  have  started  to  deteriorate, 
particularly  for  households.  There  are  no  publicly  available  households’  savings  rate  data  in 
Romania,  but  sectoral  and  survey  data  allow  for  reasonable  estimates.  Households’  savings 
obtained  as  a  residual  between  savings  of  the  total  economy  and  the  sum  of  all  other  sectors 
indicate a considerable decline since 2020, suggesting that household spent a large share of the 
pandemic  related  saving  buffers.  Survey  data  obtained  from  the  National  Statistical  Institute (8) 
(see Graph 2.1.c) confirm this assessment (9)  and suggest households’ savings peaked (at around 
18%  of  total  revenues)  at  the  height  of the  pandemic (in  Q2  2020), before declining  to  close  to 
12% as restrictions unwound, activity picked up and the inflationary shock eroded savings buffers. 
These estimates are confirmed by a recent IMF study (2022) and a series of experimental statistics 
by Eurostat (10), which also indicate that Romanian households have the third highest propensity to 
consume in the EU (at around 95% of the disposable income for 2015 – latest available data).     

Romania  is  not  experiencing  difficulties  in  financing  its  current  account.  Romania’s  still 
strong  economic  fundamentals  underpin  its  ability  to  finance  its  current  account  deficit.  Foreign 
exchange reserves stand above prudential levels (representing more than four months of imports 
and above 100% of short-term debt (11)), external and government debt levels remain low, and the 
banking sector is well capitalized, liquid, and profitable. The Common Equity Tier 1 ratio marginally 
diminished to 17.6% in Q3 2022 but remains well above the minimum recommended threshold for 
Tier  1  capital  of  6%.  Gross  non-performing  loans  represented  2.9%  of  total  loans,  a  slight 
improvement since the end of 2021. The profitability of the banking system is above that of the 
euro  area,  with  a  12.1%  return  on  equity.  Given  these  solid  fundamentals  and  positive  medium 
term  growth  prospects,  Romania  continues  to  attract  large  FDI  inflows,  which  in  2022  covered 
about a third of total external financing needs (Graph 2.1.d). Finally, large inflows of EU funds also 
contribute to alleviate external financing pressures.  

Financing  conditions  could  however  become  more  challenging  in  the  medium  term.  The 
economy  remains  dependent  on  the  availability  of  external  financing  and  the  sovereign-banks 
nexus is one of the highest in the EU, with government debt securities and loans representing more 
than  20%  of  total  banking  assets  as  of  December  2022 (12).  Despite  a  recent  decline,  Romanian 

(8)  National Statistical Institute Tempo database - Households budget survey (HBS). 

(9)  Defined as the difference between households’ total revenues and total expenditures. 

(10)  Eurostat - Aggregate propensity to consume by household type - experimental statistics. 

(11)  IMF - Romania: 2022 Article IV Consultation. 

(12)  Commission Services own calculations 

7 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

spreads  remain  materially  higher  relative  to  levels  that  prevailed  before  the  war  in  Ukraine, 
probably partly reflecting worsening external  deficits. Global monetary tightening could make the 
financing  environment  for  Romania  more  difficult  in  the  quarters  and  years  ahead.  Romania  is 
rated at the lowest investment grade by rating agencies. In this context, and given the large current 
and fiscal deficits, a successful implementation of policies guarded by the EU, under the RRP and 
the EDP is key. While the effect of EU funds and cooperation on market signals is hard to quantify, 
it probably reduces the immediate financing costs associated with growing external vulnerabilities.  

Monetary policy was significantly tightened, leading to a slowdown in credit growth. The 
National Bank of Romania (BNR) raised its key policy rate from 1.75% in early 2022 to 6.75% in 
December (13). While rate hikes came later and were overall less aggressive than in peer countries, 
BNR also used liquidity instruments effectively as a complementary tool to policy rate hikes. As a 
result, lending growth to households and non-financial  corporations started to slow but remained 
positive,  the  stock  of  credit  to  households  and  corporates  being  respectively  11.7%  and  20.9% 
higher at the end of 2022 than a year before (14). With headline inflation showing signs of peaking, 
liquidity  tightening  was  reversed  towards  the  end  of  2022.  This  is  mainly  attributable  to  large 
government  expenditures  in  the  last  months  of  the  year  and  lack  of  intervention  from  BNR.  The 
central bank confirmed this shift in policy by stopping to mention “firm control over money market 
liquidity” at their December 2022 and subsequent board meetings. As a result, the monetary policy 
stance has become a touch easier of late.   

Exchange  rate  policy  leaned  towards  preventing  large  movements  in  the  leu.  Despite 
turbulences  caused  by  Russia’s  war  of  aggression  against  Ukraine  and  the  energy  shock,  the  leu 
remained relatively stable, evolving in a narrow range against the euro, averaging 4.92 and 4.93 in 
2021  and  2022  respectively.  The  currency,  which  continues  to  be  heavily  managed,  appears 
overvalued  according  to  several  metrics  –  both  Commission  and  IMF  estimates  point  to  the  leu 
being overvalued by 11-13% on a real effective basis (International Monetary Fund 2022b). As a 
result  of  exchange  rate policies  and  of  large  foreign  capital  flows  into the  country  at  the  end  of 
2022,  the  currency  appreciated  by  6%  in  real  terms (15)  in  the  twelve  months  to  February  2023, 
limiting  the  shock  absorption  capacity  of  the  economy  and  hampering  net  exports  growth.  To  a 
large  extent,  currency  strength  reflected  policy  preferences  and  somewhat  contributed to  contain 
inflation while the country was exposed to a global inflationary shock.   

Cost  competitiveness  developments  have  stabilised  but  remain  a  concern.  Wage  growth 
reached 13.6% in 2022, well above productivity, but below national CPI inflation. ULCs increased by 
around 6.2% last year, and by 10.1% since 2019 (Graph 2.1e). Romania continues to attract robust 
FDI inflows and to gain export market shares, albeit at a slower pace than in the past. The nominal 
effective  exchange  rate  (NEER) (16)  remained  virtually  unchanged  over  2022,  while  real  effective 
exchange rates (REER) deflated by ULC and price index appreciated by slighlty more than 2%. The 
horizontal note on competitiveness (17) shows that the inflation differential between Romania and 
the  rest  of  the  EU  has  increased  considerably  in  the  last  3  years,  with  most  of  the  gap  being 
explained  by  domestic  rather  than  imported  inflation.  Imported  inflation,  stemming  mainly  from 
high  energy  prices,  is  set  to  subside.  However,  the  decline  in  domestic  inflation  may  be  more 
gradual, and past high inflation rates could eventually feed into higher wage demands, given that 

(13)  Standing at 7% at the cut-off date  

(14)  Not seasonally adjusted data. Source: BNR through DataInsight 

(15)  Source: IMF through DataInsight 

(16)  NEER and REER weighted against 42 trade partners   

(17)  European Commission (2023), Inflation Differentials in Europe and Implications for Competitiveness: Thematic Note to 

Support In-Depth Reviews, European Economy: Institutional Papers, 198. 

8 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

real wages fell in 2022. Such dynamics could have a negative impact on the cost competitiveness 
position of the economy.     

Non-cost factors continue to weigh on Romania’s competitiveness. Romania scores poorly 
in governance rankings when compared to EU peers. According to the Worldwide Governance Index, 
limited  progress  was  made  over  the  last  decade  and  significant  shortcomings  persist  regarding 
regulatory  quality,  control  of  corruption  and  government  effectiveness.  Moreover,  an  insufficient 
transport infrastructure hinders businesses’ ability to ship merchandise both within and outside the 
country and jeopardises spatial cohesion. A shrinking labour force, skills shortages, limited capacity 
of  the  public  employment  services,  a  weak  training  and  education  system  and  low  innovative 
capacity negatively affect the business environment.  

Consistent  with  the  widening  in  external  deficits,  economic  growth  is  mainly  driven  by 
non-tradables  sectors.  Gross  value  added  in  sectors  such  as  industry  and  manufacturing 
remained muted last year, being impacted by high energy prices and supply-side bottlenecks, while 
the one in agriculture dropped, as drought affected most of the crops. However, very strong growth 
rates were recorded in predominantly non-tradables sectors such as construction, retail, wholesale, 
accommodation, food services and real estate activities. Studies have shown that fast increases in 
output and productivity in non-tradables sectors, while good for output growth, can be associated 
with  growing  external  imbalances  (Dieppe  et  al.  2012)  if  wage  spillovers  from  non-tradeable  or 
public sectors generate a persistent increase in tradeable sector ULCs. Overall, current dynamics in 
Romania point to the risk of drawing scarce resources away from the tradables sector, which could 
end  up  putting more  downward  pressure  on  external  balances. Against this background, Romania 
would benefit from increasing its domestic production capacity in the tradable sector.    

Overall,  under  current  trends,  going  forward,  Romania  could  be  left  in  a  vulnerable 
position  unless  policy  action  is  forthcoming.  Given  the  continuous  weakening  of  external 
accounts, on current trends, Romania’s NIIP is projected to follow a steep negative trajectory and 
reach levels of around -73% of GDP over ten years under the baseline scenario (see Graph 2.1.b). 
Under  a  more  positive  alternative  scenario  as  compared  to  the  baseline,  Scenario  1,  the  NIIP  is 
expected to remain rather stable around  -41% of GDP by 2032 (18).  Conversely, more pessimistic 
assumptions than in the baseline, under Scenario 2, would lead to an NIIP of nearly -110% of GDP. 
Thus,  should  current  trends  continue,  Romania  may  face  more  challenging  conditions  to  fund  its 
fast-growing external financing needs. Indeed, global liquidity conditions are tightening and in the 
medium-term  official  fund  inflows,  including  from  the  EU,  are  likely  to  decline,  leaving  Romania 
potentially more exposed to exogenous shocks that could occur.  

Assessment of MIP relevant policies 

Delivering on fiscal consolidation and reforms would limit the cost of adjustment. Fiscal 
consolidation  should  be  the  preferred  way  to  bring  demand  more  in  line  with  supply  and  reduce 
domestic  and external  vulnerabilities.  This  would  also  avoid  putting  unnecessary  burden  on  other 
macro  policy  instruments,  such  as  monetary  policy,  and  reduce  the  medium-term  cost  of 
adjustment.  Full  implementation  of  reforms  included  in  the  RRP  and  adherence  to  fiscal  targets 

(18)  Alternative scenarios are defined as deviations from the baseline. A more optimistic Scenario 1 assumes full RRP 
implementation and strict adherence to EDP targets (positively affecting the trade balance and real growth while 
depressing inflation and domestic yields), and a more pessimistic Scenario 2 assuming only a partial RRP implementation 
and deviations from EDP targets (negatively impacting real growth, capital account and inflation, while putting upward 
pressure on domestic yields and trade balance). 

9 

                                                 
2. 

Assessment of macroeconomic vulnerabilities 

under  the  EDP  would  go  a  long  way  in  containing  current  dynamics.  The  RRP  also  includes 
measures  that  are  conducive  to  higher  productivity  and 
improving  cost  and  non-cost 
competitiveness,  such  as  improving  infrastructure,  education,  the  business  environment  and  the 
efficiency of the public administration, the legislative process, financial management as well as the 
judiciary, complemented by investments under the Cohesion Policy Funds.   

Tax and pension reforms could help to address Romania’s fiscal vulnerabilities. Romania’s 
tax  revenue-to-GDP  ratio  is  one  of  the  lowest  in  the  EU  and  remains  significantly  below  the 
average  in  other  countries  at  similar  stage  of  development.  Moreover,  Romania’s  tax  structure, 
which  relies  heavily  on  consumption  taxes  and  social  contributions,  is  insufficiently  supportive  of 
growth  and  weighs  on  external  competitiveness.  The  RRP  includes  key  reforms  to  strengthen  the 
tax  system,  make  it  more  supportive  of  growth,  and  increase  the  revenue  collected  by  the  tax 
administration  by  at  least  3%  of  GDP  by  2026.  On  the  expenditure  side,  the  RRP  includes  an 
important reform of the public pension system through a new legislative framework to ensure its 
fiscal  sustainability  in  an  environment  of  ageing  population,  while  correcting  inequities.  It  also 
includes measures to enhance the efficiency of public spending, by increasing the transparency of 
the  budget  process,  improving  the  monitoring  and  reporting  system,  and  carrying  out  spending 
reviews in all public sectors. Full implementation of these reforms would support adherence to EDP 
targets  and  allow  to  build  some  fiscal  space,  which  is  currently  very  limited,  to  absorb  potential 
shocks and stimulate growth when needed. It would also help reducing external vulnerabilities.  

Macroeconomic  rebalancing  will  also  require  keeping  wage  growth  in  line  with 
productivity.  In  the  last year,  the minimum  wage  increased  by  17.7%  and  the  pension  point by 
12.5%. The nominal average wage increased by 13.6%. This compares with price and productivity 
increases of 14.1% and 4.4% over the period, respectively. Macroeconomic fundamentals, including 
high inflation and the relatively low level of wages as compared with EU peers, partly explain high 
wage  growth  in  Romania,  but  recent  large  increases  in  nominal  incomes  contributed  to  fuel 
absorption,  especially  considering  the  very  high  propensity  to  consume  of  Romanian  households, 
and  to  the  build-up  of  domestic  and  external  imbalances.  Given  these  developments,  it  will  be 
important to fully implement the RRP minimum wage setting mechanism reform, and to improve 
predictability in public sector wage policies. The objectives are to ensure that wage developments 
continue  to  reflect  productivity  gains  and  respond  adequately  to  changing  macroeconomic 
conditions,  in  order  to  protect  the  competitiveness  of  the  Romanian  economy,  and  ensure 
developments in household’s income consistent with keeping external balances in check.   

Monetary  policy  plays  a  crucial  role  in  supporting  the  emerging  declining  trend  in 
inflation. It is important to prevent higher inflation expectations from feeding through to wages, 
which seems to be already happening to some extent. Past monetary tightening steps are welcome 
and should continue to produce their effects in the coming quarters. However, with uncertainty on 
global prices being higher than usual, monetary policy flexibility and capacity to respond and adapt 
quickly to developments remains important. Given large fiscal deficits, macroeconomic rebalancing 
would  be  less  costly  if  achieved  through  fiscal  consolidation  rather  than  through  additional 
monetary policy tightening. A further widening of external imbalances should be avoided, including 
by closely monitoring bank lending to households and corporates.   

With  the  leu  estimated  to  be  significantly  overvalued,  exchange  rate  policy  deserves 
particular  attention.  Keeping  the  exchange  rate  on  the  strong  side  in  2022  had  some 
advantages during the peak of inflationary pressures  – stability helped control imported inflation, 
and  Romania  being  a  small  energy  importer  there  was  less  need  to  accommodate  the  adverse 
supply shock. 

10 

2. 

Assessment of macroeconomic vulnerabilities 

Conclusion  

Romania  is  facing  vulnerabilities  relating  to  its  external  balance  developments. 
Romania’s  strong  growth  in  a  difficult  global  macroeconomic  context  is  welcome.  However,  the 
large  current  account  deficit,  which  significantly  worsened  after  the  recession  caused  by  the 
pandemic, makes the economy  potentially vulnerable to adverse shocks. Moreover, some signs of 
overheating are clearly visible, with core inflation uncomfortably high, the labour market tight, and 
wage  growth  well  in  double  digit  territory.  Romania’s  exchange  rate  is  overvalued  according  to 
several metrics, and remains heavily managed. Cost competitiveness indicators have stabilized for 
now, but structural issues should still be addressed. In this environment, risk premia and sovereign 
borrowing  costs  have  been  volatile,  but  are  higher  than  in  the  pre-pandemic  period.  With  the 
current account deficit expected to remain elevated in the coming years, the NIIP moving further 
into  negative  territory,  and  given  the  ongoing  tightening  in  global  liquidity  conditions,  financing 
external deficits could become more challenging in the years ahead if adequate policy action is not 
taken.   

Some vulnerabilities have not yet been addressed by policies.  Correcting fiscal imbalances 
is a priority. There was some fiscal consolidation in 2022, but the government deficit remains high 
(6.2%  of  GDP  in  2022)  and  its  decline  was mainly  driven by  continued  strong  nominal  economic 
growth. Moreover, growth composition was dominated by domestic components, which resulted in 
high tax-to-GDP elasticities. Going forward, fiscal adjustment should be the preferred way to bring 
demand more in line with supply and contain domestic and external deficits. This would also avoid 
putting unnecessary burden on other macro policy instruments and reduce the medium-term cost 
of adjustment. Full implementation of tax and pension reforms included in the RRP and adherence 
to fiscal targets under the EDP would go a long way in containing current dynamics.  

Based on the findings in this in-depth review, the Communication “European Semester – 
2023  Spring  Package”  sets  out  the  Commission’s  assessment  as  to  the  existence  of 
imbalances or excessive imbalances in Romania, in line with Regulation 1176/2011. (19)  

(19) European Commission (2023), European Semester Spring Package 2023, COM(2023) 600 final. 

11 

 
 
 
                                                 
Graph 2.1: Selected graphs, Romania 

2. 

Assessment of macroeconomic vulnerabilities 

Source: European Commission services 

12 

-12-10-8-6-4-2024681015Q216Q217Q218Q219Q220Q221Q222Q2% of GDPd) Current account deficit financing by instrumentNet errors and omissionsOfficial reserves (net)Debt flows (net) NENDI excl reservesPortfolio investment, equity and inv. fund shares (net)Direct investment (net)Net lending/borrowing-20-100102030400708091011121314151617181920212223*24*Rate of change y-o-y (%)e) Decomposition of rate of change of ULCInflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costULC in EU27-100-5005015Q416Q417Q418Q419Q420Q421Q422Q4% of GDPa) NIIP by sectorGeneral governmentPrivate sector incl MFIPrivate sectorMFI (excl central bank)Central bank (incl reserves)Net int'l investment position (NIIP)0.070.090.110.130.150.170.19Q I 2015Q III 2015Q I 2016Q III 2016Q I 2017Q III 2017Q I 2018Q III 2018Q I 2019Q III 2019Q I 2020Q III 2020Q I 2021Q III 2021Q I 2022Q III 2022c) HHs revenues -expenses as % of total revenues-10-8-6-4-2024620052006200720082009201020112012201320142015201620172018201920202021202220232024f) Legislative election years (black fill) and change in cyclically adjusted balanceChange in the CABCyclically-adjusted balance (CAB)-120-100-80-60-40-20021*22232425*26*27*28*29*30*31*32*% of GDPb) NIIP projectionsScenario 1Scenario 2Baseline  
 
2. 

Assessment of macroeconomic vulnerabilities 

Box 1: Inflation exposures and cross-border pass-through 

This  box  sheds  light on  the  sources  of  inflation  in  Romania  and  its  spill-overs  with  EU 
partners.  The  period  since  2021  has  been  characterized  by  pandemic  aftershocks  and  global 
supply  chain  disruptions  compounding  global  inflationary  pressures  and  a  surge  in  commodity 
prices  triggered  by  Russia’s  war  of  aggression  against  Ukraine.  As  a  result,  inflation  in  Romania 
surged. In response, wages and profits also picked up across the EU, which further added to price 
pressures  in  Romania.  With  input-output  data,  domestic  inflation  can  be  decomposed  into  the 
contributions from key cost factors. Taking into account some data limitations, the framework can 
be  used to attribute consumer and investment price changes to i) extra-EU import price changes, 
which include both directly imported inflation and inflation passed through from EU partners import 
costs  ii)  domestic  unit  labour  cost  changes  iii)  domestic  unit  profit  changes,  including  indirect 
taxation changes and iv) rest-of-EU value added price changes. (20) 

Data suggests that much of inflation in Romania reflected both surging import prices as 
well as domestic factors in 2022. In 2022, as shown in Graph 2.2, energy inflation contributed 
substantially to the increase in consumer and investment inflation. However, domestic profits were 
the key factors behind surging inflation. In addition, price changes in extra-EU non-energy imports 
and costs passed through EU  partners further lifted consumer and investment prices in  Romania. 
Contribution  from  domestic  unit  labour  costs  has  been  smaller.  Going  forward,  consumer  and 
investment  inflation  is  expected  to  be  sustained  mainly  by  domestic  profits.  Imported  inflation, 
either directly or through EU partners is expected to subside. Spill-overs from value added inflation 
in other EU countries is expected to lift domestic consumer and investment inflation only mildly this 
year and next. 

Graph 2.2: Components of gross fixed capital formation deflator growth and consumer price 
inflation 

Source: European Commission services 

(20) The graphs below are based on national accounts data and the Commission’s Spring 2023 forecast, combined with 

Eurostat input-output data. HICP is taken as the measure of the price of private consumption, including non-residents. 
Changes in import prices and value-added deflators are assumed to affect demand prices with a delay of 5 months. For 
further methodological details, see explanations in the 2023 in-depth review for Czechia, p. 16. 

13 

-505101520161718192021222324% change (year-on-year)RO: contribution to domestic GFCF deflator growth-4-202468101214161718192021222324% change (year-on-year)RO: contribution to domestic CPI deflator growthDomestic ULCUnit profits (&taxes)RoEU value added deflatorEnergy imports from Extra-EUOther imports from Extra-EURoEU import cost passthr.ResidualDeflator growth YoY 
  
 
                                                 
Table 2.1: Selected economic and financial indicators (Part 1), Romania 

2. 

Assessment of macroeconomic vulnerabilities 

(e) estimate based on ECB quarterly data 
(1) Potential output is the highest level of production that an economy can reach without generating inflationary 
pressures. The methodology to compute the potential output is based on K. Havik, K. Mc Morrow, F. Orlandi, C. Planas, R. 
Raciborski, W. Roeger, A. Rossi, A. Thum-Thysen, V. Vandermeulen, The Production Function Methodology for Calculating 
Potential Growth Rates & Output Gaps, COM, European Economy, Economic Papers 535, November 2014. 
(2) Deviation of actual output from potential output as % of potential GDP. 
(3) Current accounts in line with fundamentals ("current account norms") are derived from reduced-form regressions 
capturing the main determinants of the saving-investment balance, including fundamental determinants, policy factors 
and global financial conditions. See L. Coutinho et al. (2018), "Methodologies for the assessment of current account 
benchmarks", European Economy, Discussion Paper 86/2018, for details.  
(4) This benchmark is defined as the average current account required to halve the gap between the NIIP and the 
indicative MIP benchmark of -35% of GDP over the next ten years, or to stabilise the NIIP at the current level if it is 
already above the indicative MIP benchmark. Calculations make use of Commission’s T+10 projections. 
(5) NENDI is a subset of the NIIP that abstracts from its pure equity-related components, i.e. foreign direct investment 
(FDI) equity and equity shares, and from intracompany cross-border FDI debt, and represents the NIIP excluding 
instruments that cannot be subject to default. 
(6) Fundamentals-based benchmarks are derived from regressions capturing the main determinants of credit growth and 
taking into account a given initial stock of debt. Prudential thresholds represent the debt threshold beyond which the 
probability of a banking crisis is relatively high, minimising the probability of missed crisis and that of false alerts. 
Methodology to compute the fundamentals-based and the prudential benchmarks based on Bricongne, J. C., Coutinho, L., 
Turrini, A., Zeugner, S. (2019), “Is Private Debt Excessive?”, Open Economies Review, 1- 42. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures 

14 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Real GDP 6.51.14.13.9-3.75.84.73.23.5Potential growth  (1)5.92.53.54.23.42.82.93.33.2Contribution to GDP growth:Domestic demand 13.3-0.63.86.0-2.05.66.14.04.5Inventories -1.2-0.10.5-0.6-0.21.7-0.60.0-0.5Net exports -5.81.3-0.3-1.6-1.5-1.5-0.7-0.8-0.6Contribution to potential GDP growth (1):Total Labour (hours) -0.9-1.1-0.20.20.10.00.00.3-0.1Capital accumulation 1.72.31.01.21.51.41.61.71.8Total factor productivity 5.21.32.72.81.81.31.31.31.4Output gap (2)3.7-0.6-0.91.3-5.6-2.9-1.1-1.2-0.9Unemployment rate8.88.57.44.96.15.65.65.45.1Harmonised index of consumer prices (HICP)9.55.71.43.92.34.112.09.74.6GDP deflator 15.36.74.26.84.15.213.410.75.8External positionCurrent account balance (% of GDP), balance of payments-9.5-6.2-1.9-4.9-4.9-7.2-9.3-8.1-7.9Trade balance (% of GDP), balance of payments-10.7-7.3-1.5-4.1-4.3-5.7-6.9..Primary income balance (% of GDP)-3.2-1.5-1.3-1.4-1.5-2.0-3.1..Secondary income balance (% of GDP)4.42.70.90.70.90.40.6..Current account explained by fundamentals (CA norm, % of GDP) (3)-1.6-0.9-0.50.10.20.10.10.20.1Required current account to stabilise NIIP above -35% of GDP over 20Y (% of GDP) (4)-3.3-3.8-5.7-5.2-5.4-5.2-4.5-4.1-3.8Capital account balance (% of GDP)0.50.62.01.31.92.22.5..Net international investment position (% of GDP)-37.4-60.2-52.8-43.4-47.6-47.1-41.0..NENDI - NIIP excluding non-defaultable instruments (% of GDP) (5)-5.0-21.6-10.7-4.0-7.0-6.5-4.2..Net FDI flows (% of GDP)-6.4-2.8-2.3-2.2-1.3-3.7-3.4..CompetitivenessUnit labour costs (ULC, whole economy)10.64.66.06.95.8-1.96.25.93.2Nominal compensation per employee 18.07.89.310.94.01.911.19.66.7Labour productivity (real, hours worked)7.03.34.32.81.01.14.43.23.1Real effective exchange rate (ULC)7.4-3.42.82.6-0.4-4.12.1-0.2-0.6Real effective exchange rate (HICP)6.2-2.60.00.00.80.02.2..Export performance vs. advanced countries (% change over 5 years)82.169.225.815.420.515.7...Private sector debtPrivate sector debt, consolidated (% of GDP)41.869.056.746.548.047.944.0..Household debt, consolidated (% of GDP)10.620.917.315.416.115.813.9..Household  debt, fundamental benchmark (% of GDP) (6)-1.80.13.97.410.011.512.8..Household  debt, prudential threshold (% of GDP) (6)88.678.886.297.468.357.755.2..Non-financial corporate debt, consolidated (% of GDP)31.148.139.431.232.032.130.1..Corporate debt, fundamental benchmark (% of GDP) (6)8.28.612.514.818.520.722.0..Corporate debt, prudential threshold (% of GDP) (6)104.897.0104.5102.078.170.768.4..Private credit flow, consolidated (% of GDP) 12.83.00.12.01.33.83.3e..Corporations, net lending (+) or net borrowing (-) (% of GDP)-2.87.811.79.311.813.817.620.219.8Households, net lending (+) or net borrowing (-) (% of GDP).....-14.8-21.2-23.5-22.9Net savings rate of households (% of net disposable income).........forecast 
     
 
 
 
Table 2.2: Selected economic and financial indicators (Part 2), Romania 

2. 

Assessment of macroeconomic vulnerabilities 

(7) Unweighted average of price-to-income, price-to-rent and model valuation gaps. The model valuation gap is 
estimated in a cointegration framework using a system of five fundamental variables; total population, real housing 
stock, real disposable income per capita, real long-term interest rate and price deflator of final consumption expenditure, 
based on Philiponnet, N., Turrini, A. (2017), "Assessing House Price Developments in the EU," European Economy - 
Discussion Papers 2015 - 048, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission. 
Price-to-income and price-to-rent gaps are measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(8) Price-to-income overvaluation gap measured as the deviation to the long term average (from 1995 to the latest 
available year). 
(9) Domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
Source: Eurostat and ECB as of 2023-04-28, where available; European Commission for forecast figures 

15 

all variables y-o-y % change, unless otherwise stated2003-072008-122013-18201920202021202220232024Housing marketHouse price index, nominal.-12.53.03.44.74.47.2..House price index, deflated.-16.91.1-1.92.3-0.8-6.2..Overvaluation gap (%) (7).20.6-11.3-15.9-13.3-15.7-21.4..Price-to-income overvaluation gap  (%) (8).44.2-13.8-32.7-32.9-34.7-37.8..Residential investment (% of GDP)1.92.92.42.32.42.52.7..Government debtGeneral government balance (% of GDP)-1.6-6.3-2.0-4.3-9.2-7.1-6.2-4.7-4.4General government gross debt (% of GDP)16.326.237.135.146.948.647.345.646.1Banking sectorReturn on equity (%)23.06.02.915.212.515.0...Common Equity Tier 1 ratio10.917.118.718.420.120.0...Gross non-performing debt (% of total debt instruments and total loans and advances) (9)1.46.810.23.33.02.6...Gross non-performing loans (% of gross loans) (9)..11.14.33.93.42.9..Cost of borrowing for corporations (%)..5.4..4.610.0..Cost of borrowing for households for house purchase (%)..5.15.54.83.77.1..forecast 
  
     
 
3.  THEMATIC CHAPTER: THE EXTERNAL - FISCAL 
NEXUS IN ROMANIA 

The large government deficit is the main factor behind Romania’s external imbalances. 
The  primary  cause  for  the  large  current  account deficit  in  Romania  is  the large  fiscal  deficit  and 
some  specific  fiscal  policy  measures  that  contributed  to  fuel  recent  large  increases  in  domestic 
demand and imports. In a first step, this Thematic Chapter details how recent fiscal policy decisions 
contributed to widen the external deficit. In a second step, it argues that Romania’s fiscal position is 
significantly  worse  than  suggested  by  traditional  fiscal  surveillance  indicators.  Indeed,  growth 
composition  and  the  accounting  of  RRP  grants  both  tend  to  flatter  the  assessment  of  the 
underlying  fiscal  picture.  Finally,  it  concludes  with  general  observations  on  Romania’s  fiscal 
challenges and the need for adjustment to reduce external vulnerabilities.   

In recent years, fiscal policy has helped the economy absorb shocks. Large fiscal stimulus 
packages  were  introduced  in  the  past  two-three  years,  initially  to  shield  the  economy  against 
consequences of the pandemic, and then to protect the population against the energy shock. While 
some  of  these  measures  were  necessary  and  contributed  to  Romania’s  economy  impressive 
resilience  to  shocks,  especially  during  the  pandemic  period,  measures  to  support  the  economy 
during the energy price shock could have been better targeted (e.g. there is a universal cap for gas 
prices, and most measures have been extended until the end of 2025). Moreover, most of the fiscal 
support was geared towards protecting households from the various shocks, which contributed to 
keep private consumption firm and non-tradable sectors (construction, in particular).  

These policies contributed to a significant absorption boom in Romania. Supportive fiscal 
policy  and  very  easy  monetary  and  financial  conditions  until  the  beginning  of  2022  provided  a 
significant boost to domestic demand. Over 2021-2022, real absorption increased by 12.5% while 
real  GDP increased by less than 11%. The difference is even more pronounced in nominal terms. 
The real absorption boom was largely anticipated in the Commission Spring 2021 forecast (Table 
3.1), which was the basis for the last EDP Recommendation to Romania under Article 126(7), from 
2 June 2021. But nominal developments were not, with nominal absorption ending up growing 17% 
more  over  2021-2022  than  expected  in  the  Spring  2021  forecast.  This  translated  into  a  large 
worsening in the current account deficit, which moved from less than 5% of GDP in 2020 to close 
to 10% of GDP in 2022, reflecting very rapid nominal import growth (almost 28% year over year in 
December 2022 in current prices), as opposed to a growth in exports of just 22%. Less than 1% of 
GDP  of  the  current  account  widening  over  the period  can  be  attributed  to  the  increase  in  energy 
prices following the war in Ukraine (see horizontal note on external sustainability).  

Periods of fast absorption growth tend to temporarily boost government revenue. Several 
academic  papers  have  shown  that  growth  composition  can  have  a  large  impact  on  revenue 
elasticities  and  collection.  Lendvai  et  al.  (2011)  concluded  that  episodes  of  real  and  nominal 
absorption booms, which are often associated with widening current account deficits, were typically 
associated  with  large  positive  surprises  on  fiscal  revenue.  The  same  authors  show  that,  in  many 
instances, developments in current account imbalances were aggravated by procyclical fiscal policy, 
with fiscal policy insufficiently “leaning against the wind”. The 2019 Commission Report on Public 
Finances  in  EMU  (2020)  went  further,  showing  that  increases  in  absorption  and  household  debt 
resulted  in  higher  revenue  windfalls.  This  paper  also  provided  evidence  that  temporary  windfall 
revenues often trigger permanent increases in spending or decreases in tax rates, contributing to a 
worsening in structural fiscal positions.  

16 

 
 
3. 

Thematic chapter: The external - fiscal nexus in Romania 

Romania’s  strong  absorption  growth  fuelled  a  large  increase  in  government  revenue. 
Similar dynamics as those described in the academic studies mentioned above have been at play in 
recent years in Romania (Table 3.1). Over 2021-22, total government revenue increased by around 
37% (VAT and corporate income tax were particularly strong), much more than the 17% expected 
in the Spring 2021 forecast. This larger than expected increase was much more pronounced than 
the inflation surprise, which was “only” around 11-13 pps, depending on the indicator (HICP or GDP 
deflator).  The  Romanian  authorities  used  part  of  these  unexpected  revenue  to  boost  spending. 
Indeed, the additional government spending over the past two years exceeded forecasts by a larger 
amount than inflation surprises alone can explain. Importantly, it is likely that a large part of the 
extra  revenue  associated  with  the  recent  fast  increase  in  absorption  should  not  be  seen  as 
permanent  since  they  are,  to  a  large  extent,  associated  with  an  unsustainable  widening  in  the 
current account deficit. 

Romania’s underlying fiscal position remains weak. Fiscal policy decisions over the past two 
years  not  only  fuelled  the  increase  in  the  current  account  deficit,  they  also  contributed  to 
significantly  weaken  Romania’s  structural  fiscal  position.  Romania’s  government  balance  moved 
from -2.8% of GDP in 2018, to -9.2% of GDP in 2020. It was since then reduced to a still elevated -
6.2% pf GDP in 2022, but this mostly reflected a decent post-COVID19 growth rebound, with GDP 
increasing  well  above its potential  rate in  2021  and  2022,  and  higher  than usual  tax  elasticities. 
The  boost  in  tax  elasticities  associated  with  the  absorption  boom  is  not  entirely  captured  by 
traditional  indicators  of  fiscal  surveillance  like  the  cyclically  adjusted  balance,  which  erroneously 
tends to see it as structural. Romania’s underlying fiscal position is therefore probably worse than 
suggested  by  standard  fiscal  surveillance  indicators,  and  the  contribution  from  the  government 
sector to the external current account deficit larger.  

In  addition,  the  total  fiscal  impulse,  including  coming  from  the  RRF,  is  likely 
underestimated by traditional fiscal indicators. In national accounts the time of recording of 
revenues from the RRF grants is matched to expenditures of the same amount. Therefore, there is 
no  effect  on  the  deficit  of  any  expenditure  that  is  financed  by  a  grant  payment.  RRF  grants  do 
however  provide  a  significant  positive  fiscal  impulse,  to  the  extent  that  they  lead  to  additional 
spending relative to a counterfactual with no RRF grants. However, this impulse is not captured by 
traditional measures like the change in the cyclically adjusted balance. In case of full additionality 
(i.e.  EU  grants  are  fully  spent,  and  add  to  already  planned  expenditure),  fiscal  indicators  will 
therefore underestimate the impulse coming from fiscal policy.  

It is possible to correct the fiscal balance for the impact of growth composition and EU 
grants. Given the significant widening of the current account over the recent years and the size of 
grants in the RRF, which are expected to fluctuate between 0.6% and 1.1% of GDP over the RRF 
lifecycle,  the  elements  above  have  a  significant  influence  on  estimates  of  Romania’s  underlying 
fiscal  position.  It  is  possible  to  correct  for  these  effects.  For  growth  composition,  we  rely  on  the 
simple  approach  proposed  by  Lendvai  et  al.  (2011).  They  construct  a  “cyclically  and  absorption 
adjusted” government balance, which provides an estimate of where the government deficit would 
be if the economy had no output gap and an external position in line with its “norm”, i.e. the level 
explained by  the economic fundamentals. (21)  Regarding the impact of the RRF grants component 

(21)  The main idea behind the fiscal indicator taking into account the impact of absorption booms and busts is that the 

definition of a well-founded benchmark for tax bases' composition can be naturally related to the need of countries to 
maintain prudential current account positions. In line with the approach proposed by Jaeger and Klemm (2007), the idea is 
to strip out from the actual balance the automatic effects of both output and absorption and not only output as assumed 
with the CAB. With cyclically and absorption adjusted budget balance (CAAB), "gaps" do not only refer to output but also to 
absorption. A meaningful notion of "absorption gap" should ideally capture the difference between actual and "potential" 
absorption, where by potential absorption is meant absorption in line with output being at potential and current account 
balances being in line with fundamentals. A common benchmark for current accounts consistent with fundamentals is 

17 

                                                 
 
3. 

Thematic chapter: The external - fiscal nexus in Romania 

on  government  accounts,  an  assumption  is  needed  about  the  additionality  of  RRF  investments 
relative to fiscal plans in a hypothetical scenario without RRF. It is assumed here that half of the 
projects  and  investments  planned  for  the  RRF  years  would  have  happened  even  without  the  RRF 
and associated grants.  

Table  3.2  provides  estimates  of  Romania’s  underlying  fiscal  position  capturing  these 
effects.  Column  1  shows  the  headline  government  deficit  as  a  share  of  GDP  –  the  scenario 
assumes  a  gradual  return  to  a  3.0%  of  GDP  deficit  in  2024,  in  line  with  existing  EDP 
recommendations.  Column  2  shows  the  standard  cyclically-adjusted  balance  (CAB).  Column  3 
shows  the  fiscal  balance  adjusted  for  the  output  gap  and  growth  composition  (CAAB).  Column  4 
shows the fiscal balance adjusted for the distance to the current account norm (AAB), i.e. where the 
government  deficit  would  be  if  the  current  account  was  at  its  norm,  ignoring  the  output  gap. 
Columns 5, 6, 7, 8 show the same indicators as above but this time also adjusting for the statistical 
effect of RRF grants. Amounts already disbursed (grants) in 2021 and 2022 are taken into account 
and, for the following years, projections assume two full payments per year.  

Overall, Romania’s underlying fiscal position is probably worse than it looks. In 2022, the 
government  balance  reached  -6.2%  of  GDP,  but  fiscal  indicators  correcting  for  the  cycle,  growth 
composition and the “grants impact” point to a structural fiscal position more in a  -6% to -9% of 
GDP range. Indeed, Romania’s output gap was close to zero in 2022, but the current account deficit 
was almost 10% of GDP away from its norm. Table 3.2 also shows that reaching the 3% deficit 
target in 2024 will require an important fiscal effort in 2023 and 2024 – of the order of 1.5% of 
GDP  each  year,  according  to  most  measures.  This  will  only  be  achieved  with  continued  strict 
expenditure control or higher revenues or a combination between the two, relative to the previous 
years, even though 2024 is a “super election” year with local, legislative and presidential elections 
being organised. One concern in this respect is that, on average during the last four legislative/local 
elections, the cyclically adjusted balance worsened by 1.5% of GDP. This average includes the year 
2012  when  a  significant  fiscal  adjustment  took  place,  in  line  with  recommendations  under  the 
EU/IMF financial assistance program (Graph 2.1.f).   

Even if Romania reaches its 3.0% nominal target in 2024, its fiscal position will remain 
weak. The achievement of the 3.0% of GDP mark is likely to be facilitated by a revenue to GDP 
ratio that, while still one of the lowest in the EU average, is inflated by excess absorption and, to a 
lesser extent, by the impact of EU grants. Calculations show that assuming a deficit of 3.0% of GDP 

provided by the computations of so-called "current account norms", namely current account values consistent with medium-
term determinants of the saving-investment balance.  

The CAAB is calculated as the difference between the actual budget balance and two terms reflecting temporary budgetary 

components: one linked to the output gap and the other linked to the absorption gap. Denoting by b the budget balance, by 
y and y* actual and potential output, by ygap and agap the output gap and the absorption gap, by a and a* absorption and 
potential absorption, by ca* the current account norm, and by it the sum of net foreign income and net transfers, the 
following equations can be derived:  

(1) CABt = (b/y)t – λ ygapt 

(2) CAABt = (b/y)t – βt ygapt – γt agapt,  

(3) agapt = (at – a*t)/y*t,  

(4) a*t = y*t – ca*t + itt.  

In equation (1), λt is the standard budgetary sensitivity used in EU budgetary surveillance. In light of the previous discussion, the 

sensitivity parameter to absorption, γt in equation (2) is given by the share of indirect taxes in GDP. Given the unitary 
elasticity of indirect taxes with respect to absorption and the linearity of the CAB with respect to output it follows that  

(5) βt = λt -γt. 

The “absorption adjusted” government balance (AAB) follows a similar approach. and provides an estimate of where the 

government deficit would be if the economy had an external position in line with its “norm”. 

18 

                                                                                                                                                        
3. 

Thematic chapter: The external - fiscal nexus in Romania 

in  2024,  no  further  worsening  in  Romania’s  current  account  deficit,  and  RRF  grants  payments 
proceeding as scheduled, Romania’s underlying fiscal deficit could still be in a 4.5  – 6.0% of GDP 
range in 2024. These estimates underline the importance of reaching fiscal targets in the EDP and 
implementing  the  fiscal  consolidation  measures  planned  in  the  RRP.  Reaching  those  is  not  only 
crucial  to  rebalance  the  economy  and  reduce  the  external  current  account  deficit,  but  also  to 
correct a fiscal position that is structurally weak.    

References  

Banca  Națională  a  României.  2023. “Raport  asupra inflației,  februarie  2023,” no.  Anul  XIX,  nr.  71. 
https://www.bnr.ro/DocumentInformation.aspx?idDocument=42096&idInfoClass=3922. 

Dieppe, Alistair, Viktors Ajevskis, Zacharias Bragoudakis, Stephane Dees, Pascal Jacquinot, Tohmas 
Karlsson,  Chiara  Osbat,  et  al.  2012.  “Competitiveness  and  External  Imbalances  Within  the  Euro 
Area.” ECB Occasional Paper Series, no. 139 (December). 

European  Commission.  2020.  Report  on  Public  Finances  in  EMU  2019.  Luxembourg:  Publications 
Office. https://data.europa.eu/doi/10.2765/92125. 

International  Monetary  Fund.  2022.  “Romania:  Selected  Issues.”  IMF  Country  Report  No.  22/311. 
Washington,  D.C. 
https://www.imf.org/en/Publications/CR/Issues/2022/09/22/Romania-Selected-
Issues-523734. 

2022b. 

———. 
Article 
https://www.imf.org/en/Publications/CR/Issues/2022/09/22/Romania-2022-Article-IV-Consultation-
Press-Release-Staff-Report-and-Statement-by-the-523729 

Consultation.” 

“Romania: 

2022 

No. 

IV 

2022/310. 

Lendvai,  Julia,  Laurent  Moulin,  and  Alessandro  Turrini.  2011.  From  CAB  to  CAAB?  Correcting 
Indicators of Structural Fiscal Positions for Current Account Imbalance. Economic Papers 442, April 
Commission. 
2011. 
https://data.europa.eu/doi/10.2765/10611. 

Economic 

European 

Belgium: 

Papers. 

ECFIN 

442. 

Vol. 

19 

 
 
 
 
 
 
Table 3.1: Macro and Fiscal projections over 2021-22 vs. outcomes 

3. 

Thematic chapter: The external - fiscal nexus in Romania 

Source: European Commission services 

Table 3.2: Estimates of fiscal and fiscal stance indicators (assuming return to 3 pct deficit in 2024) 

Source: European Commission services 

20 

Spring 2021 forecastObserved dataDifferenceCumulative growth over 2021-2022Real GDP10.210.80.6Real Absorption11.812.50.7Nominal GDP16.932.215.3Nominal Absorption18.235.417.2HICP5.716.610.9GDP deflator6.019.313.3Total Government revenue17.237.220.0Government primary current expenditure 6.823.616.8Non corrected for grants impactCorrected for grant impact (50 pct additivity)Levels, pct of GDPGG balCABCAABAABGG balCABCAABAAB2020-9.2-7.4-9.5-10.9-9.2-7.4-9.5-10.92021-7.1-6.2-8.0-9.5-7.5-6.6-8.4-9.92022-6.2-5.8-7.6-9.2-6.5-6.1-7.9-9.52023-4.4-4.1-5.6-7.1-5.0-4.6-6.2-7.62024-3.0-2.8-4.3-5.7-3.5-3.2-4.7-6.1Annual changeGG balCABCAABAABGG balCABCAABAAB2020-4.9-2.7-4.0-4.9-4.9-2.7-4.0-4.920212.21.21.51.41.80.81.11.020220.90.40.30.31.00.50.40.420231.81.72.02.11.51.51.71.820241.41.31.41.41.51.41.51.5