mugur isarescu : developments in the romanian economy since 2008 speech by mr mugur isarescu, governor of the national bank of romania, at the “ romania investors days ” conference, bucharest, 16 june 2015. * * * ladies and gentlemen, i am happy to witness the growing interest the investors ’ community is showing towards the romanian economy. since this is the first reverse roadshow focused on romania, i hope it will prove fruitful for all parties involved and that it will be followed by other similar events. in my address today, i intend to briefly touch on the most relevant developments in the romanian economy and i guess you will agree with me that we have come a long way since the beginning of the crisis. probably the most synthetic assessment of the transformation is given by the fact that, at the onset of the crisis, romania fell short of all four maastricht criteria – inflation, long - term interest rates, public deficit and debt, exchange rate stability –, but now they are all fully met. up to 2008, romania was going through a period of fast economic growth ( in excess of 7 percent per year, on average ), fuelled by large capital inflows and the strongly pro - cyclical stance of the fiscal policy, especially in the last two years before the onset of the crisis. unfortunately, this came at the cost of significant macroeconomic imbalances : at the start of the crisis, romania had a sizeable structural fiscal gap ( around – 8 percent of gdp in 2008 ), a current account deficit in the double - digit area and high inflation readings. when the crisis hit, there was no other option but to make the necessary adjustments. they appear to have produced the expected results : with the current account deficit below 1 percent of gdp, a structural fiscal position in the vicinity of 1 percent of gdp, and an annual inflation rate currently at 1. 2 percent, we can safely say macroeconomic equilibria have been restored. at the same time, the economy resumed its growth at rates that can be regarded as robust when compared with the european performance ( around 3 percent in both 2013 and 2014 and an even better 4. 3 percent in the first quarter of 2015 ). as a consequence, the output lost in the first two years of the crisis has been completely recovered. public debt is currently below 40 percent of gdp and looks set to decrease over the medium - term, assuming fiscal consolidation gains are maintained and the economic growth stays at

the results is needed because this model splits the eu countries into three distinctive groups ( germany a group of its own, some euro - area countries and some nms countries including euro and noneuro area, but excluding romania and bulgaria – probably because, in particular for these 2 countries, any measure of unemployment should be regarded prudently given the large emigration and underground economy ). let us remember that catching - up is an inflationary process in itself, as postulated by balassasamuelson. maybe not much convergence is taking place between north and south, but catching - up has continued throughout the crisis between east and west – as daniel gros recently concluded in a ceps study. migration has led to upward pressures on wages in the emerging europe and to downward pressures in the advanced eu. the contribution of net emigration to the middle income trap for emerging economies should also be further studied. still, i would like to share with you some preliminary results of a work in progress4 that i am undertaking on the relationship between wage growth and inflation. if we think in terms of stocks instead of flows, we can introduce the concepts of wage gap and inflation gap ( just like the imf ’ s reo discusses about unemployment gap, and the classical theory has the output gap ). wage gap refers to the cumulated gap between current wage and a peak reference wage value in the past. the permanent income hypothesis is fundamentally flawed in times of crisis, because of uncertainty of future income. the only certain reference value lies in the past, not in the future : and that is why current consumption is influenced by past income. a recession is a game – changer. in a crisis, the reference is not ahead of us, but it is rather in the past. retirement savings and linear employment prospects are uncertain. people relate to their peak gains in the not so distant past rather than to uncertain future gains. inflation gap refers to the cumulated deviation of present inflation from the target inflation or, in the absence of such, from its long - time average. we also allow for the wage philips curve to be non - stationary : it moves over time, and it is absolutely normal to do so. reference wage values, social preferences, jobs ’ characteristics, skill endowments and even central banks ’ targets, they all change over time – hence, the impact of wage gaps on inflation cannot be the same in different time periods. the preliminary finding of our model is that inflation does not increase close to or above its