As we start the slow and painful post-pandemic mental recovery process, we may look around and see that the world is still out there. Slowly but surely the world economic engine is gearing up. Business fortune-tellers, reading the economic future in the price of oil rather than a cup of coffee or Tarot cards, have cast their spell and say that business is coming back. After a historical plunge in the abyss, the oil prices have returned to a sound 35-37$/barrel, a good sign that optimism and demand is returning. After three months of existential suspension, we are back in business.
According to public data, the pandemic has washed away more than 35 billion euros from the Romanian economy, making 500,000 people unemployed and sending another 600.000 in furlough. However, miraculously, Romania managed to record a 2.7% economic growth in T1 of 2020, the highest in the EU.
While the larger EU economies such as France (-5.4%), Italy (-4.8%), Spain (-4.1), and Germany (-2.2%, still the sharpest fall since the 2009 economic crisis) have been hard hit by the Covid-19 pandemic, the Romanian economy, somehow, managed to safely sail the storm. Or is it that the storm is yet to hit the Romanian economy? History has shown that the Romanian economy has a four- to six-month lag in relation to the larger economies and the latest economic crisis is a good example. Yet, so far so good.
The other good piece of news is that the monthly inflation rate has dropped to 2.68% in April from a worrying 4.0% in December 2019, mainly due to the collapse of the oil price and consumption. Still, annual inflation rate (the CORE2) upped slightly during the first four months of 2020, to a 3.7% percent in April from a 3.66% in December last year. The Romanian National Bank is understandably worried by the ”uncertainty”, as the word was obsessively repeated 60 (!) times in the latest document coming out of the institution. Amid this, the Romanian National Bank decided to cut the monetary policy rate from 2% to 1.75% per annum and to lower the facility rate from 1.5% to 1.25% and the lending facility rate (Lombard) to 2.25% from 2.5%. This is a clear sign that BNR is ready to play its part in kick-starting the economy. The measure will lower the cost of borrowing and thus enable companies to resume normal activities.
And the good news do not stop there, as Romania is to get 33 billion euro from the proposed 750 billion euro EU recovery plan, ‘Next Generation EU’, an emergency financial aid package meant to ensure that factory Europe restarts its production. Romania’s contribution to the common good will be in the region of 12 billion euro, a positive net gain of 21 billion euro. To put things in perspective, the sum represents almost 10% of Romania’s GDP.
This is a miraculous turn of fate for Romania and the financial package could not have come at a better time. Just six months ago, due to various reasons stretching from its inability to put forward viable projects that are eligible for EU funding to its constant attack against the justice system and willingness to fight corruption, Romania was poised to lose billions in EU funding. Now, the same Romania – no strings attached – is to receive the sixth largest sum of money in the EU’s Next Generation EU program. How we can make sure that all the money gets into the country’s real economy, helps real businesses, and produces good and long-lasting effects is anyone’s guess.
‘Next Generation EU’ will be invested across three pillars: support to member states with investments and reform, a solvency support instrument to kick-start the EU economy by incentivising private investments, and a new health program – EU4Health. Some say that history is once again undeservedly nice to Romania, but I would rather quote a more appropriate Romanian saying which goes like this: “For the blind stork, God makes a nest.”
But the good news ends here. We should not forget that this is an electoral year – no matter when the elections will actually be held – and Romanian politicians’ inability to think and act long-term is only surpassed by the inability of vast chunks of the Romanian electorate to discern between an electoral promise and an electoral lie. Populism is Romania’s chronic disease and there is no sign that the current pandemic has changed that: legislative initiatives targeting the banking system and foreign companies, ludicrous laws that want a cap on fuel prices (when the price is at the lowest level in a decade), another law that prevents the sale of state-owned companies during the pandemic are just some examples of a long list of economic silliness.
Another significant source of uncertainty stems from the fiscal and income policies, as there is a major drop in revenues due to the pandemic aid and compensation packages, but no one wants to break the bad news to the electorate right now. Where is the Government going to take the money from and who is going to pay for it, including the 40% hike in pensions promised by the law designed by the social-democrats, come September?
Having said that, the 21 billion euro gift from the EU just adds to the stake: who is going to administer and spend that money come the first day after the local elections and, equally important, general elections.