Why? Because Romania must foot the bill for growth that was too dependent on foreign savings, namely the money invested by foreigners in this country, and which reflected in the widening of the current account deficit. “The crisis was a trigger and an accelerator for the current adjustment. If it had not come, we would have issued forth from the euphoria with greater difficulty. The adjustment would have come anyway, but we could have had a softer landing. Now, we are expecting a hard landing, at least in terms of GDP [gross domestic product]. If we look at unemployment, this is not exactly a hard landing,” Isărescu added.

Lenders, companies, and consumers all demonstrated “pro-cyclical” behavior, meaning they stretched loans more than productivity allowed them to, which adds to the bill even more in this time of crisis, Isărescu indicated. “I did not expect Romania to turn into a shopping center so fast,” BNR’s Governor said.

Things started to skid out of control as far back as 2006, and the final straw was the inefficient fiscal policy, the official said. “The public sector should not have been jealous of the private sector (…) it would have been best if Romania had enjoyed a budget excess,” the Governor indicated. The situation is still unsolved: although the private sector has most probably switched to current account excess, the budget deficit is even wider, Isărescu mentioned.

“The most important problem that must be solved is the unsustainable structure of budget expenses,” BNR’s Governor said, adding that Romania could still finalize the process of converging to the euro zone, provided the country changes its focus from inflation and interest rates to the public deficit. Convergence is the process by which there is a narrowing in the gap of both prices and revenues in an emerging country, that recently became a member of the European Union, and those of other EU members.

The phenomenon is possible only in the presence of economic growth supported by productivity. In turn, productivity is only possible through investments. “Romania will have current account deficits for a few decades to come, because we will have things in which this country must invest, such as roads,” the official said. Part of the money should come from European funds. But absorption is more difficult than it should have been. “How will Romania repay the 20 billion it borrowed? With the 30 billion the country can obtain from the EU. (…) The problem is that, if these €20 billion represent a loan, the €30 billion are made up of tens of thousands of small projects, which are subject to bureaucratic or legislative interpretation differences,” Isărescu indicated.

In Brief
>Romania must foot the bill for growth that was too dependent on foreign savings.
>Lenders, companies, and consumers all demonstrated “pro-cyclical” behavior, meaning they stretched loans more than productivity allowed them to.
>Romania could still finalize the process of converging to the euro zone, provided the country changes its focus from inflation and interest rates to the public deficit.

Mugur Isărescu
Governor, BNR
>How will Romania repay the 20 billion it borrowed? With the 30 billion the country can obtain from the EU.