This is the second part of an essay by Cosmin Marinescu, that Universul.net is publishing in three parts. Professor Marinescu is an economist, professor at the Bucharest Academy of Economic Studies and adviser to President Klaus Iohannis on economic and social policy. His essay looks at the global and regional economic challenges the European Union faces and how Romania’s economy fits into the picture_and the way forward for its economy in the current global context.
2. Real economic convergence within the European Union
The map of economic convergence in the European Union shows, during the period under review, a continuously upward trend. Countries with a GDP per capita below 60% of the EU27 average have transitioned to the category of countries with a GDP per capita between 60% and 80% of the EU27 average. The number of countries with GDP/capita between 80% and 100% of the EU27 average has increased from 5 in 2007 to 9 in 2023, and estimates show an increase to 12 countries in 2025.
Romania’s economic convergence has registered a significant advance in the last 17 years, our country climbing 5 places in the EU27 hierarchy, from 26th to 21st place. Romania’s economic leap to the category of countries with a GDP/place between 60% and 80% of the EU27 average materialized in 2017, 10 years after European accession.
Romania records a real convergence of 78% of the Union average at the end of 2023, and current estimates indicate that the threshold of 80% of the EU average will be reached by the end of 2024. Also, Romania together with Poland will join the group of states with a GDP/place between 80% and 100% of the EU27 average by 2025, thus highlighting the consolidation of the economic convergence process.
Compared to Bulgaria and other states, Romania has had an accelerated path in terms of economic convergence, advancing faster in the hierarchy of EU countries. Other examples of progress in economic convergence include countries such as Portugal, Estonia and Lithuania, which have managed to make the leap to the category with a GDP/place between 80% and 100% of the EU27 average over the past 13 years.
Challenges. Despite economic progress, challenges related to poverty, inequality and rural-urban gaps persist. Although the standard of living has increased significantly, Romania’s poverty rate remains the highest in the EU, and income inequality remains relatively high. These discrepancies between different regions and segments of the population can affect economic convergence, requiring targeted interventions, so that all regions of the country benefit from economic growth.
Constraints. Sustainable economic growth faces certain constraints, such as underdeveloped institutions, human capital shortages and underdeveloped infrastructure. The lack of adequate fiscal policies, including preventing and combating tax evasion, contributes to insufficient budget revenues and difficulties in financing investments in infrastructure and essential public services. These issues can slow down the process of economic convergence and affect our country’s ability to align with the EU in economic and social terms.
Solutions. To maintain the trend of economic convergence and address these challenges, it is crucial to adopt public policies and investments that stimulate sustainable economic growth and mitigate regional disparities. It is essential to improve the collection of budget revenues, reduce tax evasion and structural reforms aimed at increasing the institutional quality in the business environment and the administrative capacity in the implementation of European funds. It is also particularly important to develop the transport infrastructure, but also to reform the education system, in order to create an environment conducive to innovation and increased competitiveness.
3. Budget deficit in EU Member States
The state of public finances within the EU shows that, in relation to the objective of reducing budget deficits below 3% of GDP, fiscal consolidation solutions proved to be more effective in the first years after the COVID-19 pandemic, compared to the post-financial crisis period. However, against the backdrop of an increasing public debt burden, fiscal adjustment at Member State level requires increased efforts in the coming years to get public finances back on the path to fiscal sustainability.
The large budget deficits of the EU states, perpetuated over the years, indicate the persistence of structural causes, manifested by the severe pressure of permanent budgetary expenditures, which are rigid, hence the difficulty of adjusting them.
Romania’s situation indicates the need for adjustments in terms of public finances, in the context in which the budget deficit in 2023 amounted to 6.6% of GDP in ESA terms, this being one of the largest deficits in the EU. In the case of Romania, the ESA budget deficit seems to have “stuck” at over 6% of GDP over the last few years, which raises serious challenges in terms of the budgetary adjustments necessary to ensure the sustainability of public finances.
Romania’s best results, recorded in 2014 – 2015, were followed by a rapid deterioration of the budgetary situation, amid the significant fiscal relaxation in 2015. The public finance situation culminated in the opening of the excessive deficit procedure in relation to the deficit of 4.3% of GDP, in ESA terms, for 2019. Thus, since 2019, Romania has continuously recorded budget deficits above the threshold of 3% of GDP related to the nominal convergence criteria.
Compared to other states, throughout the entire period of analysis, Romania performed relatively better than member states such as Greece, France or Spain, which recorded budget deficits below 3% of GDP for a larger number of years, but still face major challenges in managing public debt.
Nordic countries such as Sweden, Denmark and Finland were the best performers, recording budget deficits of less than 3% of GDP in most years of the period under review, indicating sound fiscal discipline.
Estimates for 2024 and 2025 show encouraging developments for Member States, indicating a joint effort to strengthen public finances within the EU.
For Romania, the perpetuation of large budget deficits and the increase in public debt in 2024, above the threshold of 50% of GDP, illustrate the need for a coherent fiscal consolidation strategy. It is crucial, in this regard, for Romania to improve fiscal efficiency and alleviate the pressure of public debt financing in the coming years. The adoption of responsible tax policies and appropriate structural reforms will help improve our tax situation and our position in the related ranking.
- Public debt map for EU states
The situation of public finances and sovereign debts in the European Union deteriorated after the 2009 financial crisis, and the path towards sustainability was recently affected by the pandemic crisis of 2020. In this context, the number of EU countries whose public debts exceed 60% of GDP has risen again to 15. Thus, the sustainability of public debts is once again becoming one of the major financial challenges at EU level.
Romania’s situation in terms of public debt highlights the continued to be within the limits of sustainability, but Romania’s position on the map of public debts at EU level shows the continuous increase of the national debt. Romania’s public debt has grown steadily, from about 12% of GDP in 2007 to over 35% of GDP in 2019.
Subsequently, amid the pandemic crisis, Romania’s public debt exploded, in just 2 years, from 35.1% of GDP in 2019 to 48.5% of GDP at the end of 2021, one of the fastest increases in public debt in the European Union. Currently, according to European estimates, the public debt will exceed the 50% threshold at the end of this year, which requires prudent approaches in relation to the state of public finances.
The impact of public debt in Romania. The steady increase in public debt in Romania, together with the obvious trend in the projections for the coming years, reflects the difficulties encountered in managing the economic and financial crises, as well as the COVID-19 pandemic. These aspects point to the need for responsible management of public finances, through sustainable fiscal policies, in order to reduce pressure on public debt and ensure long-term economic stability.
Romania has one of the lowest levels of public debt-to-GDP ratio in the European Union, standing at almost 49% at the end of 2023. Thus, despite the increase in public debt, Romania still remains below the European average in terms of government debt, but the public debt situation must be approached cautiously, as Romania’s specific sustainability threshold is below the European criterion of 60% of GDP.
Compared to other states. The years 2013 and 2020 were critical moments in terms of public debt in some EU Member States. States such as Greece, Italy, Portugal, Ireland or Spain have recorded levels of public debt of over 120% of GDP.
Although Romania has managed to maintain low levels of indebtedness over the same period, it still faces challenges in managing public debt. Therefore, specialized analyses indicate the need for prudent approaches in order to sustainably manage public debt in the current context of the global economy and budgetary constraints.
Perspectives and implications. The failure of member states to gradually reduce the level of public debt explains the recent revision of the EU’s fiscal rules to improve their efficiency. As public debt remains a major concern for economic and financial stability, it is essential that Member States adopt responsible fiscal policies and implement structural reforms.
- Inflation in EU countries
The inflation map in EU countries highlights the perpetuation of high inflation in the post-pandemic years, against the backdrop of relaxed monetary policies, such as “whatever it takes“, which central banks have promoted, in a coordinated manner, since mid-2020, immediately after the outbreak of the COVID-19 pandemic. The inflation map in the EU states illustrates that inflation rates above 10% have been recorded in only 3 of the last 17 years, respectively in 2008 – amid economic overheating, but also in 2022 and 2023 – amid the monetary easing that began in the year of the pandemic.
Romania’s situation shows an inflation located in the “red zone”, of over 4% in 9 years of the last 17, Romania being one of the countries with the highest number of years in which the inflation rate has reached a high level. The persistence of inflation in Romania over the last decades reflects the pro-cyclical policies to support aggregate demand, through measures focused on increasing consumption, which have generated inflation and budget deficits, especially in periods characterized by sustained economic expansion.
After the high inflation felt before and after the 2009 financial crisis, Romania has experienced disinflation since 2012, even reaching a slight deflation in 2015-2016. However, demand-stimulating policies have led to a return of inflation to high levels, especially in the context of the COVID crisis and new geopolitical challenges.
Compared to other states. In 2015-2017, the inflation rate in Romania was below that of the euro area and the EU, while many member states recorded inflation rates between 0% and 2%, which indicates a context of macroeconomic and financial stability.
The invasion of Ukraine by the Russian Federation has had significant repercussions on the inflation rate in the EU and Romania. This crisis has led to an acceleration in inflation, due to pressure on the budget and the slowdown in the pace of economic growth.
Before this rise in inflation, the poorest 40% of households were already spending more than half of their income on energy, food and housing, which amplified their vulnerability to rising prices.
Side effects. The government intervened to limit the increase in energy prices for households and firms, but not all measures were sufficiently targeted, which added to the pressure on the budget, which was already high, and could discourage behaviors aimed at energy efficiency and savings.
The significant fluctuations in inflation in Romania and other EU Member States underline the need for a balanced approach to monetary and fiscal policies in order to ensure long-term price stability. The comparison with other states highlights the importance of responsible macroeconomic policies to mitigate high inflationary pressures, given that Romania continues to record the highest inflation in the European Union.
- Long-term interest rate in EU countries
The long-term interest rate map in EU countries highlights their transition from high interest rates, fully situated in 2007, between 4% and 8%, to low interest rates, between 0% and 1% for most countries, by 2021. This dynamic has reversed since 2022, amid changes in the global macroeconomic context and in monetary policy, given high inflation and geopolitical tensions that have forced central banks to tighten monetary policy.
Romania’s situation. In 11 of the last 16 years, Romania has been in the category of states with long-term interest rates between 4% and 8%, failing to maintain the 2%-4% margin reached in 2015-2017 and, respectively, in 2021. However, Romania has benefited from relative stability in monetary policy compared to other member states. The 2009 financial crisis and the 2020 pandemic generated fluctuations in interest rate dynamics, with different impacts. The COVID-19 crisis had more moderate effects compared to those of the financial crisis.
With the exception of Greece, all EU Member States have seen improvements in interest rate dynamics since 2012, highlighting a stabilisation of financial markets over that period. Between 2021 and 2023, no Member State recorded interest rates above 8%, with the decisions of the national central banks reflecting the monetary policy of the European Central Bank and the current economic conditions.
The impact of interest rates on economic growth. Long-term interest rates have played a crucial role in shaping the economic environment of the EU and Romania in recent years. The transition from high to low interest rates has had a significant impact on investment and consumer spending by boosting the pace of economic growth. At the same time, the policy of “cheap money” has accentuated the pro-cyclical trend and inflation.
Interest rate developments in Romania were mainly influenced by the 2009 financial crisis and the economic effects of the 2020 COVID-19 pandemic. While the financial crisis generated major changes in interest rate dynamics, with a period of instability followed by a slight stabilization, the pandemic had a more moderate impact, at least in the period immediately following 2020.
The downward trend in interest rates in the post-financial crisis period highlights efforts to stabilize financial markets in the EU. However, there is a continued need to adapt to changing economic and financial conditions to ensure sustainable economic growth and financial stability.
- Unemployment rate in the European Union states
The unemployment map in the EU states shows that, despite initial concerns and estimates, the 2020 pandemic did not lead to a generalized increase in unemployment, a situation also due, however, to the exceptional measures taken at European and Member State level to support economies. The map below suggestively highlights that high unemployment rates were concentrated in the years after the financial crisis, when the highest number of countries with unemployment rates above 10% were recorded, with Greece and Spain being among the most affected countries.
Romania’s unemployment situation was, throughout the entire period of analysis, much more favourable compared to other Member States, with unemployment rates being higher than 6% before 2018. Since 2018, Romania has recorded a decrease in unemployment, returning to the category of states with unemployment rates below 6%. In fact, the post-pandemic period stands out for the increase in the number of Member States that are characterized by low unemployment rates.
In 2020 alone, the year of the pandemic, the unemployment rate in Romania made an episodic jump above 6%, later returning to lower levels. For the coming years, estimates show that unemployment in Romania remains in the same favorable lane, with rates between 3% and 6%, which reflects a situation of stability compared to the pressure of the labor markets in other member states.
The impact of unemployment. High unemployment rates can have a significant impact on economic growth and social cohesion in the EU. High unemployment marks a decrease in income and an increase in poverty among the population, which amplifies the redistributive effort of social policies, with implications in terms of incentives for work.
Although the 2020 pandemic did not generate a significant increase in unemployment in the EU, the long-term risks and possible delayed effects on the labour market should not be neglected. Some sectors may still face difficulties in adjustment and recovery, and certain social segments may continue to be affected.
In the case of Romania, the low unemployment rates are also a reflection of a significant exodus of the largely skilled workforce, which perpetuates the quantitative and qualitative tensions of the labor market. In this regard, it is essential that employment policies are adapted to changes in the economic environment and specifically target vulnerable groups and regions with high unemployment rates.
- Youth unemployment rate in the European Union
In line with the general labour market situation, youth unemployment has risen in the years since the 2009 financial crisis, but since 2013 youth unemployment pressures have gradually reduced to near-historic lows for EU countries. In recent years, the “blue” zone has become increasingly prominent and the map of youth unemployment shows that a considerable number of countries are characterized by youth unemployment rates below 15%, as well as the average of EU countries.
The states in the southern sub-model of development, as well as Romania, but also Sweden, surprisingly, feel the challenges of youth unemployment most pressingly. In the case of Sweden, a state with advantageous social benefits, the difficulties in recruiting young people without work experience are mainly caused by the specifics of the legislation in the field.
Romania’s situation. In 2010-2016, the youth unemployment rate in Romania varied between 25% and 30%, followed by a repositioning in the range of 15% – 25% in the following years. This evolution is a strong contrast with the general unemployment rate, which indicates structural deficiencies in the functioning of the labor market, but also possible “lapses” of statistical conformity with the situation of informal work.
Compared to other states. After a slight contraction in the year of the pandemic, the category of countries with youth unemployment rates between 5% and 10% has expanded, but overall progress is insufficient. States such as Greece and Spain continue to record youth unemployment rates of over 30%, but with downward trends.
The main vulnerabilities are the shortage of skilled labor, on the one hand, and the aging of the population, on the other. Inefficiencies in the vocational education and training system lead to skills shortages and structural imbalances in the labour market. At the same time, population ageing and negative demographic growth pose a serious challenge to the economic future of the European Union.
- Gross fixed capital formation (GFCF) in EU countries
Unlike the economic and financial crisis, which led to a severe reduction in gross fixed capital formation in many Member States, the pandemic crisis did not generate major repositioning effects of Member States from an investment perspective, and the number of Member States with GFCF rates above 20% increased considerably.
In the case of Romania, GFCF has aligned with global trends. Before the financial crisis, Romania was in the category of states for which the share of GFCF in GDP was over 30%, which indicated a strong investment position. However, following the crisis, Romania recorded a significant and long decline in the range of 20% – 25%.
The oscillating dynamics after 2015 show the effects of some specific measures, which oriented Romania’s economic growth model on consumption. Estimates for 2024 and 2025 indicate Romania’s return to the category of states with GFCF shares in GDP between 25% and 30%, amid investment-focused policies, similar to other states, such as the Czech Republic and Sweden.
Compared to other states, Romania occupied positions that varied during the analyzed period, with the lowest GFCF level in 2018, but with values always above the European Union average. The development underlines both resilience and the need to strengthen fixed capital investment to sustain long-term economic growth.
Trends and vulnerabilities. The lack of predictability in the political and business environment, together with the shortage of skilled labor, had a negative impact on private sector investments, GFCF being affected by the uncertainties and structural constraints in the economy.
Compared to the EU average. Although the GFCF share in the case of Romania is clearly higher than the EU average over the entire period analyzed, the investment dynamics still seem to be suboptimal from the perspective of the catching up objectives compared to developed countries, in order to boost real convergence and to overcome the average income trap.
- Share of the minimum wage in monthly wage earnings in EU countries
The last 15 years have meant a significant change in the structure of the share of the minimum wage in the monthly wage earnings in the EU states. The number of states with shares of the gross minimum wage above 40% has gradually decreased, generally falling in the range of 30% – 40% of the average gross salary. The recent developments indicate the adaptation of the minimum wage policy to the situation of rigidity that characterizes the EU labor market.
A European Romania: where we came from, where we are, what we need to do
