2025 European Semester/ Spring package: ROMANIA: ECONOMIC DEVELOPMENTS AND KEY POLICY CHALLENGES

Subdued economic growth and large macroeconomic vulnerabilities   Romania is converging to EU income and productivity levels, but to achieve further progress it needs to address structural weaknesses and macroeconomic vulnerabilities. Since its EU accession, Romania has increased its GDP per capita from 44% of the EU average to close to 80% in 2024. However, recent wage increases, particularly in the public sector, while boosting household incomes and domestic demand, have contributed to high fiscal and current account deficits. These weigh on investor sentiment, cost competitiveness and productivity growth. In addition, outdated and inadequate infrastructure relatively low R&D capacity and persistent skills shortages prevent Romania’s transition to higher-value-added production.   Supporting the private sector and the business environment is essential to help Romania transition to a new growth model. So far, the country has largely relied on advantages offered by lower labour costs, but it would benefit from gradually shifting its focus towards investments in new technologies and innovation, as this would strengthen its position in the EU value chain. Romania could boost private investment and its competitiveness by using EU funds to support infrastructure, improve research, innovation and digital capacity, develop workforce skills and increase labour market participation, while simultaneously strengthening administrative efficiency and making its policy framework more predictable.   Romania’s economic growth decelerated to 0.8% in 2024, down from 2.4% in 2023 . Buoyant private consumption and domestic demand supported by loose fiscal policy had only a limited positive impact on real GDP growth (adjusted for inflation), which was dampened by the high negative contribution of net exports. In addition, robust public investment in infrastructure could not compensate for a slowdown in private investment. Inflation fell from close to 10% on average in 2023 to 5.8% in 2024, but high inflationary pressures subsist. Labour demand decreased slightly, but the growth in wages remained high. The current account deficit widened to 8.4% of GDP in 2024, from 6.6% of GDP in 2023, mainly due to higher government spending and incomes.     Growth is likely to pick up only modestly. Real GDP growth is projected to accelerate to around 1.4% in 2025 and 2.2% in 2026, supported by resilient private consumption and a gradual recovery in private investment and exports. However, political instability and uncertainty over fiscal policy continue to affect investor confidence, the pace of reforms and the absorption of EU funds. Although Romania is among the EU countries less exposed to the US economy, growth is forecast to be hit by the recent US tariffs through the trade and investment channels. Inflation is projected to hover at around 5% in 2025 and 4% in 2026. The current account deficit is set to decline gradually, supported by a moderation in domestic demand, while remaining high at about 7% of GDP in 2026.   Romania’s vulnerabilities have increased as the twin government and current account deficits widened, and cost competitiveness deteriorated further in 2024. That finding was highlighted in the in-depth review that was part of the macroeconomic imbalance procedure Romania underwent earlier this year. The review also stressed that policy progress was minimal, including a marked deterioration in the fiscal stance .   Romania’s high government deficit is a key driver of high external borrowing needs and has raised concerns among investors and rating agencies. In 2024, the public deficit rose to 9.3% of GDP, mainly on account of generous income policies and higher-than-planned public investment spending. As a result, government debt increased rapidly, reaching nearly 55% of GDP by the end of 2024, although it remains significantly below the EU average of 81.6%. The fiscally induced surge in domestic demand also increased imports. In combination with weaker external demand, this caused the trade deficit to widen, pushing the current account deficit to 8.4% of GDP. Without resolute fiscal consolidation and structural reforms, the government and current account deficits are likely to remain very high, inflating debt stocks and leaving Romania vulnerable to change in investor sentiment and external shocks.   The central pillar of Romania’s strategy to reduce the government deficit is the medium-term fiscal-structural plan (MTP). The plan caps annual net expenditure growth at 5.1% in 2025 and gradually lowers it to 4.3% by 2028. In line with the plan, the Romanian government targets a budget deficit of 7% of GDP in 2025. Romania aims to meet net expenditure targets primarily by restraining spending growth across most expenditure categories. As a first step, at the end of 2024 the government adopted emergency measures to save 2.0% of GDP in 2025 by freezing wages and pensions, removing several tax exemptions, and reforming the microenterprise. In the MTP, Romania committed to implement a set of reforms and investments in order to extend the fiscal adjustment period to seven years (2025-2031). A key commitment in the plan is the implementation of a tax reform in 2025. This should raise at least 1.7% of GDP in recurrent revenues, alongside other reforms such as spending reviews and improvements in tax administration.   Net expenditure growth is projected to exceed the recommended maxima. In 2024, net expenditure in Romania grew by 19.9% . This increase is due to high growth in current expenditure (+18.7% relative to 2023), in particular on the public sector wage bill (+21.5% relative to 2023) and social transfers including pensions (+19.5% relative to 2023). In 2025, net expenditure is forecast by the Commission to grow by 5.4%, which is above the maximum growth rate recommended by the Council. The cumulative growth rate of net expenditure in 2024 and 2025 taken together is projected at 26.4%, which also is above the maximum recommended by the Council. Among the reforms and investments underpinning an extension that were due by the 30 April, some were not implemented such as the key reform of the review of the tax system.   (Full text:https://economy-finance.ec.europa.eu/document/download/7cb47fb4-4517-431a-95c8-17cb161d5078_en?filename=RO_CR_SWD_2025_223_1_EN_autre_document_travail_service_part1_v4.pdf)