Daianu: If we don't considerably reduce the budget deficit, we could lose confidence in the leu

If Romania does not diminish the budgetary deficit considerably we could lose the trust in the leu, we could see outflows of capital from the country, important pressures towards the depreciation of the national currency, shows in the introduction of the analysis report of the convergence “ Romania – the Euro zone Monitor’ no.`18 of 2025.’ The transatlantic relation in great distress. What will the EU do?’If you consider the impact analysed of the pension recalculation, the budgetary deficit of 2024 surpassed the one of the pandemics year (2020) – when it was 9.2% of GDP! This shows budgetary executions mingled with careless budgeting and considerable slippage, underestimation of fiscal consolidation as a necessity’ says the introduction signed by the academician Daniel Daianu.According to the quoted source, at the end of 2024 the public debt of the country surpassed 54% of GDP and its growth speed Is rapid.'Those who very casually point out that other EU countries have considerably higher public debts are going down the wrong track; Romania is not in the euro area, there is currency risk, and large budget deficits make access to financing more difficult and can induce nervous reactions from the markets. Those who say that other countries also have large budget deficits and we should not be worried are not judging the whole picture. For example, Poland had a budget deficit of 6.6% of GDP in 2024, but also a current account deficit of less than 1% of GDP - which in Romania was over 8% in 2024. Moreover, defence spending in Poland was 4.7% of GDP in 2024. In other words, if defence spending had not increased so much, the budget deficit in the neighbouring state would probably have been below 5% of GDP. Such figures are telling. The precarious state of Romania's public budget, with very low tax revenues (including contributions) (26-27 per cent of GDP, compared to an EU average of over 40 per cent, compared to 34-35 per cent in the countries in the region), is a huge handicap', says Daniel Daianu. The author says that to have a correction of high amplitude when the international environment is more than unfavourable, when you have to allocate considerably more resources for the defence, is an extremely difficult mission.According to the report the fiscal consolidation cannot be done only on the basis of expenses a considerable growth of the fiscal revenues is also necessary.'It bears repeating, fiscal consolidation is also necessary because Romania suffers from the 'twin deficits syndrome' (twin deficits); in addition to a very high budget deficit, there is a very high current account deficit. In 2024, as mentioned above, the latter exceeded 8 per cent of GDP and over 60 per cent of the financing was through borrowed resources. Romania's current account deficit is among the highest (as a percentage of GDP) in the EU and is unique in the region; the Czech Republic, Hungary, Poland, which are countries with which we traditionally compare ourselves, have much lower deficits. The very large budget deficit explains to a large extent the current account deficit. If we do not reduce the budget deficit considerably, we could lose confidence in the leu, we could see capital outflows from the country, there would be great pressure for the national currency to depreciate. The increasingly unfavourable international context complicates the domestic economic situation. It must be realised that the NBR cannot be a factotum, that it cannot ensure Romania's macroeconomic stability on its own', says Daniel Daianu. Similarly, the economist mentions that the new derogation clause put in place (with reference to defence spending) does not exempt Romania from fiscal consolidation in the years to come, as some might think.'It's enough to imagine what public debt would look like after such a timeframe if very large budget deficits were perpetuated. The clause does not change the economic reality. Markets will not accept such behaviour in the management of public finances and will force a correction. Romania allocated just over 2% of GDP to defence last year, with a cash budget deficit of 8.64% of GDP. Romania's target is to bring the deficit below 3% in seven years. Other things unchanged, the macro-economic correction, if defence spending were to be increased (even gradually), would not be about six per cent of GDP, but more than seven per cent of GDP. It is possible that a compromise could be reached in NATO and the minimum target for defence spending as a share of GDP would be between three and four per cent. For Romania, state officials have announced a target of three per cent of GDP over the next two years. We need to have higher tax revenues and to restrain spending as much as possible, to spend as efficiently as possible. There must also be a reform of the State, which should also take the form of stronger institutions and maximise the use of European funds', says Daniel Daianu.   He states that the way the absorption of European funds was treated, especially over the last years is difficult to understand; there was no sense of urgency.'We stand to lose many billions of euros from the NRRP. Romania must do everything possible to make up as much of the lost time as possible. The IDB (Romanian Investment and Development Bank) can play a similar role in the Romanian economy to that of the EIB in the EU. The intensive absorption of European funds can cushion the shock of the trade war. The need to increase defence spending could lead to an amendment of the PNRR, which would reduce the pressure on the public budget', says Daniel Daianu.   According to the report, the Multilateral Financial Framework (MFF) is likely to allocate fewer resources to Romania in the new exercise. The new MFF will change given the challenges for the EU related to competitiveness and defence/security. Romania has acquired a 'dependency' on EU funds that may boomerang back when these resources will inevitably drastically diminish - after 2026 the NRRP ends and the MFF money will be reduced in the next financial year. The massive decrease in European resources would affect budget execution, public investment, balance of payments and potential GDP. This prospect is a strong argument for macro-economic adjustment to take place within a reasonable timeframe through credible measures. Even if the EC's proposal not to take into account the increase in defence spending in the estimation of budget deficits would prevail, Romania's public budget situation would remain very complicated as it would not change the real situation of the public budget; fiscal consolidation must be achieved. In Romania more can be allocated for defence through citizens’ contribution, the business environment. And for the EU budget this could be taken into consideration. The alternative would be to reduce expenditure in other domains, which would involve decisions of economic and social policy which are very difficult’ says Daniel Daianu.According to the author, it is Romania’s interest and the other European countries that the Union be more cohesive and develop its own capacity for defense (arms industry) and NATO not to become weak. The defence industry in Romania must develop and offset arrangement would support this. But the defense industry of Romania must not be thought outside the actions conjugated at European level (EU). ‘The importance of the EU for Romania is difficult to underestimate, as the Union was born as a peace project – so not only economic reconstruction. A more divided, fragile union would be an omen for European security, we could turn to a dark history of Europe, the inter-wars period. The mention is for the NATO as well’ Daniel Daianu says.