The morning after

By bne IntelliNews November 14, 2006

Adina Postelnicu -

Romania is gearing up for a huge party to celebrate its accession to the EU, but experts warn of a series of headaches over the coming years.

In downtown Bucharest, a clock is counting down the days until Romania joins the EU. About 60 years after the communists took power, Romanians are less than two months away from their dream of returning to Europe's fold. But while everybody seems ready for the big event, not many are speaking out about what Romania has to do once the party is over.

What the EU means to Romanians is different to what Romania means to the EU. President Traian Basescu went out of his way to stress to a meeting of foreign journalists over the weekend of November 11 that Romania's rapidly growing economy and skilled workforce would be an asset to the EU when it joins in January. However, in rushing to take credit for getting Romania into the EU, politicians have done little to explain to their people the arduous process that got them there, and what the implications of that will be for the country going forward.

“This [entering the EU] is more like party on a school night: we cannot afford to stay too long, we have work to do the next day,” says Florin Citu, chief economist at ING Romania.

Targeting the euro

Citu points out that while in the short term Romania needs to watch out for macroeconomic imbalances, in the long term it should make an objective out of joining EMU (European Monetary Union). “The current account deficit is growing fast, the foreign exchange market will deepen, which means more volatility. And if consumption will go up fast, it will create inflationary pressures next year,” he warns.

Radu Craciun, head of local research at ABN Amro Romania, agrees. He expects Romania to go through the same inflationary pressures as countries that joined the EU in 2004. “The very good performance for this year – a rate of inflation around 5% – raises the bar. Failing to achieve lower inflation might imply we are looking at a trend reversal,” Craciun says.

Inflation fell from 40.7% in 2000 to 8.6% in 2005. In October, it reached a 16-year low of 4.8% and for 2007 the National Bank of Romania is targeting a rate of around 4%.

While the first year after accession brought higher economic growth for countries that joined the EU in 2004, Craciun suspects this might not be the case with Romania due to the very high growth rate expected for 2006 – somewhere above 7%.

Matei Paun, managing partner at BAC, a Bucharest investment bank, says it is this growth that is luring investors, rather than the expectation of Romania joining the EU.

“Investors are not necessarily driven by a particular date or point in time, but by an economy that is growing between 6% and 8%, by 22m consumers, by converging markets and a huge demand for various services and goods,” he says.

Many of the companies that are expanding into Romania now were once focused on Poland, Czech Republic or Hungary, Paun points out. “But the party is over there, and they are looking for the next party.”

Statistics would appear to back him up. Foreign direct investment (FDI) reached €7bn in the first 10 months of this year, up 35% from the €5.2bn attracted in 2005. According to Basescu, FDI is expected to climb to €10bn in 2007.

“It’s like a gold rush,” Paun says.

The limits of economic growth

Romania enjoyed average growth of over 6% over the last five years and

Paun expects "a broadly EU-average growth rate for the next decade."

But there are questions over whether such economic growth is the answer to all

of Romania’s problems?

ING’s Citu says the problem is that this growth has not translated into more jobs. After six years of growth, the number of workers officially active has remained at a steady 4.4m-4.5m, who have to support 6m pensioners and 400,000 unemployed.

The unemployment rate dropped to 5% in October from 5.6% in September, according to the National Institute for Statistics. But Citu says this data shows only those who are registered as unemployed.

“Maybe some of them have left to Italy [to work] or are simply working in the grey areas of the economy,” he says.

Daniel Daianu, professor of economics and a former finance minister, warned recently in the ZiarulFinanciar daily that Romania needs a post-integration strategy in order to catch up with other European countries. He says other countries’ experience has shown that high economic growth rates are not enough on their own to obtain social cohesion.

“We need to ask [ourselves] what kid of capitalism we want and what kind of public policies are needed in Romania,” Daianu says.

Paun is pessimistic. “Sooner or later Romania will face the music,” he says. “The party will truly be over when the trade deficit fuels the current account deficit sufficiently so as to make its financing unsustainable, leading to a currency devaluation, which will shortly be followed by increased inflation, higher interest rates and the inevitable economic recession.”

Paun expects this to happen in the next few years, but in his pragmatic view this scenario simply shows “how capitalism works.”

Valentin Lazea, chief economist at the National Bank, has a more sociological perspective. “People have to learn there is no such thing as a free lunch,” Lazea says, adding that public servants as well as local and central government authorities will have to adjust their behaviour.

As the integration lessons will have to be learned fast, Lazea expects this will come as a big shock to many when the party for joining the EU finally ends. “Europe does not have time to wait,” he intones.

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