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Romania has seen record economic growth. At the same time, the inflation rate has gone up and the budget deficit appears to be more and more fragile.
In the past few years Romania has seen record economic growth. Relying on the positive figures that place Romania first among the EU countries in this respect, figures that were also confirmed by international financial institutions, the Government in Bucharest has this year increased spending related to public sector salaries and has lowered a series of duties, such as the income tax, which went down from 16% to 10%.
At the same time, however, the inflation rate has gone up and the budget deficit appears to be more and more fragile. The European Commission has already warned the Romanian authorities that the country's budget deficit is getting close to the critical threshold of 3%. President Klaus Iohannis has also said recently that budget revenues are in freefall and has blamed it on the policy of the Social Democrat PM Viorica Dancila. In two weeks, President Iohannis has twice called on Dancila to resign. Political tensions between the Government and the President have escalated lately, with effects on the economy.
Professor Mircea Cosea, an expert in economy, a cabinet member in the 1990s and one of the architects of the country's economic and political reform after the fall of communism, explains:
"The problem is that we have created an environment in which the economy cannot advance. On the contrary, in my opinion, it is going to face great difficulties. This is because this political situation, which some call instability and others a quarrel, a tiff, depending on how we interpret it, is, after all, tinged with a certain sense of fear and unpredictability. There's a certain feeling of uncertainty. Trust in the Romanian economic environment and the so-called functional market economy is being lost because a well-known scenario is being repeated over and over again in the run-up to election campaigns. Romania's economy is always affected during election campaigns. We're now facing three electoral events within a period of two years. In my opinion, the electoral battle has started and is conducted in a primitive manner, because it's not a competition between projects and principles but only a quarrel, as I was saying earlier."
Economic analyst Adrian Mitroi explains the effects that political tensions have on the economic environment:
"We've been used to living in a prosperous economic context that is almost indifferent to what happens on the political scene. If this situation continues, markets will keep on doing what they always do, simply and no scruples. This mechanism of the financial markets is very tough and does not take sides. It has a single way of operating, namely by increasing interest rates and putting pressure on the exchange rate. The best solution, up to a point, is the market itself, which has its economic stabilisers. The free market economy we have at the moment, which we see as the best way to create prosperity for all of us, is also equipped with adjustment instruments."
The figures are not worrying for the time being, says economic analyst Adrian Mitroi:
"When the country is booming, as it's the case now, with a 7% economic growth, it seems almost natural to have a 5% inflation rate, at least temporarily. The inflation rate will probably settle at around 3%. If we take a look at these figures they seem reasonable given the balancing act of an economy that works above its potential. When things go smoothly, there are two types of factors that can be brought into play: the Central Bank's monetary policy, which tempers the economic exuberance and increases interest rates, or the fiscal policy, which prevents salaries from going up and increases taxes. Romania is quite a tax-friendly environment. We have a lower VAT tax and higher salaries. It all piles up, though. If you think about it, we do have a small inflation rate given the situation. So there's an accumulation of factors and substantial economic growth. Romanian consumers are optimistic. They are positive and save more than they did ten years ago. In my opinion, the most important thing is the potential for investment. Productivity in the Romanian economy is on the increase. The IT sector is highly productive and the farming sector is also doing well. These are two exceptional engines for growth, which depend a lot on the increase in productivity. So I believe we should not worry too much yet."
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