Budget consolidation is urgent, and this should start in 2020 by bringing the budget deficit as close to 3 percent of GDP as possible, according to Daniel Daianu, advisor to the BNR Governor and chairman of the Fiscal Council, in an article published on the BNR Opinion blog.

“The Romanian economy depends on what is happening in the European economic area, on the ECB’s monetary policy; the monetary policy rates from us, the internal monetary market rates are influenced by the external monetary conditions. Excessive differentials of monetary policy rates can induce destabilizing capital movements and therefore an adequate calibration is required of monetary policy, which needs the support of an optimal budgetary policy. The budgetary policy should not have large deficits, especially since the RON is not a reserve currency,” says the economist.

Growing deficits (public budget and current account) are the result of excessive domestic demand and calls for macroeconomic corrections on the public budget chain. Daianu says that here is a fiscal dominance over the internal monetary policy that can easily be overweight.

”Romania’s economy is unique in the region by the size of the budget deficit and the current account deficit; the budget execution shows a major slippage in 2019 with the cash deficit announced by the Ministry of Finance at 4.4 percent of GDP (ESA deficit probably 3.8 – 3.9 percent) while the current account deficit probably exceeded 5 percent of GDP last year, together with a worsening of its financing structure. Poland and Hungary, with which we often compare, have much stronger external balances. Romania, which is targeting the accession to the euro area, shows a fracture between word and deed”, stresses Daianu.

Monetary policy cannot effectively counteract large deficits of the public budget. The NBR can only offset the pro-cyclicality of the budgetary policy only to a limited extent. This, because it could accentuate external imbalances, would even affect financial stability. Increasing budget and current account deficits put pressure on the currency market, on the RON, affecting the stability of the national currency.

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