Romania's ruling coalition, made up of the Social Democratic Party (PSD) and their former rivals, the National Liberal Party (PNL), is expected to coast to victory in the general election this autumn. Yet, despite what appears to be a smooth electoral path, the coalition will soon face a series of tough policy decisions, particularly around fiscal consolidation — a challenge that Romania can no longer afford to delay.

Formed in December 2021, the grand coalition between the PSD and PNL is far from a natural alliance. These two parties have long been adversaries, occasionally coming together in short-lived collaborations but often finding themselves at odds. However, the current partnership between the two parties had endured, as their different ideologies take second place to the need for mutual survival, Marcus How of political risk advisory ViennEast Consulting told a webinar on September 5, jointly organised by Raiffeisen Research. 

Current indications are the coalition will remain in power post-election, with one of the two parties’ candidates expected to take the presidency, which is also up for grabs this autumn. While polling is generally unreliable, past results from local and European Parliament elections suggest that the coalition is set to cruise to an easy victory. It will be helped by internal difficulties in Romania’s other main parties; amid a resurgence of the far right in Europe this year, the Alliance for the Union of Romanians (AUR) has failed to sustain its momentum, mainly due to internal divisions. Union Save Romania (USR) has also struggled with internal issues. 

Economic slowdown

Yet a greater challenge than securing victories in the general and presidential elections awaits Romania’s ruling parties. Credible fiscal consolidation will be key for Romania’s long-run economic growth prospects, pointed out Gunter Deuber, group head of research at Raiffeisen Bank. 

Romania's economy, once one of the strongest performers in the region, had a weak start to 2024. Growth has slowed significantly, partly due to external factors like the war in Ukraine and a broader European slowdown.

The latest figures from the statistics office show GDP increased by just 0.8% y/y in Q2 and 0.7% y/y in H1. The figures confirm an earlier flash estimate, which prompted analysts to revise downward their full-year GDP growth projections to under 2%. ING was the latest, announcing on September 6 that it is revising its 2024 growth forecast down from 2.0% to just 1.3%. 

Speaking at the webinar, chief economist at Raiffeisen Bank Romania, Ionuț Dumitru, highlighted the country's fiscal imbalance as a pressing concern. 

“The elephant in the room is Romania’s fiscal imbalance, which has not been addressed yet. The budget deficit is now probably even higher than 8% of GDP, and we expect it to remain very high in H2,” said Dumitru. 

“After the election we expect the government to start fiscal consolidation, with the intention to adjust the deficit gradually in the next years, so as not to jeopardise the economic growth outlook too much.”

Inflation, once among the highest in Europe, is now on a downward trajectory. It stood at 5.4% in July and is forecast to drop to 4.5% by the end of the year. Yet, Romania's fiscal challenges may prevent a smooth recovery. Planned changes to the VAT as part of fiscal consolidation efforts are expected to keep inflation higher than desired through the second half of 2025.

Opportunities and risks

However, the country's medium-term prospects remain hopeful, with expected inflows of EU funds and significant public investment, said Dumitru. Infrastructure projects, especially in services and construction, are booming, while manufacturing struggles due to weak external demand.

Romania is well-positioned to benefit from a burgeoning energy sector, particularly in electricity production. How notes that the country has the potential to become an energy powerhouse, even a net exporter of electricity and natural gas. However, these opportunities come with significant infrastructure challenges. With new energy projects expected to come online over the next decade, Romania’s transmission and distribution networks will need major upgrades to handle increased capacity.

Romania also faces investor risks, including legislative unpredictability, poor corporate governance in state-owned enterprises (SOEs) and corruption. Emergency decrees and political appointments have contributed to a governance environment that is far from ideal for business confidence, How warned during the webinar.

The long-term outlook

In the long term, Romania's economy has demonstrated resilience. As Deuber pointed out, Romania has been one of the most successful economies in the region in terms of convergence with Western Europe. It has achieved impressive post-pandemic recovery, second only to Poland in terms of sustained long-term growth. However, Romania also experiences higher macroeconomic volatility compared to its peers, and this volatility is likely linked to its fiscal and political cycles.

To maintain stability, credible fiscal consolidation will be essential. The country’s average budget deficit, around 5%, remains higher than regional peers, and its long-term growth prospects depend heavily on stabilising its public finances and improving its policy balance. Without these steps, Romania risks undermining the progress it has made in recent years.

Romania’s grand coalition is on track to secure another term, but the road ahead will be far from easy. Fiscal consolidation, economic growth, and infrastructure investment will all require careful management in the face of significant external and domestic pressures. The decisions made in the coming years will be crucial for Romania's long-term economic health and political stability.