A group of business organisations and individual entrepreneurs in Romania have signed a “Call for Saving the Economy” asking the Romanian state authorities for an economic stimulus package worth €30bn (15% of GDP). They envisage funding the package through substantial borrowing from international financial institutions. 

The signatories are mostly local entrepreneurs largely in the sectors of horeca, tourism and transport that are among the hardest hit by the coronavirus (COVID-19) pandemic. 

The list of initiators includes, for instance, the Romanian Business Leaders formed by local entrepreneurs and professionals but, notably, not the Foreign Investors Council that includes subsidiaries of multinational groups, and banks that are generally part of foreign groups.

The government's economic support package gained clarity recently, but it remains thin. The executive has already promised to guarantee and pay the interest for loans in the amount of up to €3bn extended by banks to small and medium sized enterprises — but the steps taken so far have been of much smaller magnitude. And the bureaucracy makes this measure hardly credible. The government has also launched a programme to pay unemployment benefits to employees in technical unemployment (some €1.6bn). A further €500mn worth of grants are expected to be financed from the European Union, but there is no guarantee in this regard. 

Under these circumstances, it is understandable that the entrepreneurs are calling for more committed intervention. The authors of the manifesto asked for an “interventionist” “shock therapy” with money borrowed by the government (to be repaid later in the future), including from the International Monetary Fund (IMF) or the European Bank for Reconstruction and Development (EBRD) and “injected” in the economy.

Even if this means asking future generation to pay off the debts, there is no other way to save the economy, the authors of the letter argue.

They believe that substantial state intervention could help the local economy avoid recession or close the year with a low decline and maintain its competitiveness in the global market. In contrast, the lack of immediate intervention could throw the country into a long and deep recession, more severe than the one in 2009 and with little chance of significant recovery in the next decade. 

In the end, the investors propose the creation of an economic crisis group that should include all those who can contribute with solutions, starting from their proposal, and decide if such a “shock therapy” is possible and viable in Romania.

"Shock therapy" or interventionism?

Perhaps the “shock therapy” literally recommended by the authors of the manifesto is not the best description of the programme they suggest, since the term generally refers to a smaller role played by the state in economy — while the Romanian entrepreneurs are asking for exactly the opposite: stronger intervention by the state in the economy.

“We consider that, in the present situation … it is necessary to rethink the way the Romanian state must intervene, in the sense of an extraordinary approach in an extraordinary situation. We believe that the Romanian state should behave like a responsible stakeholder in all Romanian companies under the present conditions,” reads the opening of the local investors’ call, which is addressed to President Klaus Iohannis, the heads of the Romanian parliament, the government and the main political parties in Romania.

Not straightforward

The logic suggested by the entrepreneurs is that Romania’s public debt-to-GDP ratio is still low at around 35% at the end of last year, and the European Union has just lifted the constraints on the budget deficit. The country could, therefore, borrow as much as it needs to finance the economic stimulus, they conclude. However, while the EU may have lifted (temporarily) the constraints on the budget deficit, rating agencies and the banks have not changed the procedures followed in assessing the sovereign risk. Running wide current account and budget deficit is still seen as risky and Romania is unlikely to raise the kind of money the entrepreneurs suggest (€30bn) from the international market. Romania might hope for only €1bn from the IMF, according to sources familiar with the ongoing discussions in the government, while the country has already started talks for €1bn from the World Bank’s International Bank for Reconstruction and Development (IBRD).

One way or another, the government will have to finance the €30bn package, except for the unlikely case that the European Union finances it instead (by transfers from the wealthier states). After stimulating economic growth in a first stage, the Romanian government must either repay the money borrowed to finance the stimulus package (assuming it managed to find lenders) or raise the money from the relatively more profitable sectors of the economy to finance the stimulus package targeted at the sectors that need temporary support to further develop. In fact, in both cases the €30bn will be paid by local companies and households via higher taxes. It is only a matter of distributing the cost of the package among generations and categories of taxpayers.

On the other hand, although this is not detailed, the entrepreneurs included loans guaranteed by the government in the €30bn package besides grants, which would diminish the impact on the budget deficit and public debt.

Unclear size and architecture

The €30bn size of the stimulus package seems a bit too large compared to the GDP decline expected by independent analysts. ING bank expects Romania’s GDP to drop by 6.6% this year then to rise by 7.1% in 2021, thus returning to the 2019 level. The 6.6% GDP decline this year means less than €15bn, or half of the stimulus package suggested by the Romanian entrepreneurs. Secondly, the way the Romanian authorities should “inject” the money into economy is not fully explained by entrepreneurs. If most of the money included in the package is commercial loans guaranteed by the government, this would significantly reduce the public borrowing needs.