Interview with the economic adviser to the Prime Minister of Romania

//   4 luglio 2011   // 0 Commenti

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Mrs Andreea Vass - State Adviser of the Prime Minister of Romania


ML: At this stage, the domestic economy seems to have emerged from the recession. The economic recovery, for the moment it’s only “technique”, it can be considered concrete and lasting?

Andreaa Vass: At a first glance, the economic recovery may seem only “technique”. However, beyond the statistics of 1.7% increase in the first quarter of 2011 relative to the same period in the last year and a projected 1.5% increase in GDP in 2011 and 4% in 2012, a change of economic paradigm can be seen. The shift from a model of economic growth based on consumption and imports to one which focuses on investments and exports increasingly appears as the only sustainable path of development among the worldwide economies. The Government did some major necessary reforms for the Romanian economy, in order to ensure a lasting recovery. We started with the fiscal problems of Romania, in spite of possible and undesirable political losses. We acted on the side of the large government expenditure reductions, following the European experience, from which we learned that large adjustments based on the spending side are more successful, they are not recessionary and they lead to more stable consolidations of the budget. Moreover, we made an important step by adopting, for the first time in Romania , a multi-annual financial framework and the Fiscal Responsibility Law. Through these, we will achieve the reduction of the budgetary deficit, higher levels of transparency and more predictability. The recently adopted Labour Code brings important changes for the private sector. The hiring and firing practices are more flexible, employers can conclude limited duration employment contracts of maximum 36 months, as compared to the 24 months before, and they can reduce the working hours or can fire more easily their employees during difficult economic conditions for their business. Moreover, the Code of Social Dialogue is completing the Labour Code through reforms that aims to restructure the unions, the employers associations and the collective labour contracts. With regards to the public pension reform, four were the major measures implemented: the elimination of the pensions that are not based on the contributiveness principle, the increase of the retirement age, the pension indexation and the introduction of a minimum social pension. Starting from the principle that an indebted country is not a free one, by doing so, we reduced the financial burden of both the state and the next generation. In order to create the abilities and competencies required by the labour market, and especially by the European labour market, the new National Education Law develops an educational system focused on the student and on the quality of the process. We encourage long-life learning among Romanian pupils and students.

ML: In Romania , as in the rest of the world, there are some macroeconomic factors can affect the path of growth and development. How do you assess the problem of inflation? What do you expects in the medium term, there will be a lowering of this ratio/index?

Andreea Vass: We performe well in exports, but we are lagging behind in inflation. In 2010, exports recorded their highest level in the whole history of Romania with a total value of 37,25 bn euros. Trade deficit in the same year halved as compared to 2008. More than that, in the first four months of 2011 goods export was 36% higher as compared to the same period in 2010.  At the beginning of the year, we forecasted a level of 5.1% of inflation in 2011. The actual level of inflation is 8.41%, the highest in the EU. When assessing it, we have to analyze the sources that generate the inflation. The inflation increases, first of all, due to a general increase in food prices. On the short term, it is possible for the inflation to increase, as a direct consequence of the evolutions on the energy market. A liberalization of the energy prices means an increase in energy prices for companies. Starting the 1st of July, the Romanian companies, excepting the thermal power producers, will pay 10% more for natural gas, as the first step in the strategy meant to set free the natural gas market by 2013 for companies and between 2013 and 2015 for household consumers. This will probably lead to a general rise in prices, tantamount to a growth in inflation. But the National Bank of Romania (NBR) managed well the situation up till now. In a medium term, we are expecting a more favourable evolution, in order to reach the level envisaged, if not for this year, at least for the beginning of the next one.


ML: In recent years we have witnessed a “bank bubble” when the market was over supplied with excess liquidity which followed a restrictive phase of the credit. How do you assess today the attitude of the banks in helping the economy and in promoting the resumption of investment? What role did the IMF?

Andreea Vass:After the “bank bubble”, the banks adopted a much more prudent behaviour. They started to search a less uncertain business and economic environment. Today, we assist at a resumption of investment for non-financial companies, and a slow credit recovery for population. Accordingly to the information BNR released in May this year, in the first quarter of 2011 the credit demand of non-financial companies had a positive evolution that is assumed to continue in the next quarter, as a consequence of the favourable expectations regarding the economic situation. For private consumers, credit consumption had also a positive trend. The IMF together with The EC had a decisive role, improving the Romanian stability internally and externally and assuring that the measures the Government had taken were the right ones.


ML: What are the main pillars of the government’s economic policy? What are your expectations for the future?

Andreea Vass: The Government had three major opponents in 2008. First of all, the most severe economic crisis in the last 60 years; then, the budgetary deficit of 4.8% in GDP in the year with the highest economic growth (7.9%) that led the EU Commission to trigger the excessive deficit procedure; and finally, an unreformed state and the unreasonable decisions of the Tăriceanu Government, which undertook social spending on debt, without coverage, such as salary and pension point increases. As a consequence, we were in need to address this situation immediately and aggressively. The Government’s vision in dealing with the economic and financial crisis is structured on three pillars. The first represents the structural state reforms, in order to avoid the major economic slippages. It is forecasted that the general budget deficit would have been close to 10% of GDP in 2009 and to 14% of GDP in 2010 and 2011, in the absence of the austerity measures taken by the Government. We are currently counting on a 4,4% of GDP budgetary deficit for 2011. In the first quarter of 2011 we recorded a budgetary deficit of only 1% of GDP, which keeps us on the scheduled reduction. Secondly, we envisaged the recovery of public finances. The Government effort was focused, on one hand, on improving and reducing public expenditure (67% in 2009, 69% in 2010 respectively, of the total budgetary adjustment effort) and on the other hand, on increasing the revenues (33% in 2009, 31% in 2010 respectively, of the total budgetary adjustment effort). Finally, these two pillars are completed with measures for the re-launching of a healthy economic growth and, on the long run, with measures aimed at the saving of jobs and the boosting of the absorption of the unemployed, the improving of public investment, the fostering of private investment through state aid and through state guarantees, the diminishing of the fiscal and administrative burden for companies in difficulty and the accelerating of the absorption of EU funds.

In doing so, we expect to put Romania ’s economy on the real and sustainable development path, with investments as major pillar growth.


ML: Romania will soon decide if and when to adopt the euro. What are your thoughts about it? The excessive volatile exchange rate may have adverse effects in the economic recovery ?                                                            Andreea Vass: Despite the discussions regarding the sustainability of Romanian economic politics in the last months, Romania keeps the 2015 deadline for the Euro adoption. For the moment though, Romania is meeting just 2 out of the 5 Maastricht criteria, those regarding the exchange rate and the public debt. Maintaining the goal represents a valuable catalyst for policy coherence. The advantages of euro adoption are higher than disadvantages. Euro adoption is associated with benefits such as lower transaction costs and lower interest rates that induce investment. The single currency eliminates the uncertainty related to exchange rate movements and thus diminishes the risk related to foreign trade, leading to a growth in international trade and investments that will finally generate a higher level of GDP per capita. Moreover, being part of a single-currency area means more advantages for citizens and enterprises. These are translated into a more stable environment for the whole economy by eliminating exchange rate fluctuations and therefore by eliminating uncertainties, risks and exchange costs. The elimination of costs related to the exchange of different currencies will facilitate business in the non-European markets, will make easier the price comparison of goods and services between the countries into the euro area and, as a consequence, will enhance competition. On the long term, euro adoption can be seen as increasing the living standards.


ML: The crisis in Greece, almost in default, may affect the country? Do you believe that Romania will be involved in the financial rescue plan? Andreea Vass: In a lesser or a higher degree, everything is economically connected. That’s why the Greek situation may affect the Romanian economy in several ways. First of all, there is a risk of financial contagion. Then, there is the risk of adverse impacts on trade, foreign direct investment (FDI) and workers’ remittances. As a trade partner, Greece has kept though a low profile: in 2010, only 1.5% of Romania ‘s exports were directed to Greece , while imports from Greece accounted for just 1.3% of total imports the same year. Romania is more vulnerable at a reduction in FDI flows from Greece . According to the last dates of BNR, in 2009, Greece occupied the fifth position among the main investors in Romania. The stock of Greek-owned FDI accounted for 6.6% of total FDI flows, like in 2008. In the banking sector, the situation is under control, although the degree of sensitivity is high. The Greek bank subsidiaries operating in Romania can be tempted to reduce their exposure and limit lending in order to help their parent banks in Greece in terms of funding and liquidity. Still, the BNR is prepared to face the shocks. Moreover, the 5 billion Euros made available to Romania by the IMF are a kind of a source of protection. They represent a preventive deal and are not currently planned to be used.   The recently problems that affected the national currency in Romania were not induced only by the problems in Greece , but also by the increase of the investors’ aversion to the global risk. Yet there is an indirect impact that can affect Romania ’s economic recovery, namely the decline in EU’s economic growth following the Greek situation. The financial rescue plan with concern to the countries outside the Euro zone is not decided. The project of Hungarian presidency is under discussion. Until now, the proposal is to redirect a certain percentage of EU funds to Greece , an action that does not imply funds from national budget. It is sure that the countries in the Euro zone will contribute to support Greece , but the implications for Romania and the degree of its involvement would be assessed only after a final decision is taken.

ML: The maturity of the ruling class of a country is mainly evaluated by two indicators: by the rate of corruption and by the rate of tax evasion. What is your opinion on the subject?

Andreea Vass: The rate of corruption and that of tax evasion are worrying. The 2010 Corruption Perceptions Index places Romania on the 69th position (out of 178 countries), with a score of 3.7 out of a maximum of 10 associated with the highly clean countries. We can appreciate as positive the foundation of DNA in 2005, but we still need effective measures in this way.

You could perceive Romania as a corrupted country with no corrupted people for too many years in the past. Now the changes are visible and the political will to fight corruption is valuable: you hear constantly about people sent to justice and the custom system investigated for corruption. Four new codes were implemented in order to restore the judicial system’s credibility, by enhancing the transparency, by simplifying the legal framework and by improving the accessibility degree, with positive aspects already visible and mentioned in the report issued by the Cooperation and Verification Mechanism. The tax evasion is also a problem, because the decrease of the state’s financial resources makes difficult the payment of pensions and wages, the investments and all the activities of public authorities that serve the citizens. Still, we are on the right path. In 2010, following the fiscal inspections, the additional amounts determined were 74% higher than in 2009. Budget revenues represented 33% of GDP in 2010, a record in the last 20 years, partially because of the succeses in fighting fiscal evasion. The black labour market also diminished alongside with the adoption of the new Labour Code that includes much higher sanctions. Thus, the number of official labour contracts active in present, 6.37 mil, is much higher than in 2008, 6,23 mil, a year with the highest economic growth. There is, of course, a lot of work to be done in order to gain the desired degree of maturity of the working class.

ML: To date, Romania has one of the lowest rates of use of European structural funds, which implicitly it means losing ground against other European competitors. What could be the stimulus for the enhanced use?

Andreea Vass:We have already adopted measures in order to improve the absorption of EU funds. On one hand, these regard a series of financial facilities to the beneficiaries. We doubled the maximum pre-financing quota, from 15 to 30% of the eligible value and provided pre-financing also to the private beneficiaries which enjoy state support, up to 35% of the grant’s value. We have enhanced the flexibility of the eligibility criteria, with respect to the lack of debt to public budgets, and we introduced the possibility to pledge/mortgage assets relevant in the project. The private beneficiaries have the option to open project accounts not only with the State Treasury, but also with commercial banks. Furthermore, the obligation for the micro-enterprises to provide the co-financing of the European projects in the form of their own contribution to the eligible costs (in the Regional Operational Programme) was removed. The full project value is granted to the beneficiaries that are institutions of the central public administration. The auction procedures were speed up, by modifying the legislation concerning the acquisitions.  On the other hand, there are measures which aim at the simplification of the applicant’s guide. There are some documents, such as the “Summary of the project”, that are no longer required when the project is submitted, while others are replaced with statements on the applicant’s own responsibility (copies “according to the original” are accepted instead of certified copies). Moreover, the listing of the requested documents is highlighted when the financing contract is signed and the obligations of the beneficiaries are clearly stated after signing the contracts. As a result, the absorption rhythm accelerated. Up to June 24th, the total payments to the beneficiaries raised to 2.64 billion Euros, which represents almost 13% of the 2007–2013 allocation related to pre-financing and reimbursements. The contracts signed cover more than 55% of the funds alloted for the seven years, thus our priorities are three for the moment: implementation! implementation! implemention! And the other three priorities are: responsible, correct and licit implementation!

ML: The renewable energy sector that could be a driving segment of the economy has experienced a period of uncertainty. In the next few weeks should be finally approved the law on E-RES. Foreign investment may come, but many others were diverted to other countries. An opportunity or a lost opportunity?

Andreea Vass: We have to respect the obligations assumed through the Europe 2020 Strategy as regards the third objective, climate change and energy. The approval of the law on renewable resources will enforce a less uncertain legislative framework, needed to attract foreign investors. We shall see if we took or we lost this opportunity. I feel Romania is so alive and kicking!


Andreea Vass



economy recovery



structural reforms

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