Up to a point, Romania’s economy had all the tools at its disposal to become Europe’s biggest success story. Growth outpaced most of the bloc. Incomes rose fast. Foreign investors poured in.
But the current situation is not so hopeful. Romania’s economy is in a weak shape, with serious vulnerabilities.
And if you contrast “bad shape” meaning risk of economic deterioration or stagnation rather than strong growth, then Romania qualifies. But not all hope is lost.
A state too large for its tax base
Romania’s economic model has delivered rapid convergence since EU accession. GDP per capita rose from under €3000 in 2004 to more than €18,000 just 20 years later.
That rise, however, came with a persistent mismatch between spending and revenue.
Romania collects about 27-31% of GDP in taxes compared with the EU average of about 41%.
The VAT gap is the largest in the union. More than a quarter of potential VAT revenue is never collected.
The revenue system is porous and heavily reliant on consumption taxes. So when growth slows, revenue falls sharply.
At the same time, public spending has grown much faster than the economy.
The 2017 wage law raised public wages and pensions in a way that embedded higher spending into the budget.
That made the state far more expensive to run. The deficit moved above 4% of GDP even before the pandemic. COVID support pushed it to 9.3%.
After a brief correction to 5.7% in 2023, election-driven wage and pension increases brought the deficit back to 9.3% in 2024.
This is the highest in the EU by a clear margin.
Why Romania’s growth model is running out of road
Romania’s growth has long been driven by consumption, EU-funded investment, cheap labour, and foreign factories.
These elements helped the country catch up fast. But they are finite.
The pool of workers is shrinking. Wages have grown faster than productivity.
Many sectors now depend on tax exemptions that reduce the revenue base. The current account deficit has widened to over 7% of GDP because Romania imports far more than it exports.
Weak investment is another sign of strain. Firms hesitate to expand when inflation is unpredictable, and the fiscal path is unclear.
Bond yields near 7-8% raise the cost of long-term projects.
Credit rating agencies have moved Romania’s outlook to negative. Investors price the risk of abrupt policy changes and political turnover.
This combination of slow growth, high borrowing costs, and a large external deficit is unusual inside the European Union.
It indicates deeper structural problems rather than a temporary slowdown.
The EU steps in as the fiscal bill arrives
The EU has watched these imbalances grow for years. Romania has been under an excessive deficit procedure since 2020, but has struggled to follow the agreed path.
The European Commission has now tied future access to cohesion funds to a more credible fiscal plan.
These funds are central to Romania’s development strategy.
The current funding cycle allocates more than thirty billion euros to Romanian projects. Losing this support would hit growth and weaken investor confidence.
In order to avoid that outcome, the government adopted a wide package of consolidation measures.
VAT was increased, wage rises in the public sector were delayed, pension indexation was frozen, new excise taxes were introduced, and several thousand local administrative jobs are set to be removed.
The government expects these steps to lower the deficit to 5% after 2026.
The Commission projects a slightly slower adjustment. Performance will depend on implementation and political stability.
This tightening comes at a difficult time. Inflation is expected to reach about 7% in 2025 as energy price caps are lifted and gas prices liberalised.
Consumption will stay weak because real wages are pressured by tax changes and slower pay growth.
Fiscal consolidation in a weak economy tends to produce modest growth figures. The Commission’s forecast of 0.7% in 2025 is a clear indication of where things are headed.
Markets watch politics as closely as economics
Romania’s debt level is still moderate at around 57% of GDP. That is lower than many EU states and far below the levels that triggered past crises in southern Europe.
The issue is not solvency today but the trajectory over the next decade. High deficits, rising interest costs, and weak growth can affect debt dynamics quickly.
The country’s treasury aims to cut as much as €6 billion from its foreign debt issuance.
Investors are pricing this in. Yields near 7.5% are not crisis territory, but they signal a lack of confidence that Romania can sustain consolidation through multiple elections.
Source: Bloomberg
Politics amplifies the uncertainty. The far right has gained ground by opposing the new fiscal measures and criticising the parties that allowed the deficit to grow.
Many households already feel squeezed by high prices and low purchasing power.
VAT hikes and wage freezes are unpopular. Public doubt is reinforced by the fact that the current government includes several parties that helped create today’s fiscal problems.
If political support erodes, the consolidation plan could stall. Markets would demand a higher premium, and the adjustment would become even harder.
A test of Romania’s next decade
Romania is entering a defining phase. The easy part of convergence is over.
Consumption can no longer carry growth. Foreign investors look for stability and credible policy. EU funds cannot substitute for domestic reform.
The state is too costly relative to what the country collects, and revenue leaks weaken its ability to fund public goods.
The growth model that delivered fast convergence now limits the next stage.
The underlying question is whether Romania can move from a cycle built on spending and short-term demand to one anchored in productivity, tax capacity, and stable institutions.
Doing so requires discipline across several governments, not just one. It also requires the ability to sustain reforms when they are unpopular.
Romania’s economy has reached the point where the old economic formula cannot take it further, yet the new formula has not been built.
Countries rarely spend long in this gap. Some push through and redefine their trajectory.
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