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March 2, 2021

Lazea: Forced GDP growth – one of the causes behind crisis

Valentin Lazea, chief economist at the National Bank of Romania (BNR), claims that the banking institutions were reporting losses even prior to Emergency Ordinance 50. “We have had only a fiscal crisis but insufficiently thought-out laws can add a banking crisis,” the economist told ‘Saptamana Financiara’.

In order to explain the domestic factors that led to the crisis’s onset in Romania, Lazea stated that Romania, a country that went through its first full economic cycle as a market economy in 2000-2010, committed a series of macroeconomic errors such as forcing the GDP to grow beyond its potential. “Although the intention was praiseworthy (reducing as fast as possible the lag that separated it from EU countries), the push led to the deterioration of four indicators which weighed significantly in the eyes of foreign investors starting with 2008 (the current account deficit, the total external debt, the structural budget deficit and the public debt),” the BNR official explained. He added that this year Romania will have a public debt of 30 per cent of the GDP, representing an exponential growth compared to 2008 back when it represented 13 per cent of GDP. “If such a growth continues the capital markets will simply stop financing Romania or will do it at exorbitant interest rates,” Lazea pointed out, opining that the quick reduction of the budget deficit and the drastic lowering of the public debt’s growth rhythm are needed because this is what capital markets are indirectly asking for.

In what concerns the investments, the economist admitted that the quality of FDI is more important than its quantity. “For example, in the Visegrad Group countries the FDI mainly went into industry and tradable, while in Romania they concentrated in non-tradables such as constructions, retail and financial services. That is why at the onset of the crisis the external balances of the private sectors in the Czech Republic, Poland, Slovakia and Hungary were balanced or had a slight deficit, while in Romania the private sector’s external deficit was closing in on 7 per cent of GDP, calling for a painful adjustment,” Lazea explained.
Referring to the statement made by Peruvian economist Hernando de Soto, Lazea stated that it illustrates as best as possible the instability of two of the elements foreign capital keeps an eye on: the quality of the judicial system and the depth of the financial market. Because of the unpredictable manner in which the Romanian justice system works people hesitate when it comes to taking investment risks and when they do they prefer investing in real-estate assets (houses, plots of land) rather than in financial or productive assets. De Soto stated that “as long as property rights are not well defined assets cannot be transformed into capital, cannot be transacted outside a small circle of people that know each other and cannot be used as collateral for loans or as participation in an investment.”

Romania had the “good fortune” of facing merely a fiscal crisis, unaccompanied by a banking crisis. Therefore, we should make sure we won’t cause, ourselves, such a crisis, by passing poorly weighed pieces of legislation.

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