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January 27, 2023

The EU-Southeast Europe Summit: Regional economic growth still very heterogeneous

By    Constantin Radut
Day two of the summit organized in Bucharest by The Economist has featured several panels focusing on various sectors of the regional economy and of the economies of countries located in this part of Europe. The presentations and points of view were very diverse and heterogeneous, just like the region on which The Economist has focused. However, as one of the speakers stated, Southeast Europe is a part of the continent that extends towards the Caucasus rather than towards Bucharest or Zagreb. On day two the speakers were personalities and officials from Romania, Croatia, from various European and national economic bodies.
Romania needs economic growth of 5-6 pc on the medium term
After presenting the main measures that the Romanian Government has taken for post-crisis stability and the improvement of the business environment, for local companies and foreign investors, Romanian Public Finance Minister Ioana Petrescu pointed out that the Government plans, as a strategic goal, to reach a medium-term economic growth of 5-6 per cent per year, in order for Romania to cover the gap separating it from other European states and to become part of the countries of average development in the EU.

“Our target is to have a medium-term economic growth of 5-6 per cent each year. We need this growth in order to catch up with the rest of Europe and I believe that if we continue with this type of measures that encourage the business environment we will attain this goal by maintaining fiscal discipline,” Petrescu stated. She pointed out that Romania has registered the second-largest fiscal consolidation after that of Greece, its structural deficit dropping from over 9 per cent of GDP in 2009 to 1.7 per cent of GDP today, the results being obtained by maintaining fiscal discipline.
Foreign banks are dominant in the region
National Bank of Romania (BNR) Governor Mugur Isarescu had particularly pertinent observations on the economic conditions in Southeast Europe. He emphasized that for this part of Europe “what I find defining is the quasi-absolute domination of foreign banks, which usually operate through local subsidiaries (mostly Austrian and Greek). According to IMF figures, the foreign banks’ share in the total assets of the banking systems varies from 71 per cent in Serbia to 92 per cent in Macedonia and Montenegro. Romania is at the middle of that interval from this point of view.”
The destructuring of national banking systems and the replacement of local banks with foreign banks had at one point positive attractiveness for both sides. However, the financial crisis which started at the end of the last decade revealed a different reality. The under-financing of local economies because of the migration of foreign capital. “The transition towards a low dependence on external financing should take place in an orderly manner, without forcing an aggressive reduction of the loans-deposits ratio which would generate excessive constraint at the level of the credit offer and, consequently, on economic growth. The idea of an orderly deleveraging process is even more relevant as in some countries it entails a fiscal consolidation process, which would amplify its inhibiting impact on aggregate demand,” Mugur Isarescu emphasized.
The BNR Governor added: “In order to visualize the size of this process, I point out that external financing from parent-banks dropped in Romania by approximately EUR 9 bln compared to the start of the crisis, approximately one third of this drop taking place in 2013.”
Electronic payments to reduce underground economy
A very interesting point of view was presented by Catalin Cretu, Visa Europe Manager for Romania, Croatia and Slovenia. In his opinion, a 10 per cent hike in electronic payments leads to a 5 per cent drop in the underground economy. “In Romania the underground economy represents 28 per cent of GDP, which means EUR 30 bln that can be brought to light. A 10 per cent hike in electronic payments leads to a 5 per cent drop in the underground economy, here is why the electronic payments industry is so important for a country’s economy,” Cretu said.
Pan-European infrastructure corridors
Romanian Transport Minister Ioan Rus presented the need for Romania, but also for other regional states, to improve its road, railway, naval and air infrastructure. The speaker informed the audience that Romania’s Master Plan, drafted together with an American company, is the first “scientific” document that establishes the country’s needs in the transport domain. The document is currently in public debate until the end of October. The observations and suggestions made by those taking part in the debate will be analyzed by a special Transport Ministry commission together with the American consultant. Then the document will be analyzed by the Government and will be sent in its final form, probably at the end of November, to the European Commission for final approval. The Master Plan will be a mandatory document for the future governments, for the next 25 years. Budget funds as well as European Union funds will be earmarked on its basis. According to Minister Rus, by 2030 Romania needs approximately EUR 30 bln in order to finance infrastructure projects.
The EU-Southeast Europe Summit: On the Road to Stability and Growth, was an event that took place in Bucharest on October 20-21 and that represented not only a political and economic event but also an event that marked the outlook that Romania can have in Central and Eastern Europe as a central pillar in many sectors of this part of the continent. We quote BNR Governor once again: “We have seen Romania placed on various cardinal points in Europe: East, South, Southeast and even Center – which wouldn’t be so far from reality geographically speaking. Obviously, such classifications take into account the meridians or parallels, but also look beyond them – what better example than the membership of the Club of Governors in the Black Sea region, a club whose founding members I and the National Bank of Romania are. At first made up of the central banks of riparian countries, the club gradually grew, so that currently Poland, Czech Republic, Israel and even China – or at least their central banks – can say they have access to the Black Sea.

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