Analyst: EU financing adds 5pp to Romania’s GDP annual growth by 2027

If Romania absorbs the EUR 80 bln financing from the European Union, the country can reach an additional economic growth of 5pp each year in the next seven years, estimates CFA Romania president Adrian Codîrlaşu, quoted by Ziarul Financiar.

He believes the country should run public budget surpluses to prevent a bubble that might appear following such massive inflows.

The projection is highly optimistic, particularly as Romania will also have to contribute some EUR 15-20 bln to the EU budgets while its absorption rate is typically low.

An annual growth rate of 5% per year over the next seven years (2021-2027), would result in a 34% higher GDP in 2027 compared to 2020, assuming 5% GDP decline this year and the scenario of no growth without EU financing (natural growth would magnify the effect of the 5pp mark-up generated by the European financing).

In this year's prices, this means an additional EUR 77 bln compared to this year's GDP and over EUR 80 bln compared to 2017 GDP under the baseline scenario.

The cumulative extra GDP generated by the European financing calculated over the entire seven-year period would reach EUR 147 bln, resulting in a multiplicator of nearly 2 for the European funds. Thus, the payback period of the EU funds would be shorter than seven years (it would be between five and seven years).

"If we absorb all the money from the European Union, this could contribute about 5% to GDP every year. This is a huge amount. It is very important that public policies adequately address these coming capital flows. A prudent policy would be that of a budget surplus, in order not to generate a speculative bubble," said Adrian Codîrlaşu.

But things will get worse before getting better, according to the CFA head's projections. Romania's economy will shrink by 4.5% in 2020, and the budget deficit will be 7-8% of GDP. On the upside, the exchange rate will remain immune to the pandemic, Codîrlaşu said.

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