Romania should consider implications from EU recession

World Bank has released their global outlook for 2012. Among other things it confirms that euro area will  see a decrease in real GDP relative to 2011:-0.3%. The figure is not that important what it is important is that WB moves closer to what the market has been expecting for sometime – recession in the euro area in 2012.
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This should not come as a surprise as it would have been very difficult to have growth while imposing austerity measures and the cost of capital is rising. Furthermore, recession will make it more difficult for EU leaders to deal with the sovereign debt problem plaguing the area.

Unfortunately for Romania EU is its main trading partner. Last time euro area entered recession Romania followed one year later with a vengeance. Much like in 2008, 2012 is an election year. Thus recent history would tell us that “political forces” will try to keep the economy growing in 2012 also. There is another difference however with 2008: real and potential growth. In 2008 the economy was growing above its potential growth of 6%. In 2011 and 2012 the potential growth is just above 0% with the economy growing at potential. In this environment it will take a smaller negative shock to push the economy into recession than in 2008.

In order to avoid recession in 2012 or 2013 Romania needs to act today.

Graph: real GDP growth

Sources: IMF and WB

3 thoughts on “Romania should consider implications from EU recession

  1. And what do you suggest? It’s easy to say Romania needs to act, but what actions do you think could help the country avoid recession and achieve fiscal and monetary targets in the same time?

    1. @ zoli
      If I were a cynic, besides a skeptic, I would say that it is not my job to suggest anything. These people have a job to do and they should do it. Now this job entails to make sure the economy grows, it creates jobs and does not create inflation or higher taxes for future generations. It is not an easy job but nothing is easy.

      But I am not.

      If you were reading my posts, since August 2011, I had at least 10 dedicated to possible solutions. In a nutshell I favor lower taxes with drastically lower public expenditures. I favor a functioning and free money market. I am in favor of personal bankruptcy. I even proposed a rules based fiscal policy few days before Mr. President agreed to a similar one in Brussels without knowing what he was agreeing to. I think I offered a lot of solutions for a bystander.

      The government has fiscal, monetary and economic policies as tools to deal with these negative shocks. Until it decides what to do with those it can start by making this year’s budget on a more realistic economic growth. That is why I posted the graph today. Otherwise we repeat the mistake of 2009 when the budget was created on an economic growth of 3%.

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