Nominal and real growth in Romania during ten years of EU membership*

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1 Available online at Procedia of Economics and Business Administration ISSN: , ISSN-L: Motto: By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. John Maynard Keynes, The Economic Consequences of the Peace, MacMillan &Co, 1919, pp Nominal and real growth in Romania during ten years of EU membership* Eugen GHIORGITA 1, Cristian UTA 2, 1,2 Spiru Haret University, Faculty of Economic Sciences, Fabricii Street, no. 46G, Bucharest, , Romania, eugenghi@gmail.com, cristi.uta@gmail.com Abstract: A problem marked by the spectre of eternity has raked the mind of the Romanians from the great to the small along the existence of the modern Romanian national state, namely the economic and social catch-up with the developed countries, or, in other words we ve got to catch them!, as we want to live like them. This idea became an obsession for the Romanian intelligentsia ever since the time when Petrache Poenaru, a man walked through Europe before 1850, urged the Romanians to follow the parable of the advanced countries of Europe, preaching the condemnation to progress of Romania. In other words, Romanians either progress, or no longer exist! Socialism has maintained the same persistent tension of recovering the gaps by a sustained economic growth and the condemnation to development, the economic and social macro-indicators being the basis for revealing the achievements of the Romanian people under the wise guidance of... What was defining for Romania until 2007 remained after the year of Romania's accession to the European Union. In other words, much has changed, but we are the same. The mentality of a community, however diverse the individuals make up, contains some paradigms or stereotypes of thought. The present paper represents an attempt to objectify the paradigms of Romania's integration into Europe. We are thus trying to distinguish between the official achievements of the ten years of institutional, and not only geographic, presence of Romania in Europe and the resistance of frustrations accumulated over several centuries of history. * The present paper was put forward in an initial form at the National Economic Conference (CEN 2017), on May,

2 Keywords: nominal growth, real growth, GDP, consumption, investment JEL Classification: E01, E20, E21 1. The Road to U.E. The unbeatable protocronism of the Romanians is also manifested here, namely on the road followed by Romania towards the European Union: all the reports on the way to Europe invoke Romania's quality as the first country of the socialist camp in Central and Eastern Europe that had official relations with the European Community. The real ground, however, of this claim is the agreement concluded in January 1974 with the EEC whereby Romania, as a developing country, was included in the GSP (Generalized System of Preferences). A series of agreements followed, culminating in the 1980 agreements, which set up the Joint Commission Romania-CEE and the Agreement on Industrial Products. The work of nearing Romania to EEC, that has started during socialism was continued with increased efficiency after In 1991, a Trade and Cooperation Agreement was signed and entered into force in February 1995, although the provisions on trade relations have been applied since 1993, by signing an Interim Agreement. In fact, in the same year, on June 22, Romania filed a request for membership in the EU. Romania's request was naturally followed by the monitoring of Romania's progress in the process of joining the European Union. A series of annual reports have been drawn up, which once again naturally found the progress made in 1997, 1998 and 1999, which led to the start of the accession negotiations with effect from 15 February The stated objective was to obtain full membership in Although economic progress was indisputable, a 2003 report by Emma Nicholson showed, synthetically, that Romania had not become yet a rule of law with two structuralendemic issues: corruption and the slow pace of reform. It was, in fact, the matter about what is still today, ten years after accession: corruption, the malfunctioning of the legal system, bureaucracy. However, during 2004, the U.E.'s perspective on Romania has improved so that on December 17, 2004 the negotiations for the accession of Romania to the European Union were concluded. All 31 chapters were declared closed, including Justice and Home Affairs. In fact, Romania's commitments rather than realities were taken into account. As a result of the changes recorded during 2004, on April 25, 2005 was signed Romania's Treaty of Accession to the EU. Also on the formal line, the authors of the Country Report for 2005 were optimistic, showing that Romania has made significant progress in aligning the internal legislation with the European Union legislation by becoming able to fulfill its obligations as a state Member of the Union from the accession's very first moment... We have lagged a little over this pre-accession period, because the speed with which negotiations have been concluded, improved reports, signed the Accession Treaty, without a national referendum, reflects a hurry similar to that of the forty-eighters and Unionists in the middle of the nineteenth century the one to radically change everything! At least then, 174

3 even if formally, ad-hoc divans were convened in which the representatives of most of the population voted for union! For over 150 years, we've been building forms without substance, and we're getting used to the rhetorical question, but how many countries are having forms with substance? 2. Statistical data with contradictory interpretations Undoubtedly, for most analysts, Romania's socio-economic development was positive after January 1, 2007, when it joined the European Union. The first argument in favour of this positive development is the upward trend in GDP. But how is GDP calculated? What is the share of volatile components in GDP? What are the material assets, plus the contribution of intelligence (for example, software), and what are the financial ones? What is the underground economy in GDP or around GDP? There are questions to which probably only a few people can answer, and those ones only with approximation. 2.1 Romania, the country in Europe with one of the highest GDP growth rates That's what statistics look like or demonstrate. However, statistics may be used according to the interests of the researcher. Statistical information can be interpreted in an optimistic, pessimistic or realistic, i.e. objective way. The objective interpretation implies the elimination of prejudices as well as of interests. Therefore, the rigorous analyzes of the chronological series always take into account the real values of the macroeconomic indicators, not the nominal ones. Nominal values are usable in the correlation system for the same reference period (year, semester, month). Leonard Orban, quoted by declared on In the past ten years, Romania's Gross Domestic Product grew by almost 60%, from 98 billion euros in 2006 to 158 billion euros in [1] Similarly, one of the many researchers of the evolution of Romania's economy over the past 26 years, Dragoş Filipescu estimated in an article published on his blog: In 2016 the estimated GDP is billion and 182 billion USD. [2] Both variants are approximately accurate, as confirmed by Eurostat: Table 1: Evolution of Romania's Gross Domestic Product in [3] billion euro, current values Indicator Nominal GDP ,6 Average nominal growth over % 27.4% 44.7% 22.3% 28.8% 35.4% 35.7% 46.6% 52.8% 62.5% 72.3% Source: Eurostat, updated on Thus, as compared to 2006, Gross Domestic Product in nominal terms increased by 62.5% by 2015 and by 72.3% by 2016, respectively. However, nominal values are affected by inflationary processes at national (RON) and European level (Euro). That is why it is necessary to deflate them, respectively eliminate the influences of inflation. 175

4 The same source presents year-on-year increase in comparable, real-time terms, chain linked volumes. Table 2: Annual average increases in Romania's Gross Domestic Product in the period annual average increase over the previous year Average annual growth Average nominal growth 27.4% 13.6% -15.4% 5.3% 5.2% 0.2% 8.0% Average real growth 6.9% 8.5% -7.1% -0.8% 1.1% 0.6% 3.5% Source: Eurostat, updated on The discrepancies are notable, especially for the first year of Romania's presence in Europe, i.e. 27,4% nominal average as against only 6.9% real average growth. Naturally, real GDP growth of 6.9% in 2007 and 8.5% in 2008 was considered big, even spectacular by analysts. On the basis of the real annual average increases, we recalculated the Real Gross Domestic Product in constant values, comparable, taking 2006 as the reference year. Table 3: Evolution of the Real Gross Domestic Product of Romania in billion euro, constant values, reference year % 6.4% 6.0% 3.1% 3.9% 4.8% Indicator Real GDP ,3 Fixed base 100% 106.9% 116.0% 107.8% 106.9% 108.1% 108.7% 112.5% 116% 120.5% 126,3% indices Average real growth compared 6.9% 16.0% 7.8% 6.9% 8.1% 8.7% 12.5% 16.0% 20.5% 26.3% to 2006 Source: Calculated on the basis of Eurostat data, updated on Data provided by Eurostat shows real GDP growth of only 26.3% in the ten years since joining the European Union compared to a nominal increase of 72.3%. After the peak of 2008 (16% up on 2006), 06), in 2010 GDP has returned to roughly the 2007 level followed by a slight increase in 2011 and Between 2013 and 2016 we witness a real recovery of the economy. Thus, real GDP growth is almost three times lower than that of nominal GDP. Therefore, it is good to be skeptical of some reporting of economic macro-indicators, especially when they are expressed in nominal sizes. Graph 1 Graph 2 Source: Calculated on the basis of Eurostat data. 176

5 However, real GDP growth in the ten years of Romania's presence in the European Union is not negligible. The dynamics of Romania's economy in is considered to have been one of the highest in the EU, standing above the European average. Table 4: Dynamics of the Real Gross Domestic Product in Romania compared to the EU average in the period % - Dynamics of Real GDP Romania UE - 28 countries average Source: Calculated on the basis of Eurostat data, updated on In nominal terms, GDP value of the peak Graph 3 year 2008 (142.4m euros) was reached in 2013 (144.3m euros). In real terms, the level of GDP in 2008 (114.2 million euro, in 2006 values) was reached one year later in 2014 (Table 1 and Table 3) As can also be seen from Table 4 and Graph 3, GDP growth in Romania exceeded the average GDP growth of the 28 countries of the European Union each year. In the period , compared to an average GDP growth of 20.9% in nominal terms in the EU and only 8.4% in real terms, Romania recorded values of 72.3% and 26.3%, respectively. Graph 4 Graph 5 Rankings based on Eurostat data (Graphs 4 and 5) reflect Romania's top position. Leaving aside the economic successes s of Malta, the head of the series with a growth of 83.8% (!), in GDP nominal terms Romania a was exceeded in 2016 only by Slovakia and Bulgaria (77.8%, respectively 74.1%), with a 72.3% growth holding an honourable fourth place in the European hierarchy of economic omic growth as compared to The situation is slightly changing, if we consider the real GDP change: Romania ranked sixth by 26.3%, after Malta (43.9%), Poland (41.4%), Ireland (39.2%), Slovakia (35.7%) and Luxembourg (30.4%). 177

6 Therefore, we can say that the evolution of real GDP in the ten years thatt have passed since Romania became EU member has been brilliant, despite the ups and downs caused by the economic crisis from In order to correctly interprett Romania's economic situation, we must also take into account the level of GDP per capita indicator. GDP per capita real growth follows the trend of overall GDP real growth, but the per/capita nominal values show a higher increase in 2016 over 2006 than the total GDP! Table 5: Evolution of Romania's Gross Domestic Product per capita during [4] - current prices, Euro/capita at market prices - GDP/capita Nominal GDP Average nominal growth over % 30.4% Source: Eurostat, updated on % 28.3% 37.0% 43.5% 45.7% 56.5% 63.0% 76.1% 87.0% According to Eurostat,, provisional data for 2016 show a nominal value of GDP of 8600 euro/capita, i.e. 87% over the value of 4600 euro/capita in 2006! As shown in Table 1, overall GDP increased only by 72.3% in the same period. There could be at least two reasonable explanation for this gap: Graf 5 a. First, the decrease in population number. As shown by the same source, in 2006 the official number of inhabitants was 21.3 million people, as in 2016 the population was estimated at 19.8 million inhabitants (- 8,3%). b. Second, the depreciation of the national currency. Source: Eurostat, updated In 2006 the annual average exchange rate was 3,5245 lei/euro, whereas in 2016 it was 4,4908 lei/euro. During ten years the European currency appreciated by 27,4% as against the Romanian Leu. A less optimistic image offers the penultimate place occupied by the level of Romania s GDP/capita among the other 28 EU countries in Only Bulgaria has a lower level of GDP/capita (6800 Euro), while Poland, Croatia and Hungary are not too far from it (within a marge of 3000 Euro). So, one can say that, despite the progress recorded during the last ten years, Romania remains one of the poorest countries of Europe. 178

7 2.2 Contradictory realities Is Romania's economic growth sustainable? This is the question! An expected GDP growth of 5.8% in 2017 would be a reason for joy and pride for the governors and the population? A detailed analysis of Romania's economic and social situation is not the objective of this paper. It is worth pointing out some delicate issues that come to correct the enthusiasm of GDP growth over the last three years. Several voices have been heard, arguing that the growth of Romania's economy is overwhelmingly based on final consumption and, to a lesser extent, on increasing industry's participation in GDP formation. A first proof of this is the chronic deficit of the foreign trade balance over the past 27 years with negative effects on the current account balance. Consumption of imported products, i.e. the net imports, was supported by the money creation, a process that generated the internal and external depreciation of the national currency. However, things have been well-known for several decades. In his fundamental work, The General Theory of Employment, Interest, and Money, J.M. Keynes warned of the consequences of dependence on foreign investment and current account deficit: In an open system with foreign-trade relations, some part of the multiplier of the increased investment will accrue to the benefit of employment in foreign countries, since a proportion of the increased consumption will diminish our own country's favourable foreign balance. [5] Can one than say that economic growth based mostly on final consumption is sustainable? Is this real growth? Consumption itself is not necessarily bad! But long-term debt consumption can not have beneficial effects. Than what should we do? Refrain from consuming? It is hard to understand how, in a penultimate country in Europe with regard to the incomes of the employed population, the hypermarket chains and the malls resist, multiply and even make profits. The underground economy should be considered. Much of the incomes that sustain consumption seem to have as source the underground economy. However, the data provided by Eurostat (only 28% of GDP) seem to be lenient. Ten years after joining the European Union, Romania remains a country of contrasts, a country where 25% of the population live below the poverty line, the gross minimum wage is 320 euros (1450 lei) and the average of 697 (3131 lei), consumption remains extremely high, reflected not only by the value of daily sales of goods, but also by the receipts of domestic and foreign tourism operators. An unemployment rate of 5-6% remains a praise for us compared to other European countries unless we take into account the methodology of calculating the unemployment rate and the two, three or four million Romanians who work temporarily or already permanently in other European or extra-european countries. We can not afford to address the situation of health and education systems, of small and medium-sized agricultural producers, and of Romanian SMEs in general. However, regarding the situation of enterprises in Romania, some observations are worthwhile. With 22 companies per 1,000 inhabitants, Romania has the lowest value in the EU (average of 43 in December 2014), indicating a still undeveloped entrepreneurial spirit. In spite of the 179

8 significant increase in the number of firms, the degree of concentration in some economic sectors remained important.[6] Romanian companies face complicated problems: 285,000 companies (48% of the total) have negative equity in 2014 compared to about 29,000 (10% of the total) in This situation requires either recapitalization or exit from the market. On the other hand, the Gross Value Added (VAB)/Company indicator (real convergence criterion, created by analogy with the GDP/per capita indicator) shows that the economic force of Romanian firms is still low. VAB/company in Romania is in December 2014 of 126,000 euros compared to an average of 300,339 euros in the EU (42%).[7] The enthusiasm for statistical macro-indicators has not diminished, but has increased over the past ten years. Just like years ago, we have to prove with more or less reliable data that on average we are getting better and better! And if, by chance, a cavilar sounds up, it's not so well for everyone, or it's not that good, we have the replies ready: But..., who's really going well today? Conclusion: The final question is: Is it better in Romania in 2017 than it was in 2006? The answer will, of course, be differentiated according to the incomes decile of each interviewee, regardless of whether the sources of income are transparent or not! It is indeed very difficult to determine the extent to which today is better or less good than ten, twenty or thirty years ago. Generally, people forget the past difficulties, referring strictly to the present. Therefore, the problem should be reformulated in the sense Why do today's living conditions seem to some people more difficult than in the past? References [1] Leonard Orban, Romania received European Funds of 39 million euros during 10 years of EU membership accessed on [2] Dragoş Filipescu, Was it better during Ceauşescu s time? Do statistics lie or do people lie? Era mai bine pe vremea lui Ceauşescu. Minte statistica sau mint oamenii? [3] accessed on [4] accessed on [5] J.M. Keynes, The General Theory of Employment, Interest, and Money, Chapter, X, Book III. [6] Vasile Iuga, The effect of the EU on Romania, February, 25, 2017!7] Ibidem. 180