Romania: Boom on the Black Sea shore

For most people, emerging and developing countries are a long way away. But for those who don't want to travel too far away, Romania is a country that combines the security of the European Union with the high growth rates of emerging countries. The largest country on the Balkan Peninsula has become a key player on the Black Sea since joining the EU

Since its EU accession in 2007, the largest country in the Balkans often fell short of its expectations. Although Romania managed to close the income gap from initially 26.4 percent of the EU average at the turn of the millennium to 76.7 percent in recent years, the price was high. More Romanians left their homeland for other EU countries - especially Germany, Austria, and Italy - than from any other OECD country following EU accession. Instead of an economic boom within its own borders, Romania's population abroad grew to become the fifth largest diaspora in the world - in absolute numbers, only surpassed by much larger countries such as Mexico, India, China, or the still twice as large Poland. This phenomenon affected all Eastern European countries, and according to an IMF estimate, the growth of output remained below expectations due to the exodus. Romania, being the easternmost country on the periphery of the EU, has always been overshadowed by growth stars like Poland or the Czech Republic.

Abbildung 1 Entwicklung der Pro-Kopf-Einkommen (in aktuellen US-Dollar) Quelle: Weltbank - Graphik ändern

Positive Outlook thanks to EU-Integration

Even though the European Commission had to revise the country's growth outlook for 2024 downwards by 0.4 percentage points, Romania is developing into Europe's major growth engine with an expected growth of 2.9 percent in 2024 and 3.2 percent in 2025 - even surpassing the other ex-communist giant, Poland. Considering Romania's population of 20 million, this represents significant potential in absolute numbers. At the same time, the inflation rates, which burden purchasing power, are expected to decrease (from 5.8 percent in 2024 to 3.6 percent in 2025).

Abbildung 2 Wachstumsraten Rumäniens im Vergleich mit anderen osteuropäischen Ländern (Quelle: Europäische Kommission, 2024)

At the same time, the country benefits from high payments of up to 14.3 billion euros in grants and an additional 15 billion in favorable loans from the European Union's Recovery and Resilience Facility. These funds are particularly driving the construction of the still underdeveloped infrastructure of roads and buildings. Additionally, there's the REPowerEU package, aimed at supporting countries in breaking free from dependence on Russian natural gas while simultaneously promoting renewable energy sources. Romania will receive an additional 1.4 billion euros from this initiative. However, Europe's interests in these efforts are not solely economically driven.

Thanks to war, good times are ahead

The aim is to stabilize Romania and integrate it more deeply into European institutions. Ironically, the war in Ukraine brings the Black Sea country into the center of action. On one hand, due to the international support for Ukraine, Romania suddenly becomes the scene of numerous activities by the EU and NATO.

Abbildung 3 Rumänien an der Frontlinie

Furthermore, Romania is offering its port infrastructure to Ukraine through a corridor, from where the war-torn country can ship grain to the world. Four million tons per month are expected to be shipped via a railway line under construction that will connect Ukraine, Moldova, and Romania, deepening the integration of the region. This is despite the fact that the two countries do not share an easy neighborhood. Notably, 150,000 Romanians and 250,000 Romanian-speaking Moldovans live in the Ukrainian region of Bukovina, where minority rights issues frequently lead to disputes. Additionally, Romania is experiencing a steady influx of people from both countries, whom Bucharest considers part of its own nation, distributing passports diligently.

On the other hand, Romania's peripheral location on the Black Sea suddenly becomes an advantage. Numerous companies from the countries bordering the inland sea - primarily from Russia and Ukraine - are relocating their production. In Ukraine, the obvious state of war and uncertainty about its near future are the reasons, while in Russia, the war economy, political arbitrariness, and ongoing sanctions increasingly put the security of investments in question. Romania is attractive because it still offers comparatively low wages, is within the European single market and thus its legal framework, and has managed to keep its currency, the leu, stable despite all the crises of recent years.

For example, the Finnish tire manufacturer Nokian Tyres sold its factory in Russia to set up in Oradea, Romania, for 650 million euros. The location managed to prevail due to its advantageous factors, such as affordable, well-trained labor force, logistical benefits including a railway connection, and renewable energy, against more than forty other locations. Originating Russian companies, which serve the German-speaking market with software solutions, tried to protect their male employees during the partial mobilization by relocating their offices - and never returned. For them, Romania on the Black Sea is also an option to move closer to European markets without losing sight of the post-Soviet ones.

Political stability and liberalizations stall

While other Eastern European countries like Hungary or Poland grapple with the EU freezing disbursements of funds and subsidies due to insufficient anti-corruption mechanisms and rule of law issues, the Commission has acknowledged Romania's sufficient progress in fighting corruption. Therefore, after several judicial reforms, a monitoring mechanism in place since 2007 was lifted. An EU representative told Reuters that the country could become an example of good governance in the notoriously corrupt Balkans if it accurately implements its national resilience plan.

Nonetheless, according to the World Bank, the country has gradually lost momentum from pro-business reforms introduced during its EU accession, mainly due to gaps in public administration and the quality of institutions, where the effects of one of the most rigid communist dictatorships still linger. Additionally, the country's economy has suffered from the constant departure of well-educated young people, while the remaining population has significantly aged.

Abbildung 4 Poverty, Inequality, and Decline from the Communist Era Are Still Part of Romania

Top left (2017): A shepherd operates a draw well in the region around Botoșani on the border with Moldova. Numerous rural villages in Romania are still not connected to the most basic infrastructure. Top right: an old woman vegetates on the streets of the capital, Bucharest. Bottom: crumbling platforms and rusting trains from bygone times in Sibiu 2010. (Source: own, 2010, 2017)

Despite the catch-up of recent years, there remains a significant gap between Romania and the rest of the EU. 45 percent of the population lives in rural areas, where poverty rates are about six times higher than in cities. Some communities are not even connected to the electricity grid. There, people have little access to good jobs and opportunities to participate in the country's positive development are lacking. Instead, they rely on subsistence farming or do not have any source of income at all. Informal workers generate around 21 percent of the GDP but contribute nothing to tax revenues and are not protected by social security systems, which proved particularly fatal during the recent COVID- and energy crises. Access to finance is mostly limited to larger cities, and many in the poorer half of the population do not even have a bank account.

All of this is even more pronounced for deprived population groups, such as the Roma and Sinti, whose numbers in the population range between 3 and 10 percent - the exact number is unknown as many do not disclose this for fear of discrimination. And the inequalities are even widening – there seems to be an urban, dynamic Romania integrated into European markets, and a rural, poor, and isolated Romania where the benefits of liberalization and the market economy have not taken hold.

Green and digital restart

Therefore, Romania still has many challenges ahead. Since 1989, the country has struggled to move away from the extremely centralized energy production of the one-party rule of the neo-Stalinist communists under Ceaușescu. Electricity and energy production are largely derived from power plants fueled by coal, primarily imported from Russia. The increasing competitiveness of renewable energies could enable Romania to make its industry as a whole more productive, according to the World Bank. However, there is still a lack of network expansion and storage technologies, and operators suffer from constant financial shortages to invest. Similar issues apply to the transport infrastructure of the country, which is the eighth largest in the EU by area, covering 238,298 square kilometers. Whether it's highways, buses, other public transport, or airports, Romania is below the EU average in both rural and urban areas. Even the Danube, the region's largest waterway, is inadequately developed.

Abbildung 5 Danube meets the Black Sea in Sulina and its significant Lighthouse

The Danube is one of Europe's main waterways and has the potential to connect the major European markets with those of the Black Sea. Yet, so far, this potential has been underutilized. However, with the export of Ukrainian grain, Romania's port capacities are now being pushed to their limits. (Quelle:  https://www.shutterstock.com/de/image-photo/sulina-lighthouse-located-on-branch-danube-1358534444 )

Mobilizing the private sector

Despite the shortcomings of public infrastructure, the World Bank sees the private sector as a primary engine for productivity and competitiveness. After proving resilient to the economic and social shocks of the pandemic, energy crisis, and war in neighboring Ukraine, Romanian real wages are now growing strongly again, which is also reflected in the rapidly rising prices for services.

However, Romanians, tested by suffering and crises, have a very conservative approach to saving and investing, focusing more on safety and value preservation than on growth opportunities. The banking sector, with only 52.5 percent of bank assets as a percentage of GDP, is the least developed in the entire EU - Bulgaria and Poland are each at 95 percent. The limited access of small and medium-sized enterprises (SMEs) to financing, especially for more innovative new technologies associated with higher risks, is currently one of the biggest obstacles to Romania's overall societal growth.

Therefore, the World Bank recommends that the country expand its expertise in public-private partnerships. Continuous government changes from unstable politics have eroded investment security. Likewise, the prevailing bureaucracy from the days of communism is still an impediment.

While many Romanians have long since embarked on their journey to Europe, their homeland has not quite arrived there yet. Located at the crossroads between Western and Eastern Europe, the medium and long-term success will depend not only on the external political dynamics in Ukraine but also, and especially, on the development of the creative power of its own population - particularly those for whom the promised prosperity of Europe has yet to arrive.