FINANCIAL AND ECONOMIC CRISIS IN ROMANIA:

VULNERABILITIES AND OPPORTUNITIES FOR

ECONOMIC RECOVERY

Mihaela Daniela NICULESCU

Hyperion University, Bucharest

Abstract
The current economic crisis through which humanity is going is not limited to the
economic and financial sector, but also the whole society including an increasingly polluted
environment. The problems that contemporary society is facing have serious consequences
for the entire planet and they refers to resource depletion, climate change, food and water
crisis, deforestation, population growth, an increased gap between rich and poor countries,
monetary policies crisis and more. Romania’s economy is connected to international
economic flows and therefore feels the positive aspects (eg. the catching-up process recorded
in the 2000 – 2008 period) and negative (in 2008 some countries were already in crisis, but
Romania was still on an upward trend, with an increase of 7.3% in 2009; in 2009 instead
Romania had a sudden drop in the GDP level, reaching -7.1%). The crisis effects on
Romanian economy manifested on several levels: the evolution of the industrial production,
of employment and foreign direct investment attracted. The purpose of this paper is to
highlight the vulnerabilities of Romanian economy hoping to find and suggest some solutions
to economic recovery.

Keywords: financial and economic crisis, financial instability, recession, economic recovery
JEL Classification: E6, F43, O4

Introduction
The current crisis has brought renewed attention to people's interest in understanding
macroeconomic financial flows and the role that they can play in the propagation and
amplification of shocks, both in periods calmly economic, but especially in troubled times.
Increasingly complex financial innovations in the context of globalized financial markets
(which have led to increased cross-border transactions) have created the premises triggering
the financial crisis. Many financial institutions that have issued new complex tools were
affected by the crisis, completely ignoring the risks they are subject in their pursuit of profit.
Another "incentive" was the credit boom that fuelled unsustainable growth rates.
Economic activities do not evolve uniformly, but know some fluctuations which
correspond to financial cycles and print economy two directions: expansion (economic boom)
and contraction (decline or recession). These financial cycles start with a slower progress,
and then get into a phase of accelerated growth that will degenerate into a phase of chaos and
disorder, and eventually the economy will enter a consolidation phase and even recovery.
The period preceding crisis is characterized by a sharp increase in investment, which
leads to increased production, number of employees, revenue and ultimately profit. Rising
incomes and low unemployment contributes to increased demand for goods and services,
which will fuel price increase. Thus, the economy will reach its maximum, production stops
rising (not to forget that labour is almost fully used) and the savings is passed investment. At

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this point of "euphoria" economy slow down and ultimately enters into a process of
decreasing the activities and also production. As most investments come from lending,
borrowers will find it hard to repay the loans taken: demand and incomes are decreasing, but
unemployment is raising due to more frequent bankruptcy situations. The lack of trust of
entrepreneurs (during crisis) especially in the economic outlook is manifested by lowering
national investments. Finally once the assets have been devalued, losses absorbed and
balance rebalanced, traders can again consume and spend. Market economy engine starts
again and with it begins a new financial cycle that will guide the economy to a new period of
growth. At a lower interest rate induced by artificial credit expansion many business plans
that were previously seen as unprofitable get an apparent profitability, leading on o short term
to a business boom. At a lower interest rate induced by artificial credit expansion just many
business plans that were previously seen as unprofitable becomes apparent profitability,
leading to a sort term business boom.
Credit market becomes vulnerable to certain monetary conditions and can have
serious effects when economic activity slows down greatly. However, the economic crisis
does not affect equally all social categories even if their propagation is influenced by the
current globalization. Most affected are disadvantaged groups that will feel more acutely
negative shocks on their living standards, translated by inflation, by reducing income,
increasing unemployment and reducing public expenditure.

1. Literature review
Crises can be defined as situations with a strong instability, bringing volatility and
uncertainty. They are failures with major implications for the life and work of people, often
leaving behind undesirable situation. As man was always attracted to everything "unusual"
crises - as rare phenomena - have been the subject of studies by economists, and others.
I will point out some of the recent works in this area: Napoleon Pop "Romania during
the post-crisis period: a limitative evaluation" (2010). The author suggests as anti-crisis
measures regaining investor confidence and consumer demand relaunching. Serdar, Torun &
Topkaya (2009) make an interesting analysis of the current economic crisis regarding its
effects on economic growth. They demonstrate that while change of investment levels in
GDP is positively effective and significant to economic growth and current investment rate,
interest rate is negatively effective and significant. Niculescu & Marin studied some
"Correlations between foreign direct investments and economic growth" (2012). The study
concluded that attracting foreign investment is a vital solution for the recovery of Romanian
economy in economic crisis in which we find ourselves. Darvas (2011) makes an interesting
analyse of economic growth after crisis in Central and Eastern Europe, concluding that these
economies had become vulnerable by the onset of the current crisis.

2. Ways of spreading crisis

The crisis triggered in the last quarter of 2007 in the United States has its origins in
the early 2000s, when Fed governor decided to cut interest rates by issuing money. It has thus
been an extremely serious, "monetary relaxation" considering that between 2001 and 2004
the nominal interest rate fell from 6.25% to 1.75%. By the summer of 2004 FED interest rate
whittled down to just over 1%, contributing to the credit accounts required reserves held by
commercial banks at the Federal Reserve System. Based on these new reserves, banks have
created new scriptural deposits which became the engine of extending loans.
Similar monetary policies were also adopted by other countries like: Japan, where the
central bank provided bank credits at a nominal rate of zero; the UK Central Bank that
offered loans at a rate close to zero; the European Central Bank that gradually reduced it to
about 2%.

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 Since purchasing housing is mostly on credit, prices are very sensitive to changes in
interest rates. Downward trend that long-term interest rates had in the second half of the
1990s caused banks to give refunds without ensuring the customer solvency. Offensive
advertising campaigns have made refinancing to jump from $ 14 billion in 1995 to about 250
billion in 2005.
The huge increase in property prices was not exactly on a solid basis, and
accompanied by increased lending led again to increased property value. Through the effects
it has had on the global economy, the current crisis is considered the worst recession in the
last hundred years.
Being a financial crisis in the first instance, the current international crisis broke in the
real economy by affecting the basic structure of economic activity. The transition from
nominal to real was made through banking channel. Decreased liquidity in the banking
system lowers economic activity which will lead in turn to a decrease in demand for domestic
non-bank loans which might reduce the supply of domestic non-bank loans. On the other
hand, the banking system will try to compensate the lack of liquidity by encouraging
attracting bank deposits on term, which will increase the cost of domestic bank loans. This
vicious circle will be out only by reducing the interest rate that is by taking by the banking
system of a part of the cost recovery growth.
In times of economic crisis behaviour changes: on the one hand is lost investor’s
confidence in the economic environment in question, on the other hand, the banking system
loses confidence in potential customers for reasons of excessive prudence. Therefore, lack of
trust (mutual, by the way) has on the national economy comparable effects with the lack of
liquidity.

3. Economic crisis in Romania

Although the effects of breaking "housing bubble" had been felt in Western Europe
(which was affected by the crisis due to exposure to U.S. financial markets) and even
globally, for Romania crisis remained something that could not reach us, given that the
Romanian economy was not fully connected to international financial markets.
Only in the fall of 2008, Romania began to realize the danger of the crisis, and the
signal was given by subtracting the country rating by Standard & Poor's from "investment
grade" - low risk investment - to "junk" that is speculation. The downgrade came to reconfirm
the downgrade from "stable" to "negative" from Fitch in January. Fitch punished us for
increasing current account deficit and Standard & Poor's for political commitments to
increase spending before the general elections. At the end of 2008 Fitch downgrade again
Romania, two steps outside the recommended investment category to BB +.
The situation remained until February respective March 2010 when first Fitch, then
Standard & Poor's has improved Romania's rating from "negative" to "stable". Fitch
continued the trend by including Romania in July 2011 in the category recommended for
investment. The paradox of these quotations is precisely that in 2008 when Romania was
going through a period of growth was demoted, and in 2010, amid a recession, Romania's
rating improves. This may be also due to Romania’s loan accessed from the IMF. Romania
was affected by the crisis in several directions:
- In financial terms the access to external financing was reduced and lending volume
declined;
- In terms of trade it has been a decline in exports;
- In terms of investor confidence, Romania was affected in this chapter, many investors
withdrawing the investments they had in Eastern Europe;
- In terms of foreign exchange it was manifested a monetary depreciation of the
domestic currency.

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 Effects of the crisis on the Romanian economy manifested in several ways:
development foreign direct investment, economic growth, changes in the level of industrial
production, unemployment and inflation evolution.

3.1. Foreign Direct Investments

Although the FDI attracted by Romania increased significantly in 2000 compared to
the 90s, Romania is still at the bottom of the table on FDI attracted capita among European
countries. Thus, for the period 1990 - 2008 Romania had a stock of FDI of almost 50 billion
EURO, which means a level of 2300 EURO per capita. Weaker than Romania in this respect
is only Serbia, which has a level of almost 1,700 EURO, exactly 1696 EURO.
Statistics on FDI developments capture a sinuous evolution, marked both by increases and
decreases as the absence of a real national strategy on investment.

Fig. 1. The evolution of FDI attracted by Romania between 2000 and 2012

The evolution of FDI attracted by

Romania between 2000 and 2012
10000

8000

6000

4000

2000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: www.bnr.ro
According to the National Bank of Romania, foreign direct investment in 2011
reached minimum of past nine years (1815 million EUR), and continued to decline in 2012 to
621 million EUR after the first half. By the end of the year, FDI attracted by Romania did not
exceed 1,600 million, making 2012 the fourth consecutive year in which FDI is on a
downward trend.

3.2. The evolution of economic growth

Growth in Europe has decreased dramatically during the crisis, the situation in
Romania being presented in the table below:

Tabel 1 The evolution of economic growth in Romania between 2000 and 2012
Year 2000 2005 2006 2007 2008 2009 2010 2011 2012
GDP, (%) 2.4 4.2 7.9 6.3 7.3 -7.1 -1.2 2.5 0.3
Source: NBR reports
In 2009 Romania had one of the highest GDP declines among European countries,
along with Slovenia, which decreased by 8.1% and Hungary which decreased by 6.7%. In
2009 all EU-27 Member States, except Poland, have ended the year with negative growth. It
should be noted that many Eastern European countries - such as Romania, Ukraine, Latvia,
Hungary - had to turn to the IMF for financial assistance.
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3.3. The evolution of inflation
Tabel 2 The evolution of inflation in Romania between 2000 and 2012
Year 2000 2005 2006 2007 2008 2009 2010 2011 2012
Inflation 45.7 9 6.56 4.84 7.85 5.59 6.09 5.79 3.33
Source: www.insse.ro
We can observe that, even in conditions of crisis, the inflation in Romania has
decreased in the last three years. It still remains one of the highest rates among EU countries.

4. Conclusions
Romania did not have a large exposure to foreign toxic assets and so the impact of the
crisis was smaller. Romania should focus on exports to countries that have been less affected
by the crisis, such as China and the countries that have a big market like India. On the other
hand, it is necessary to adopt measures to stimulate domestic consumption of domestic
products and possibly green. It is also recommended to take some measures to stimulate
exports of products, not only raw materials. In 2013 Romania still has a cheap labour force
and well qualified, which is an advantage compared with other east European countries. This
is another reason to encourage investors, whether domestic or foreign. In the same vein it
would require a better allocation of financial resources for education, health, research,
development and innovation.
Last but not least, Romania must implement the principles of sustainable
development, gradually making the transition from excessive and unreasonable use of
resources to achieve a balance between economic growth and development and the natural
environment.

References
Darvas Z, 2011, "Exchange Rate Policy and Economic Growth after the Financial Crisis in
Central and Eastern Europe", Eurasian Geography and Economics, 52(3), pp. 390-408.
Drăgan C.M., 2010, Criza. România la răspântie, Editura Universitară, Bucureúti,
Serda K., Torun M., Topkaya O., 2009, Effects of Global Crisis on Economic Growth and
Investment Relations in European Countries, http://www.opf.slu.cz/kfi/icfb/proc2009/pdf/
Pop N., 2010, Romania during the post-crisis period: a limitative evaluation, www.ipe.ro/
RePEc/ vls/vls_pdf/vol14i4p93-110.pdf
Niculescu M.D., Marin C., 2012, "Correlations between foreign direct investments and
economic growth", Simpozionul Cadrul conceptual al economiei postcriza, ASE, Bucureúti
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Pedagogică, Bucureúti
* * * Punctul critic. Trimestrial de diagnoză socială, politică úi culturală. România, victimă a
crizei? Numărul 4, mai 2011, Editura Niculescu
* * * www.bnr.ro

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