Romania’s two decades of income catch-up are under threat from a fiscal deficit that would give most finance ministers nightmares.
In 2025, Romania finally joined the Schengen Area, a milestone that felt to many Romanians like belated acknowledgement of the country’s transformation since the 1990s. GDP per capita, measured in purchasing power terms, has risen from well under half the Organisation for Economic Co-operation and Development (OECD) average two decades ago to roughly 83 per cent of it today. That is a remarkable story of convergence. The OECD, which published its latest economic survey of Romania this week, says so too. Then it spends the next 150 pages explaining why the story is in serious danger of going wrong.
Romania’s budget deficit hit 9.3 per cent of GDP in 2024, among the highest in the European Union and approaching territory that, in a different country and a different decade, triggered a sovereign debt crisis. Public debt has climbed 20 percentage points since the Covid-19 pandemic, reaching 55 per cent of GDP, and the OECD projects it will top 64 per cent by 2027. GDP growth, meanwhile, crawled to just 0.7 per cent in 2025. Inflation, officially targeting 2.5 per cent, ran at 7.3 per cent. The central bank has not moved rates since mid-2024.
The red ledger
The roots of Romania’s fiscal problem lie in the years of expansion that produced those flattering convergence numbers. Government wages grew fast, social spending ballooned, and tax compliance remained a persistent failure. The VAT compliance gap (the difference between what the state should collect and what it actually does) is among the largest in the EU. Property taxes, which economists consider among the least damaging forms of revenue, remain barely used. Informality is widespread: undeclared work accounts for a striking share of gross value added.
The government has since adopted consolidation packages. The OECD approves, with qualifications. Pension reform has linked retirement ages to life expectancy, a necessary step. Several tax exemptions have been removed. But the survey notes a problem: Romania’s formal budget framework looks perfectly respectable on paper. Fiscal rules exist. A Fiscal Council monitors compliance. The trouble is that ad hoc spending decisions and repeated exemptions have hollowed out any practical credibility. Bucharest has a habit of promising restraint and then finding reasons not to practise it.
Empty desks
If the fiscal problem is urgent, the demographic one is slow-burning but arguably more consequential. Romania’s population has been shrinking for years. Emigration, particularly of working-age adults, was the dominant driver until recently; now ageing has taken over. By 2050 the old-age dependency ratio is projected to rise by a further 20 percentage points, squeezing the pension system and the labour force simultaneously.
The labour market is already thin and oddly shaped. Romania’s overall employment rate of 49.2 per cent sits well below the OECD average of 58 per cent. The female rate is just 40.6 per cent, a figure that reflects cultural norms, inadequate childcare provision and parental leave arrangements that, however generous in intention, tend to keep women out of the workforce for long stretches. Youth inactivity is higher than in almost all comparable Central and Eastern European economies. Older workers leave too early: Romania’s avoidable mortality rate is among the highest in the OECD, and poor health outcomes have a way of shortening careers as well as lives.
The competitiveness picture is no more cheerful. Romania spends just 0.4 per cent of GDP on research and development, against an OECD average of 2.5 per cent. Only 17.8 per cent of working-age adults hold tertiary qualifications, less than half the OECD norm. Digital technology adoption among firms lags behind regional peers, despite the country having some of the fastest fixed broadband speeds in Europe, infrastructure that for many businesses sits largely untapped. Romania has integrated well into global value chains, but predominantly at their lower end: assembly, processing, components. Moving further up requires skills and innovation that the current system does not produce in sufficient quantity.
Climate change adds another layer of risk that neither governments nor businesses have fully priced in. Climate-related economic costs amounted to six per cent of GDP between 1980 and 2023. Heatwaves and river flooding are the main culprits, compounded by ageing water infrastructure and low disaster insurance coverage. The government has a National Strategy for Adaptation to Climate Change; the OECD describes the implementation gaps as substantial.
The medicine
None of this is beyond repair. The OECD’s prescription is sensible, if demanding: tighten fiscal discipline, broaden the tax base, invest in childcare, reform education, extend working lives, build flood defences. Romania has the institutional scaffolding, including EU membership, access to substantial structural funds and a Recovery and Resilience Facility that, if absorbed efficiently, could provide real impetus.
The catch is that Romania has heard prescriptions like this before. The OECD survey contains a section on past recommendations and actions taken; it makes for modest reading. The country’s two-decade convergence story was impressive. Whether the next two decades repeat it depends on whether Bucharest can govern as well as it has grown.
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