The Twin deficits syndrome – the case of Romania

This analysis examines the situation of “twin deficits” in Romania. For several years, the budget deficit and the current account deficit, as a tandem, have been at very high levels, a unique case in the EU. In 2024 both deficits were over 8% of GDP given that approx. half of the budget deficit is financed in foreign currency (the cash budget deficit was 8.64% in 2024). Public debt has increased dramatically since the global financial crisis, rising from 12% in 2008 to over 54% of GDP in 2024. Tax revenues, including social security contributions, are well below the EU average – around 27% of GDP compared to 41% of GDP; and even below those of peer EU countries – Hungary, Poland, Bulgaria. Romania's economy has made great progress in the last two decades in terms of income per capita (at purchasing power parity) and other benchmarks, but large deficits have led it into a very difficult situation, which requires a large-scale macroeconomic correction. The correction of the budget deficit would reduce the current account deficit considerably; our estimates suggest a transmission coefficient of the budget adjustment of over 0.5. Our estimates show that the national currency is probably overvalued in real effective terms by about 4% by using the industrial production price deflator, but decisive for reducing the current account deficit is the reduction of the budget deficit. European funds play a major role for the Romanian economy and can cushion the contractionary impact of the macroeconomic correction.