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The Macroeconomic Dashboard: From Financial to Corona Crisis


Worldwide, economies periodically face cyclical evolutions, economic crises, shocks generated by exogenous factors of the economic system, as is happening right now amid the health crisis caused by the COVID-19 pandemic. The common ground of these developments is the need for policies able to support the economy and to establish the necessary corrections, in accordance with imbalances. Nevertheless, solutions must be accurately identified and adapted to the real causes of crises, otherwise economic treatment will fail. 

15 years and 2 crises since Romania’s accession to the EU, compacted in economic maps

The present analysis reflects the preoccupation to outline a comparative picture as comprehensive as possible, for all EU countries, and to highlight the directions and perspectives of Romania’s economic consolidation in the corona crisis context.

In this regard, I used the statistical data series for all EU countries, on economic growth, current account balance, budget deficit, government debt, and budget adjustment as an effort to strengthen public finances. The considered timeframe is 2007-2021, that is from the beginning of Romania’s presence in the EU.

The graphical method used consists in grouping the EU countries according to the recorded performances and highlighting the hierarchy of Member States on each indicator, for each of the studied years. Thus, developments can be dynamically tracked by the Member States advancing or retreating in the annual rankings of the Union.

Statistical data are extracted from the EUROSTAT and AMECO databases. In the case of Romania, the figures for 2020 and 2021 reflect national projections estimated by CNSP.

The economic growth map and the limits of the two crises

In terms of economic growth, the performance of EU countries is represented by annual rankings while grouping them by performance category. Therefore, the economic growth map for the Union for the 2007-2021 period clearly shows the years in which economic crises have culminated, namely 2009 and 2020. In those years, the economic downturn has been widespread, with one European exception – Poland.

Based on the selected performance ranges, some conclusions can be drawn:

- In the years 2008-2013, the EU countries registered economic declines or moderate increases, but in the next 6 years, between 2014-2019, the EU economic growth expanded and consolidated, as a phase of economic expansion;

- In 2020 – the year of the COVID-19 pandemic, the severe economic downturn manifested itself in almost all EU countries, unlike the 2009 crisis, when the number of countries with a significant decline in GDP, of over 5%, was relatively lower;

- Italy, Croatia, Spain, Portugal, Greece were the most affected countries by the 2008-2009 crisis, through economic declines recorded over several years, while their recovery was relatively slow but steady, starting in 2013 and 2014;

- Romania has registered, in the previous crisis, severe economic declines, of -5.5% in 2009 and -4% in 2010, when the austerity measures were applied. Romania headed, relatively quickly, towards the top of the European rankings, starting with 2012;

- Between 2013 and 2019, Romania was constantly in the “blue” zone, with high rates of economic growth, being in second place in the 2016 European ranking but, since 2017, the pace of economic growth has successively slowed down, reaching 4.1% in 2019;

- Excepting Greece, all EU countries have experienced economic growth since 2015, but the group of countries with an economic growth of over 3% gradually decreased since 2017 and until the onset of the 2020 health crisis;

- Greece was the poorest performing country, with severe economic decline over the 5 years of presence at the bottom of the ranking. Instead, Ireland was the champion of economic growth, also with 5 years of presence at the top of the rankings;

- Unlike the 2008-2009 crisis, the 2020 economic downturn has suddenly and almost uniformly occurred for all EU countries, with similar phenomena in some sectors, given the health crisis and lockdown measures from the economy;

- For 2021, the forecasts show a fairly consistent economic growth, with growth rates of over 3% for almost all EU countries, which indicates – if they materialize –, a first significant difference compared to the 2009 crisis.

These specific observations in terms of quantitative performance need to be considered in light of specific policies and macroeconomic imbalances which cast doubt over the sustainability of economic growth.

In Romania, for example, the policies of 2015-2019, excessively focused on stimulating consumption through fiscal easing and increasing permanent spending, supported a predominantly quantitative economic growth, but lacked the qualitative contribution of investments and structural reforms.

The spectrum of macroeconomic imbalances is a key factor in judging the quality of policies. How an economic crisis begins and plays out is especially important, but also how to get out of the crisis and therefore the policies for economic recovery.

Sometimes, out of a (political) desire to get much done as quickly as possible, policymakers get the wrong direction and/or dosage. Thus, anti-crisis policies can imperceptibly become pro-cyclical policies, and recovery policies can even slow down the economy.

The current account map and structural imbalances

In the long-term evolution of an economy, the current account of the balance of payments is the most comprehensive macroeconomic indicator of sustainability. The current account situation shows us whether an economy consumes more than it produces, and therefore lives on debt, or whether it accumulates “wealth” through balance of payments surpluses. It should not be understood, however, that current account deficits are undesirable all the time. The problem is their permanence throughout the economic cycles.

- The current account deficits have predominated in the European Union until 2012, but later the situation was balanced, and the current account surpluses were mainly manifested, the EU average evolving on “green” during almost the entire period;

- The group of Nordic countries, Sweden, Denmark, the Netherlands, plus Germany, Austria have accumulated current account surpluses over all 15 years, despite the two crises and cyclical economic developments;

- Greece, Cyprus, Great Britain, France and Romania are the countries that have accumulated current account deficits over the entire period, noting that Romania is defined by the longest period of evolution on “red”, in 10 out of 15 years;

- In the case of Romania, but not only, the persistence of large current account deficits is accompanied by large budget deficits, which explains the paradigm of “twin deficits” that characterizes us since 2016.

The budget deficit map and the slope of fiscal consolidation

Both crises have left their mark on macroeconomic imbalances, of which the budget deficit is by far the most sensitive indicator, as shown by the public finance situation represented on the map below.

The public finance map clearly illustrates the impact of the two crises on budget deficits. It is noted that, in the context of the financial crisis, the deterioration of the budget balance has been occurring since 2008 and became much more pronounced in 2009.

Instead, the corona crisis simultaneously shifted almost all EU budgets to red, after a 2019 in which only Romania did not meet the 3% budget deficit threshold, according to the nominal convergence criteria.

- The “red-orange” pyramid, elongated to the right, shows the slope of fiscal consolidation, which begins in 2010 and progressively descends for 6-7 years. 2017 is the only first post-crisis year when all EU countries met the 3% budget deficit criterion;

- Greece, Ireland, Spain, Portugal, the United Kingdom are the countries with the most severe budget deficits and for most of the years, in the context of 2009 financial crisis, which also explains the burden on public debt;

- The Nordic countries (Sweden, Finland, Denmark) managed to meet the 3% budget deficit threshold even in the context of the economic crisis, while the Southern countries, France and Spain had excessive deficits until 2016;

- Italy has returned since 2012 to the observance of the 3% of GDP deficit threshold, along with countries such as the Czech Republic, Austria, Hungary, which have consistently maintained the path of fiscal consolidation;

- Germany, starting in 2012, has recorded 7 years of budget surplus, the strongest performance of this kind, together with the Nordic countries and Estonia, a country with 6 years of budget surplus, situated at the top of post-crisis economic growth;

- Romania remained “in the red” for two consecutive years, with a budget deficit of over 6% of GDP, and the next two years (2011 and 2012) in “orange”, with budget deficits of 5.4 and 3.7% of GDP, returning from 2013 on the territory of nominal convergence;

- Bulgaria is, most likely, the country with the strongest fiscal consolidation in Eastern Europe, managing to return to the territory of nominal convergence since 2011, and on a budget surplus for 4 consecutive years, between 2016 and 2019;

- Starting in 2016, European public finances have consistently trended towards budget surpluses. In 2019, the year before the pandemic, 17 member states recorded budget surpluses, and only Romania had a deficit of over 3% of GDP. The European Union thus became a global champion in fiscal consolidation;

- In 2021 – the first year after the corona crisis –, projections on budget deficits are strikingly similar to the state of public finances in 2010 – the first year after the peak of the financial crisis. The significant difference is related to the clearly different trajectory of economic growth, which seems to uniformly return to normal after the crisis.

The concern about reducing budget deficits in the post-crisis years remains current, especially in the context of the growing burden of public debt at the EU level. 

The map of public debt and the layers of sustainability

The 2008-2009 crisis was coterminous, through its financial implications, with the so-called “sovereign debt crisis”, which has become a threat even to the EU’s institutional establishment. The case of the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain) is emblematic in this respect, used as a “no alternative” argument in favor of austerity policies. The public debt map thus becomes relevant for post-crisis economic policies and their long-term implications.

The public debt map clearly shows that more and more EU countries have advanced in the category of countries with high public debt, while those with low debt have dwindled.

- Before the crisis, only Italy and Greece had public debts of over 90% of GDP. After the crisis, 8 countries “woke up” with public debt over 90% of GDP, of which Portugal, Italy and Greece reached, for several years, over 120% of GDP;

- Related to the pre-crisis situation, the category of countries with public debt between 60 and 90% of GDP has increased by 8 countries, so that compliance with the public debt threshold of 60% of GDP, according to the Copenhagen criteria, becomes the exception to the rule;

- The number of countries with public debt of less than 30% of GDP fell from 10 in 2007 to only 3 because of the financial crisis. Estonia, Luxembourg, and Bulgaria consistently dominate the list of top countries with the lowest debt;

- By consolidating public finances in the period of 2016-2019, several countries have entered in the “green”, with a level of public debt below 60% of GDP. The Netherlands, Finland, Germany, and Ireland have thus returned to the nominal convergence criteria;

- Alongside the severe deterioration of public finances in 2020, the cycle of public debt growth will resume in the coming years, which raises again the issue of budget adjustments and the degree to which the public debt burden can be tempered.

In this respect, the budget balance adjustments are particularly relevant, on the one hand, as an indication of the intensity of the deterioration of public finances in the crisis years and, on the other hand, as an assessment of the fiscal consolidation effort in the post-crisis years.

The map of budget adjustments and fiscal consolidation effort

The map of budget adjustments thereby highlights the countries that have resorted to a more consistent fiscal consolidation effort, respectively, the countries that have chosen the path of gradual fiscal consolidation, rather as an effect of economic recovery, and not necessarily as a policy of “rehabilitating” public finances, through austerity measures.

Firstly, it is important to understand whether the post-crisis fiscal consolidation effort has led to increased sustainability in the evolution of public debt, without affecting short-term economic growth, by reducing aggregate demand.

Secondly, the comparative analysis of the two critical moments, the 2020 corona crisis and the 2008-2009 economic and financial crisis, would highlight how appropriate it would be to continue a policy pattern of post-2020 budget adjustments.

The map of budget adjustments captures, through the areas marked in blue and green, the hierarchy of countries with positive adjustments of the budget balance, i.e., the countries that have used fiscal consolidation, by reducing the budget deficit from one year to another. The areas marked in orange and red highlight, in hierarchical order, the countries whose budget deficits have increased from one year to the another.

Also, for 2009 and 2020, the reference years of the two crises, the explosive leap of budget deficits is captured by calibrating the representation in relation to the intensity of the increase of deficits, associated with specific colors.

- Thus, in 2009, the critical year of the financial crisis, only 7 Member States recorded increases in the budget deficit of more than 6 percentage points compared to the previous year. In 2020, the main pandemic year, only 3 Member States appear to have budget deficit increases of less than 6 percentage points compared to 2019;

- In 2009, the deterioration of public finances was the result of the economic recession and the related fall in budget revenues, the policy concern in the post-crisis years being that of fiscal consolidation and return to the convergence criteria;

- Between 2010 and 2018, the budget adjustment map is generally dominated by fiscal consolidation, with most EU countries in “blue” and “green”. 2019, by reversing the trend of fiscal consolidation and correlated with the growth map, seems to indicate the slowdown in economic expansion, as sign of a new cyclical evolution;

- Greece, Estonia, Lithuania, Romania, and Spain are the countries that, immediately after 2009, turned “blue” and experienced the most intense fiscal consolidation, through measures that adjusted the budget deficit by about 2 percentage points compared to 2010;

- Countries whose budget deficits continued to widen in 2010, such as Poland, Germany, Portugal, Ireland, turned “blue” in the following year, starting in 2011 their path of consolidating public finances;

- Ireland, for example, was the budget deficit champion for 4 consecutive years, between 2007 and 2010. However, since 2011, Ireland turned “blue” for 5 consecutive years, managing to consistently return to nominal convergence in 2015;

- Romania has been placed, from 2010 to 2015, in the “blue” and “green” areas, so on the path of intense fiscal consolidation. Since 2016, amid cuts in taxes, the situation of public finances has continuously and aggressively deteriorated;

- In 2020, the budget deficit explosion is the result of both the impact of lockdowns in the economy and the sharp increase in budget expenditures (health expenditures, intended to combat the COVID-19 pandemic, but also anti-crisis expenditures, intended to support economic sectors, through state aid, payment for technical unemployment);

- In 2021, budget consolidation efforts of 2-3 percentage points of GDP are estimated for most EU countries compared to the previous year. On the one hand, health spending will gradually shrink, and, on the other hand, the economic recovery will naturally mitigate the deterioration of public finances.

From this point of view, the analysis of macro adjustments under the circumstances of the two crises requires a careful comparative look, for relevant nuances in terms of solutions.

Crisis mirror – different causes, different manifestations, accordingly imbalances

For the conclusion’s accuracy, it is important to understand that the two crises analyzed have neither identical causes, nor manifestations. The moment of 2009 and the moment of 2020 are simply from different playbooks, so they must be treated differently.

The 2008-2009 crisis was primarily a financial one, therefore economic by its nature, i.e., the textbook manifestation of the “economic cycle” based on the strongly pro-cyclical expansion of monetary policies. Meanwhile, the 2020 economic crisis is the anticipated and assumed result of the COVID-19 pandemic, being the consequence of lockdown measures, not the reflection of “disturbances” in underlying economic mechanisms.

Also, the 2009 financial crisis has manifested itself with different intensity from one country to another, while the pandemic crisis has occurred relatively uniformly, with a high degree of simultaneity and similarity, at least in the case of EU countries.

At the same time, in terms of economic recovery, it seems that there will be key differences. The 2009 financial crisis led to a slow resurfacing over 4-5 years. Austerity measures, taken under the burden of sovereign debt, also mattered. In our current crisis, as health constraints will diminish, and as a combined effect of vaccination campaigns against COVID-19, economic forecasts show a relatively rapid recovery.

The recovery and resilience mechanism, in parallel with the suspension of budget deficit constraints, also indicate a definite difference in economic treatment. If the 2009 crisis was characterized by restrictive measures, given its financial causes, the pandemic calls for measures to stimulate the economy, a context in which the financial system becomes, this time, part of the solution.

Even if the economic recovery is supported in a convergent way at the European level, the pressure of macro imbalances at national level will not resolve itself, perhaps even worsening in the case of countries lacking the initiative of reforms.

Romania at extremes: from austerity to excessive deficit

In hindsight, some relevant conclusions can be drawn regarding Romania. Firstly, it can be said that, in 2010, Romania experienced one of the most severe fiscal consolidation efforts among EU countries, although the burden of public debt had not yet become constraining, as we may anticipate for the current crisis. Therefore, the “austerity package” applied by Romania, through budget adjustments from 2010 to 2011, seems to have been disproportionate.

Secondly, if we look at the pace of economic growth in the post-austerity years, budget adjustments do not seem to have held the economy in place, unlike other countries. Thus, from the bottom of the ranking, Romania jumped quite quickly to “yellow” in 2011-2012, and then to “blue” – i.e., to growth rates of over 3% of GDP in 2013-2014. These developments seem to reflect, unlike other countries, the absence of significant public debt constraints at that time.

An important conclusion however emerges, almost a historical irony regarding Romania’s passage through the crisis. The crises, both the financial one and the pandemic crisis, found Romania equally unprepared from the perspective of the sustainability of the economic course and the fiscal space for intervention.

Before both the 2008-2009 financial crisis and the 2020 pandemic, Romania was a champion of economic growth. On the map of economic growth, in the years before the crisis, Romania was in “blue”, among the first countries in the EU hierarchy. Instead, on the budget balance map, in the same years preceding the crises, Romania was in “orange”, with deficits of 5.4% in 2008 and 4.4% of GDP in 2019, at the bottom of the rankings of EU countries. And this “deficit growth” has, however, little in common with the principles of sustainability.

From this we deduce that there is something wrong with Romania’s development model in recent years, something that can only be changed through a call for responsibility, long-term vision, and sustainability reforms.

It is a fact that Romania has never benefited from a country rating that would facilitate the financing of financial imbalances in times of crisis, precisely when there is a greater need. As a corollary, let us remember that in the background of the 2008-2009 crisis, despite a significant effort of fiscal consolidation from 2010-2011, Romania’s public debt jumped in just 5 years from 12% of GDP in 2008 to 37% of GDP in 2012. This is the steepest rise in public debt of those years.

As an irony of economic history, the austerity measures adopted in Romania in 2010 demanded their political revenge, obtained in the form of populist measures from 2017-2019, some initiated in 2015 – through large-scale fiscal easing.

The consequence was that the painful effort of fiscal consolidation in the crisis years, unfair for the Romanians who endured the austerity bill, was unjustifiably wasted, precisely in the years of economic growth.

Thus, in 2020, Romania was again found on the wrong foot by the pandemic, lacking the budgetary space so necessary for the management of the health crisis and the support of the economy.

Romania at extremes is the image of our economic evolution between 2009 and 2020 – a period bookended by the two crises. Romania after 2009 endured one of the most severe austerity packages, while Romania before 2020 had the largest budget deficit in the EU. Between the two crises, Romania moved from austerity to excessive deficit, which is by far the most contrasting economic evolution in the EU.

That is why the political cycle of the coming years and the health crisis must significantly change the conduct of economic policies, through responsibility for the future.

Corona crisis prospective conclusions and economic policy decisions

With the mitigation of the health crisis, the economic outlook will also return to positive territory, and the peak of the 2020 budgetary imbalances will be progressively diminished, in conditions of economic growth, most likely starting in the second quarter of 2021. There remain, however, a series of challenges.

- In 2020, the decline of Romania’s economy will be moderate compared to the evolution of other countries. Even if Romania did not register a V-shaped recovery, according to the textbook definition based on quarterly dynamics, there are good premises for an economic growth of over 4% in 2021, according to current projections, and for a return to pre-pandemic economic levels in 2022;

- Given the defining differences - at the level of causes and economic phenomena - between the pandemic and the financial crisis of a decade ago, we can estimate the relatively faster recovery of the public finances, and fiscal consolidation efforts will have to be less burdensome, as budget adjustments and social costs;

- In terms of economic policy decision and in relation to the need for fiscal consolidation, a “wait and see” approach can make sense, at least in terms of health uncertainties that strongly influence economic sentiment;

- But structural reforms and fiscal consolidation can no longer be postponed, as Romania must recover historical slippages, prior to the COVID-19 crisis, and which cannot be rolled over indefinitely, given that current projections already indicate the reaching of 50% of GDP for public debt in 2021;

- The middle way for Romania would be an adjustment of the budget deficit on a trend of 7-5-3, according to the already announced objectives, possibly with extra ambition depending on the return of economic growth. For example, an adjustment of about 2.5 percentage points, such as the one anticipated in the 2021 budget, seems to be in line with the estimated dynamics of adjustments at the European level;

- One of the challenges of the 2021 budget construction, however, concerns the degree to which the nominal budget adjustment (cash and ESA) will represent a consistent adjustment in structural terms, as an indication of a sound fiscal consolidation;

- It is already imperative to improve efficiency in collecting budget revenues, through a reformed (digital) tax administration, which will instill discipline and transparency within the tax system. It is also essential to optimize budget expenditures, through objective mechanisms of prioritization and efficiency of public expenditures;

- Romania needs a clear package of structural reforms, especially in health, education and administration, legislative solutions in the field of public procurement and European funds, but also a strategic vision on the architecture of the financial system, as a key factor in supporting major investment projects;

- The consistent package of European funds from the 2021-2027 programming period, including the funds allocated through the Recovery and Resilience Mechanism, are the “cheapest” and safest sources of financing for the necessary investment and reforms, and Romania has the duty to fully exploit these opportunities;

- The success of the reforms and of the economic recovery will be significantly influenced by the coherence of decisions and the correlation of the fiscal-budgetary and monetary policies set, to further support the confidence of investors and the general business environment;

- It is essential to manifest a real partnership between the state and the business environment, built on principles of honesty, transparency and dialogue, a partnership that becomes a sine qua non requirement for the efficiency of economic reforms and policies;

- Economic policy measures must be set with caution, including with a view towards a future crisis, so that some of the pandemic solutions do not intensify the causes of a new economic crisis, which may have been delayed by the emergence of COVID-19;

- Globally, the economy will continue to internalize structural changes and macroeconomic adjustments, digital transformations and extensive technological advances, with the pandemic becoming a lesson of adaptation and flexibility of the economy, in a disruptive setting.

(The above text is the English version of the Romanian article on the authors’s blog and is published in The Market for Ideas).

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