Financial, we are getting worse and worse, but the electorate prefers the same ruling class

The social and political convulsions of the first three months of the current year left their mark on the entire semester, because the PSD-PNL coalition turned to the state piggy bank to calm them down. Thus, the Ciolacu government decided to increase budget expenditures, ordered the employment of over 10,000 new civil servants, decided to increase salaries in the public sector, increase the value of the gross minimum wage in the economy to 3700 lei per month, and to support the new expenditures, contracted, according to the data official loans of 135 billion lei in the first semester.

The above situation led at the end of June to the recording of a budget deficit of 3.6% of the Gross Domestic Product, a deficit that demonstrates that the target assumed by the state budget law, of 5% at the end of 2024, will be far exceeded , which will also create tensions in the relationship with the European Commission. Under these conditions, the European Commission warned three times during the first semester that our country will not respect the budget deficit target of 5% of GDP negotiated last year for the end of 2024 and that a deficit of over 7% will probably be reached from GDP.

The first good news in the first semester was the reduction of the inflation rate, which started in January with a level of 7.41% to be fixed on June 30, 2024 at the threshold of 4.9%. The National Bank of Romania contributed fully to keeping consumption under control throughout this period, which, despite favorable signals regarding the reduction of the inflation rate, refused to reduce the reference interest rate for monetary policy, keeping it at the level of 7%, its first reduction by 0.25 percentage points being operated only in July.

Winning the Roşia Montană trial before the Canadians from Gabriel Resources meant a breath of fresh air for the governing coalition in terms of budget spending, but the whole affair caused a political scandal through the defeatist statements of Prime Minister Marcel Ciolacu and the Minister of Finance Marcel Boloş - statements prior to the ICSID ruling, which initially contributed to the speculative rise on the Canadian stock exchange of the company's shares in that country.

At the end of the first three months of the current year, we recorded the entry on March 31, 2024 of our country into the Schengen Area - of free movement of goods and people - with air and sea borders, but without having a clear perspective regarding the entry with the borders land, although Prime Minister Ciolacu stated that this will happen by December 31, 2024.

In the last month of the first semester, more precisely on June 9, the European parliamentary and local elections took place, which were merged by the PSD-PNL coalition under the pretext of isolating the extremist parties. The coalition's decision proved to be a winner for PSD and PNL, as long as that alliance won 19 European deputy seats out of the 33 held by Romania, and PSD and PNL obtained around 30% each in the local elections.

Externally, we note the failure of President Klaus Iohannis to become the Secretary General of NATO, but also the approval by the Supreme Council of Defense of the Country, in the June 20 meeting, of the donation of a Patriot system to Ukraine, worth over one billion dollars , a donation following the request that US President Joe Biden sent to his counterpart Klaus Iohannis, on the occasion of a meeting that the two had in Washington at the beginning of June.

We also mention that the last month of the semester marked the qualification, by the Romanian national men's football team, after 24 years, in the round of 16 of the Euro 2024 final tournament, after beating Ukraine 3-0, losing 0 -2 to Belgium and tied 1-1 with Slovakia. Unfortunately, the national team's road to Euro 2024 stopped in the round of 16, when Romania lost 0-3 to the Netherlands, after a game dominated by the Batavian players. Euro 2024 also recorded a first: in the four matches played on German grounds, the Romanian football team was supported by more than 100,000 compatriots in the stands of the stadiums.

• January - the month of protests

The political scene in our country was awakened to reality suddenly on January 9, when hundreds of farmers began to move to the Capital, dissatisfied with the fiscal measures imposed by the Government at the end of last year and the generalization, starting from January 1, 2024, of the Ro e-Invoice and Ro e-Transport digital reporting systems, but also the increase in fuel excises and RCA tariffs. Because in the last days of the protest, the central authorities chose to ignore the farmers, they were joined by the transporters, who took over part of the demands of the agricultural producers, and the protest gradually spread to 22 counties of the country, where several roads were blocked, road traffic moving with difficulty.

Confronted with this situation that tended to degenerate, especially since the entrances to the Port of Constanţa were also blocked by protesters, thus compromising the transit of Ukrainian grain, Prime Minister Marcel Ciolacu, Minister of Finance Marcel Boloş and Florin Barbu, Minister of Agriculture and Rural Development they chose to act as a firefighter and make decisions under the pressure of those on the street, amending several normative acts in two weeks and setting up working groups to amend other normative acts in February and March. When the members of the Government thought, after the meetings of January 11 and 18, that they succeeded in quelling the protest, the farmers and transporters presented them with a list of 76 demands for which Prime Minister Marcel Ciolacu and his colleagues had to assume new deadlines solution. The top 10 claims out of 76 were:

- the recognition of road transport as a strategic economic sector and the development of measures to support this economic sector in order to remain competitive and continue to bring direct revenues to the state budget;

- reducing the RCA to 5,000 lei at a technically permissible maximum mass of 40 tons and introducing the traction and national/international assistance into the RCA policy;

- the possibility of recovering a percentage of the fuel excise for licensed transport companies directly from the pump;

- the introduction of a non-taxable food allowance for posted workers, in the amount of 60 euros/day, to be added to the maximum ceiling of 87.5 euros/day within which the posting allowance can be granted and the increase of the non-taxable ceiling from three to four basic salaries;

- shortening border crossing times by amending OG 43 and complying with European Regulation 1100/2008 on customs controls (which provides for the elimination of mass and size controls at border crossing points to streamline traffic across borders);

- moving the controls of the roviniet, the scale and the measurement of the gauge on the national territory at least 15 kilometers from the border crossing point;

- the cancellation of Law 370/2022 which changes the ceiling for determining the type of taxation for micro-enterprises from 1,000,000 euros to 500,000 euros and returning to the same ceiling of 1,000,000 euros, according to the old law;

- the granting of APIA subsidies related to the current year until the end of January of the following year, including for the farmers in the classical control sample and through remote sensing, as well as the acceleration of the processes for the financial compensations associated with the other direct payment schemes (eco-schemes, measures of agro-environment, etc.);

- regulating trade in markets by prioritizing local trade, eliminating fake producers;

- simplifying the granting of agricultural aid by de-bureaucratizing the way of submitting single applications.

Of these, eight were settled during the first three months of the current year.

Prior to the respective protests, the Government had to intervene in the fire department to solve an acute problem in the health system, which is facing a serious staff crisis, and ordered on January 11 by memorandum to exempt this sector from the provisions of the emergency ordinances issued last fall, by which he established the ban on new employment in the budget sector. Through that memorandum, the urgent hiring of 4,500 doctors was allowed, after which the Government later decided to hire almost 2,000 more people in the social assistance system.

Practically, through all the measures taken in the first month of the year, the Ciolacu Cabinet mitigated part of the fiscal changes ordered at the end of last year and suspended part of the budget system reform proposed by Marcel Boloş, the Minister of Finance, a fact that had a negative effect on budget execution in the first semester of 2024.

• February - Pfizer sues us for requested but unpaid vaccines

The month of February was marked by the controversial statements of Prime Minister Marcel Ciolacu regarding the Roşia Montană case, although from September 2023 - when the debate procedure at the international arbitration court ended - and until February 1, 2024, the head of the Government did not make any public appearance on this case. At the end of February, the prime minister seems to become categorical in his statements regarding Roşia Montană, giving the impression that it is very certain that we will have to pay compensation as a result of this process, as early as, on February 24, he declared: "Roşia Montană (was used) to invent a political entity (...) and now we have the bill: according to some, two billion dollars, according to others, five billion dollars. This is the bill that all Romanians will pay. At one point, someone wanted to use Roşia Montană, «Uniţi Salvăm Roşia Montană», to create (Union) Salvăm Romania. This is the truth".

If on February 1 Prime Minister Ciolacu was talking about the court's decision that will come by February 10, about the payments that should be discussed "with those who are likely to win this trial" and about making available the documents and decisions made "so that Romania loses this process", statements later completed by the Minister of Finance Marcel Boloş, who stated that it is possible that the Government will be obliged to pay compensation of 6.7 billion dollars, on March 7 - only one day before the ICSID published the decision favorable to Romania - Marcel Ciolacu posed as a defeatist and stated that he is willing to organize a referendum for Roşia Montană.

"Let's see if the Romanians agree to start gold mining", stated Marcel Ciolacu on March 7, the respective solution being brought into discussion after Minister Boloş stated, on the same day, that it is possible that, instead of paying the compensation of 6.7 billion dollars, the Romanian state to offer those from Gabriel Resources the possibility of continuing the mining project in Roşia Montană.

However, the next day, on March 8, ICSID rejected the action of the Canadian company Gabriel Resources and, immediately, Marcel Ciolacu and Marcel Boloş posed as winners and claimed that they had achieved an important victory for Romania.

For the attitude of Prime Minister Marcel Ciolacu, as a result of which the shares of Gabriel Resources and RMGC experienced a double increase on the Toronto stock exchange, former Prime Minister Dacian Cioloş filed a criminal complaint with the General Prosecutor's Office, and the former Minister of Transport, Cătălin Drula, submitted a complaint criminal case at the DNA.

At the beginning of February, the prime minister also announced that our country chose another international file, opened by the Pfizer company for the non-procurement of a huge amount of anti-Covid 19 vaccines ordered by the Cîţu government. According to the data in the file, the Pfizer company is asking the Bucharest government to pay 564 million euros for the 28.94 million vaccines ordered.

Also in February, the PSD-PNL coalition decided that the European Parliament and local elections would be held on the same day, June 9, despite criticism from the opposition parties.

• March - air and maritime Schengen for Romania

The government continued, in the last month of the first quarter of the current year, to adopt decisions regarding the extension of some price capping measures and to dilute the provisions of law 296/2023 and GEO 115/2023 regarding the reduction of public sector spending, adopting several normative acts and memoranda operating wage increases and allowing new state employment. Under these conditions, no one was surprised that European Commission officials, in the report published on March 25 regarding the macro-economic imbalances in our country, show that, despite some improvements, Romania still faces the vulnerability of fiscal revenues, and large budget deficits and a high rate of inflation, all of which are above pre-pandemic levels, make the national economy potentially vulnerable to shocks.

The statements of European officials removed the optimism of political decision-makers in Bucharest who announced at the beginning of the month, that on March 1, the rating agency Fitch reconfirmed the rating of Romania's government debt at BBB-/F3 for long-term and short-term debt in foreign currency, as well as and stable outlook.

The main notable event of the first month of spring was recorded on March 31, when our country entered, after 11 years in which it met all the criteria required by the acquis communautaire, in the air and maritime Schengen, thus removing control from the two borders regarding the identity of persons.

• April: Păcănelele - prohibited in small towns

In April, the government continued the policy of increasing some budget expenditures, including for the investments made by local public administrations, but also for the financing of energy investment schemes and those intended for small and medium enterprises. However, the Ministry of Finance and the Government as a whole received good news from the Standard&Poors agency, which in April maintained Romania's government debt rating at BBB-/A3 for long-term and short-term foreign currency debt, as well as the outlook stable. Moreover, in order to explain to international investors the new fiscal measures in our country, Marcel Boloş, the Minister of Finance, went to Washington in April where he had meetings with the representatives of the International Monetary Fund and the main funds ofinvestments, but also with the representatives of the rating agencies Standard&Poors and Moody's.

In the first month of the 2nd quarter, we recorded a consensus at the legislative level, with the Parliament adopting the ban on grocery stores in towns with less than 15,000 inhabitants, a measure that, according to industry representatives, would negatively affect over 200 small and medium-sized companies which operates in this economic sector and which will reduce revenues to the state budget. The law was promulgated by President Klaus Iohannis and entered into force on April 29.

During April, the PSD-PNL governing coalition faced the media's revelations about how the doctor Cătălin Cîrstoiu - the candidate of both parties for the position of general mayor of the Capital in the June 9 elections - made his fortune, based on an incompatibility at least morale between the position held - as general manager of the Bucharest University Hospital - and the clinic owned by his wife where the doctor treated several patients who had previously passed through the public hospital. The scandal ended only on April 23, when the leaders Marcel Ciolacu and Nicolae Ciucă gave up Cîrstoiu's candidacy, and the PSD and PNL teams mobilized to submit the candidacies for the position of general mayor of the Capital of Gabriela Firea and Sebastian Burduja.

• May - Tarom receives a state aid of almost 100 million euros

The government established the increase of the minimum gross salary per country to 3,700 lei from July 1, the 10% increase in salaries for several categories of budgetary employees -, new staff hires (2,700 new employees only in the health sector and 220 at ANAF) and providing new finance to farmers and businesses.

Furthermore, during May, the Government approved the granting of an individual state restructuring aid for the national Romanian air transport company, Tarom SA, aid that was previously approved, on April 29, by the European Commission. According to the government decision, the value of the state aid amounts to 471 million lei, approximately 94.67 million euros. Of this amount, 214.3 million will be used by Tarom to cover the liquidity deficit and financial balancing of the company in 2024. Considering the need to make urgent payments in June 2024 related to the purchase of the new B737 MAX aircraft, first installment of the restructuring aid, in the amount of 60 million lei, will be granted from the Reserve Fund at the disposal of the Government.

At the end of May, the Dutch group Damen asked the Constanţa Court to declare the bankruptcy of Damen Mangalia Shipyard, in which the state is the majority shareholder with 51% through the Ministry of Economy, Entrepreneurship and Tourism through the state company Şantierul Naval 2 Mai Mangalia. For the investments made in Mangalia, Damen claim that the Romanian state should pay them 160 million euros, an amount for which they have opened an international arbitration procedure at a specialized court in Vienna, Austria.

Externally, we note the decision of the Turkish President Recep Tayip Erdogan to allow Romanian citizens who travel to Turkey for tourist purposes to enter that country based on their identity card, the stay being allowed for a maximum of 90 days during a 180-day period .

Internally, we remind you that on May 24 the National Anticorruption Directorate announced the start of the criminal investigation on behalf of former SRI generals - Florian Coldea and Dumitru Dumbravă - and lawyer Doru Trăilă, who allegedly promised businessman Cătălin Hideg that they would influence the magistrates to change the sentence of criminal conviction pronounced by the trial court. The three would have asked Hideg to pay 600,000 euros, of which the businessman would have paid 100,000 euros.

• June - Ciolacu and Ciucă win the "comasates"

The best news for the leaders of the PSD-PNL governing coalition, Marcel Ciolacu and Nicolae Ciucă, came in the evening of June 9, when they found out that they had won the European parliamentary elections and the local elections, which they combined on the same day. with the stated aim of isolating extremist parties. Following the elections for the European Parliament, the PSD-PNL alliance won the lion's share, with 48.55% of the votes, which was equivalent to sending 19 deputies out of the 33 that our country has to the European Parliament. The rest of the seats were distributed as follows: AUR - 6 deputies, ADU - 3 deputies, UDMR - 2 deputies, S.O.S. Romania - 2 deputies and one seat for the independent candidate Nicolae Ştefănuţă.

The two governing parties also won the local elections for mayors, local councilors, county councilors and county council presidents.

The negative news for the governing coalition came at the time of the publication of the budget execution for the first six months of the current year, which records a deficit of 63.67 billions lei, respectively 3.6% of GDP compared to the deficit of 37.21 billion lei, respectively 2.32% of GDP related to the first semester of 2023. Total revenues amounted to 275.50 billion lei in the first half of 2024, registering an increase of 13.5% (y/y), supported by receipts from current revenues - insurance contributions, VAT, payroll tax, profit tax and non-tax revenues. The expenses of the consolidated general budget amounted in the first semester to 339.17 billion lei, which in nominal terms represents an increase of 21.2% compared to the same period of the previous year. Expressed as a percentage of the Gross Domestic Product, spending in the first six months of 2024 increased by 1.8 percentage points compared to the same period in 2023, from 17.4% of GDP to 19.2% of GDP.

Of the total budget expenditures, investment expenditures, which include capital expenditures, as well as those related to development programs financed from internal and external sources, amounted to 46.27 billion lei, an increase of 41.07% compared to the same period of the previous year, when they were worth 32.80 billion lei.

In order to counteract the increase in budget expenses, the Ciolacu Cabinet also took a set of measures aimed at improving the collection of revenues at the state budget and also increasing some taxes. Thus, on June 13, the Executive decided to increase by 10.4% - the rate of inflation, all mining taxes provided for by the mining law 85/2003, after which on June 21 it shocked the entire business environment, by adopting two emergency ordinances , without prior consultation of the social partners, normative acts that modify the e-Invoice system and introduce the Ro e-TVA system.

The measures taken by the government in the first two quarters regarding budget expenditures were criticized by the National Bank of Romania in the report on financial stability for the first semester published in June, which shows that there are several systemic risks and vulnerabilities regarding the national economy and to the state of public finances. Among the vulnerabilities cited in the report, we mention the high share of undercapitalized companies, the increase in the number of insolvency proceedings initiated and the low degree of financial intermediation. BNR experts also show that in the short term, the most important risk factors for financial stability in Romania are: global uncertainties in the context of the war in Ukraine and the conflict in the Middle East, the tension in internal macroeconomic balances, the level and persistence of twin deficits in our country, the risk of non-payment of loans contracted by the non-governmental sector and the risk associated with challenges to cyber security and financial innovation.