Romania Faces Real Risk of Recession Amid Fiscal Challenges, Warns Finance Minister

Romania is confronting a significant risk of entering a recession, according to recent statements from the Minister of Finance, Alexandru Nazare. The warning comes amid soaring public deficits, high borrowing costs, and necessary austerity measures that have stirred public discontent and political tensions.

At a press conference, Minister Nazare highlighted that Romania’s budget deficit remains alarmingly high, estimated at around 9.3% of GDP in 2024, which is the largest in the European Union and far exceeds the EU’s 3% fiscal deficit limit. Although there are government plans to reduce this gap to about 7% by the end of the year, early 2025 figures suggest the deficit has worsened compared to the previous year. This fiscal imbalance adds to mounting pressure on public finances.

To address this, the government began implementing the first round of fiscal tightening measures on August 1, 2025. These include raising the highest VAT rate from 19% to 21%, increasing excise duties, and freezing public sector salaries and pensions until 2026. Two additional packages of fiscal reforms are scheduled for rollout before the end of the year. Despite resistance fueled partly by opposition forces on the far right, officials emphasise these steps are crucial to ensure fiscal sustainability and social equity.

Finance Minister Nazare candidly acknowledged the difficulty of the situation, stating, “Of course, it is not easy. We are all fully aware of the current state of the budget.” The government is also exploring sensitive reforms such as revising special pension schemes and altering state company governance to meet the conditions required for accessing vital European recovery funds.

Furthermore, borrowing costs for the Romanian state have risen steeply, with external market interest rates exceeding 7%, complicating debt servicing and raising concerns about financial stability. Experts warn of broader risks this fiscal stress poses, including a potential “hard landing” for the economy as public sector payments, including salaries and pensions, remain under threat if the deficit is not brought under control.

Political instability, alongside economic challenges such as the weakening of the Romanian leu against the euro, signals a volatile environment. Analysts stress the urgent need for a stable government that can enforce effective economic policies to prevent recessionary pressures from deepening.

Although Romania has managed to avoid a financial crisis akin to Greece’s by maintaining disciplined monetary policy and cautious fiscal management, continued political uncertainty and high deficits threaten this fragile equilibrium. The expiration of a precautionary IMF agreement in September 2025 further compounds risks, as the government and international partners have yet to reach a consensus on extending financial support, given disagreements over energy subsidies and fiscal measures.

In summary, Romania stands at a critical crossroads. The Finance Minister’s warnings reflect the real dangers the country faces economically, with recession looming if decisive and sustained fiscal reforms are not implemented. The coming months will be decisive in determining whether Romania can stabilise its finances without resorting to chaotic tax hikes or suffering a severe economic downturn.