The main events of 2024 in Romania: business & society impact

After more than a decade of intense negotiations, one of the most awaited events of 2024 will be Romania’s accession to the Schengen area, expected in March this year. It is the world’s largest such free movement area, which includes 27 European countries, facilitating the mobility of over 420 million people[i]. At the moment, Romania and Bulgaria will be accepted into the European Schengen area only partially: by sea and air, starting on 31 March, according to public data[ii].

The accession to the Schengen area, even in partial form, brings significant economic opportunities for Romania: will increase the accessibility and confidence of foreign investors, while making the transport of goods by cargo aircraft more efficient, in areas such as pharmaceuticals, critical infrastructure (military), e-commerce, etc. The Port of Constanta could also become the main gateway from Eastern Europe for EU goods. After the outbreak of the conflict in Ukraine, cargo traffic on the seafront is on an upward trend, with a 22.5% increase in 2023 compared to the previous year[iii].

An European Parliament resolution shows that non-Schengen countries have increased trade costs for goods at a rate of between 0.4% and 0.9% of the trade value at each Schengen border, while the costs applicable to trade in services are even higher: for the whole Schengen area they amount to between EUR 6.5 and 13 billion per year[iv].

European parliamentary elections, the most important signal of the year

This year, four types of elections will take place in Romania and they are expected to create a context of expectation and social tension, which may be amplified considering that the media space will be dominated by information about the elections, according to CES Bucharest analysis.

Although the European Parliamentary elections have generally not a major stake for the population, this time the situation is different, as they are the first elections after a tense period following the pandemic, the conflict in Ukraine and the economic crisis. Following these, major reorganizations in the political spectrum may take place, which may fuel the state of instability and tension. 

Also, in the context in which Romania’s image plays an essential role in the European Union, the European Parliament elections on 9 June will determine the 33 Members of the European Parliament who will represent Romania in the European Parliament for the next 5 years.

This is not only a democratic exercise, but also an opportunity to guide the decisions that will determine the economic direction of the country. Political stability and Romania’s external image can accelerate foreign investment to maintain the development trend and a prosperous economic environment in Romania. The allocation of European funds and the prioritization of development programmes may also be influenced by the results of the European Parliament elections. Members of the European Parliament are also the ones who set the guidelines for the European Union’s monetary and fiscal policies, which have a fundamental role in the economic environment.

After the European Parliamentary elections, the public institutions reorganization project is expected to be resumed, as a measure to help recover the 20 billion lei budget deficit, postponed until 1 July 2024, after the elections.

IMF recommends new changes in fiscal and budgetary policies for Romania

The IMF report published on 8 December 2023 highlights the resilience of the Romanian economy in recent years, in the context of pandemic shocks, the conflict in Ukraine or rising energy and food prices, forecasting a modest recovery in growth, followed by a return to its potential rhythm in the mid-term, under substantial risks, such as an escalation of the conflict in Ukraine, a possible slowdown in economic activity in Europe or a sharp global slowdown. According to the report, fiscal policies, public spending policies or monetary policies are elements that need to be carefully managed, while also highlighting the need for predictability in fiscal and spending policies for the necessary fiscal consolidation.

Romania has significant potential to sustain real income growth and continued convergence with Western Europe, and this requires investment in physical infrastructure as well as in people and education and strengthening the efficiency of the state, the report highlights.

The implementation of the IMF recommendations could have new effects on the economy. Efforts to reduce the budget deficit could lead to an increase in fiscal costs for companies and therefore to a destabilization of private actors` budgets, which may later affect the labor market.

Institutions` digitalization: the business implications 

The modernization and digitization of public institutions has been one of Romania’s top priorities in recent years. Among the projects announced as of 2022 is the implementation of a complex Big Data platform through which large volumes of data will be integrated and valued in operational and analytical terms, or the SFERA project, which aims to achieve a better management of tax obligations.

The electronic invoice (E-Factura) system, an important milestone in Romania’s alignment with European tax reporting standards, has caused confusion in the first month of implementation, authorities already proceeding with corrections and updates to the system. The business environment’s concerns about the

smooth functioning of the system have been tempered by setting 1 July 2024 as the deadline for imposing sanctions on economic agents who do not comply with the new reporting standards. At the same time, the business community raised concerns about data management and security.

The implementation of each of the major digitization projects could have a significant impact on the Romanian business environment. On the one side, companies should expect more transparency and better cooperation with fiscal authorities. At the same time, efforts to combat tax evasion could lead to an increase in compliance costs for companies, but also to the migration of some economic agents to the grey areas of the economy.

Romania is also currently working on a project to modernize the customs system and implement electronic customs. According to the public announcements, border customs offices will be equipped with 26 scanning systems in the next few years. The project is part of the NRRP, with non-reimbursable funding of €34 million, and is expected to produce effects in reducing the gray economy, which negatively impacts the Gross Domestic Product, represents unfair competition for the business environment, illicit traffic of goods also representing a danger to consumers` safety. By modernizing the customs system, Romania is also checking one of the essential conditions for being accepted as a member of the Schengen area on land, by increasing security at the borders of the free area, especially in the context of major crises, such as that of migrants.

New EU anti-corruption policies could be transposed in Romania, too

The European Commission published in May 2023 a package of legislative proposals against corruption at national and EU level. These proposals include a new anti-corruption directive, which should harmonize the current EU anti-corruption legal framework[v].Theproposed directive will be on the EU’s decision-making mechanisms during the year, with adoption in the European Parliament, approval by the Council and then moving to the stage of harmonization of national legislation.

Adopting new measures to prevent corruption, while prosecuting the authors and reducing the criminal phenomenon of corruption, could reduce economic and social costs and will have a positive impact on the economy. At an equal level, the institutional environment could enter a new stage of transparency towards citizens and the private sector, but also of caution and responsibility for their own actions, according to the CES Bucharest analysis.

New sources of capital for the economy 

Soon, the Neptun Deep project, through which Romania will become the biggest producer of natural gas in the European Union, is expected to enter the development phase, with over 80% of the value of the contracts for the project already allocated to contractors and suppliers. The first cubic meters of natural gas will be extracted and delivered to the national grid in 2027 and official estimates show that Neptun Deep will bring in an estimated €20 billion in budget revenues, while also helping to create 9,000 new jobs.

The advancement of highway construction could also generate additional funds in the economy. Nearly 200 kilometres of highway could enter the actual works phase in 2024, including sections such as parts of the Bucharest highway and the first section of the A8 highway.

This year’s education pay rises and the change in the income classification of all teachers will have a noticeable positive effect on the banking sector, with practically 300,000+ education employees having access to bank real estate loans.

The social impact of the events expected in 2024

In addition to the business environment impact, the 2024 events could also have a significant social impact. Modernization of institutions could lead to an increase in compliance costs for companies, by directing parts of activity to the informal sector, which could mean a reduction in jobs.

The implementation of the turnover tax could have a negative impact on pensions. This is because the turnover tax would be supported by consumers, who may have lower incomes. The chain price increases on products and services due to galloping inflation may have a negative effect on the purchasing power of the population, with the effect of reducing consumption.

At the same time, the four types of elections may lead to a state of social tension, amplified by successive election results and public debate, which will spill over into the final election results.

Last but not least, the entire context of the year is expected to not favor education, considering all the other priorities that will dominate the public space. Romania ranks among the last countries in the European Union in this respect, with one of the highest rates of functional illiteracy: more than 40% of young people aged 15[vi]. Romania has at its disposal more than 3.6 billion euros through the NRRP for the development of the education system, but the degree of absorption will be visible at the end of the year, as well as whether there has been a change in the perception among public actors that a competitive, high-performing economy means first and foremost an educated country.

[i] Chamber of Deputies, (2022) PARTICIPATION OF ROMANIA IN THE SCHENGEN AREA, pg. 4/26

[ii] Ministry of Foreign Affairs – Adoption of the EU Council Decision on the application of the Schengen acquis in Romania and Bulgaria

[iii] According to the information communicated by the National Company Administration of Maritime Ports (CNAPM)

[iv] European Parliament – European Parliament resolution on accession to the Schengen area (2023/2668(RSP)), point E

[v] European Comission –  Anti-corruption: Stronger rules to fight corruption in the EU and worldwide – II. Stronger rules to fight corruption

[vi] European Commission – Education and Training Monitor 2022 – Romania