Romania is taking steps to fight rampant tax fraud and to trim its budget deficit by taking its nationalized industries public. With Romania being one of the most corrupt countries in Europe, with a score of 46/100 per Trading Economics, this effort to reform is a welcomed sign. But will it be enough to push back on bureaucratic bloat and mounting corruption?
Prime Minister Ilie Bolojan announced that he will spearhead the effort to reform Romania’s state-owned energy and transportation companies and to take the government’s companies public: “As for the companies,” Bolojan said, “they are from the energy and transport sectors and, very likely, in the first week of August, we will make public the companies that are to be listed. Listing, from my point of view, is a good thing because it increases the capacity of the Romanian stock exchange to be a stock exchange in an emerging country that is developing, but, at the same time, it also increases the financing capacity of this company, the transparency in terms of managing its activity.”
So why the push for sudden reforms? In Bolojan’s own words: “Romania is losing billions in euros in wasted profit from state-owned companies, which artificially increase their expenses, mostly on wages. We can no longer tolerate this situation.”
The situation is intolerable, so why continue on with state-owned companies at all? Why not scrap the idea altogether for more successful—and profitable—private companies?
Transparency is a step forward, but is it enough?
Despite receiving over 100 billion euros in funding since joining the EU in 2007, Romania’s immense budget deficit has raised eyebrows in Brussels. Thanks to its bureaucratic bloat, lack of transparency, and decades’ worth of political and economic corruption, the Romanian government has been spending well above its means. Spending has gotten so dire that the country has a projected budget deficit of around 9 percent of economic output this year, the highest in the European Union. For reference, the target reference value set by the EU is just 3 percent.
Through a draft recommendation, the European Commission asked Romania to reduce its deficit to 2.8 percent of GDP by 2030, or risk losing EU funding. “Access to European funds is conditional on fiscal reform; without it, we would lose access to these funds,” Bolojan warned, “We cannot let our country end up in a situation like Greece.”
Without action, that will likely be the case. Romania's state-owned companies are already operating at a significant loss. In 2019, the ten most unprofitable state-controlled companies, primarily in the energy and transportation industries, accumulated losses exceeding RON three billion, employing 68,000 people and generating nearly RON ten billion in turnover. Despite these abysmal numbers, these state-owned companies remain artificially afloat thanks to subsidies from the state budget, aka Romanian citizens’ tax dollars, as well as allocated EU funding (other Europeans’ tax dollars).
Despite holding the most state-owned enterprises in Europe, with approximately 1,400 in total, and receiving billions in EU budgetary funding, the Romanian government is still unable to produce successful state-owned businesses of note. In fact, Romania only holds one state-owned company that reaches the 1 billion euro threshold, a natural gas company. Meanwhile, local private companies, mostly foreign-owned, hold businesses worth well over the 1 billion euro mark.
It’s Time to Denationalize
The financial headache created by these state-owned businesses isn’t new. An EU Commission analysis from ten years ago found that, compared to its private sector, Romania’s state-owned businesses perform more poorly, experience lower profitability, and are accruing more debt by the day. Poor corporate governance, bureaucratic bloat, and the inefficient allocation of funding are the usual suspects hindering growth. Meanwhile, attempts to privatize are either delayed or ignored.
Apart from flirting with raising taxes on its citizens and businesses, Romania should look to its contemporaries for solutions, particularly Argentina.
Under President Javier Milei, Argentina has experienced an economic boom that puts central planning theorists to shame. Implementing novel libertarian ideas involving deregulation and dismantling large segments of his federal bureaucracy, Milei has succeeded in reducing government spending, cutting inflation down from 25 percent per month when he first entered office in December 2023 to only 1.62 percent currently, and lowering the poverty rate to below the 40 percent mark.
The best part of it all? Milei accomplished these feats without billions in funding from the EU, and by instead cutting down on government regulation, red tape, and unnecessary oversight, unlike in Europe, where we see too many countries increasing their reliance on the EU regulatory scheme in order to remain eligible to receive EU funding, as Bolojan made clear.
While the EU money appears enticing, inefficient corporate management structures and the government’s incessant need to influence business practices clearly only lead to greater inefficiency, more debt, and higher taxes. It’s time for Romania to try something novel: denationalize, privatize, and let the market do its thing.
