Although Romania claims the highest GDP growth rate in Europe and a low unemployment rate, all is not rosy in the seventh most populous member state of the European Union, and prominent lawyers in the country admit to profound dissatisfaction with the country’s leadership and concern about its long-term prospects.
Emerging from Darkness
Nobody would deny Romania’s challenges. The country remains one of the poorest in Europe, with an average monthly wage of only EUR 540 in 2016, and the country is ranked 50th out of 51 countries in the “Very High Human Development” section of the Human Development Index prepared by the United Nations Development Programme. (See Box 1).
Still, its progress in recent years has been remarkable. Romania’s EUR 374.51 billion GDP (PPP) in 2016 represented a 5.0% increase from the year before – the largest growth rate in Europe reported that year (see Box 2) – and it has reportedly shot up to 7% (again the highest in Europe) through the first nine months of 2017. The country’s GDP per capita of EUR 18,950 in 2016 was 59% of the European Union average, up from only 41% when it joined the EU in 2007. Meanwhile, unemployment is at a relatively low 5.4% (see Box 3).
You would expect lawyers in the country to be enthused about that growth, reveling in what must be booming books of business, and optimistic about the years to come.
You would be wrong.
Exchanging Short-Term Gain for Long-Term Potential
Despite the country’s growth, Ion Nestor, the venerable head of Nestor Nestor Diculescu Kingston Petersen, claims that “the mood on the ground is not one of hyper-optimism despite the economy doing well on paper.” He worries that the standard of living and other economic indicators have been “pumped up,” with insufficient focus on long term sustainability.
Bryan Jardine, the long-time Managing Partner of Wolf Theiss’s Bucharest office, agrees. “My concern is that the growth Romania is currently experiencing may not be sustainable, since it is being driven largely by increases in short term consumer consumption (bolstered by recent VAT reductions and salary increases) but with no corresponding productivity gains by the work force or any significant government investment in longer-term systemic improvements or infrastructure. The government is increasing spending without increasing tax revenues, risking a ballooning deficit, coupled with inflationary pressures, and it is now trying to figure out new and exotic ways to find these revenues (e.g. a ‘split’ VAT scheme, taxes on turnover instead of profits, ‘solidarity taxes,’ and so on).”
Jardine does not deny that 2017 has been a good year both for the country and his own business – but he, like Nestor, worries that that success may be built on sand. “I am concerned that the current government has no long-term plan for the development and progress of Romania and to make it an attractive destination for FDI. Instead, they seem more concerned about retaining power–by ramming through legislation that modifies existing laws on anti-corruption, weakening the enforcement of certain anti-corruption laws that may impact their current hold on power, or distributing more financial largess to their constituents in order to solidify their political hold over this segment of the population.”
Sergiu Gidei, the Managing Partner of CEE Attorneys Boanta, Gidei si Asociatii, is similarly concerned. “In my opinion the growth of the Romanian economy is too much based on the consumption stimulated by certain governmental policies (like an increase in minimum wages), as well as affordable financing granted by the financial sector. The risk is that such growth is not sustainable in the medium and long term.” Instead, Gidei says, “the economic growth should be directed to some solid sectors like public infrastructure projects and industry.”
And Sebastian Gutiu, the Managing Partner of Schoenherr Bucharest, concurs. “I tend to believe that consumption by itself cannot continue to sustain a strong economic growth for too long.” According to Gutiu, “Romania should be looking for solutions to increase the predictability and stability of its legislative and fiscal framework, while on the economic level it should focus on finding ways to attract foreign direct investments (a difficult task, considering the already low level and the recent descending path registered by FDI), to increase the EU funds absorption rate and to lower the foreign account deficit.”
Building Bridges and Roads … to Economic Health
Indeed, there seems to be a consensus that the repeated delays to long-awaited infrastructure projects is a real problem concern. Most point the finger at the political class. “I think that there is a lack of political consensus between all political forces regarding the major public infrastructure projects,” says Gidei. “It should be decided upon such major projects which are essential for Romanian economy and such major projects have to be assumed and implemented by all political forces.”
Schoenherr’s Gutiu agrees: “I would say the lack of stability has been the main reason for Romania’s failure to develop its infrastructure. And I am not talking only about the unstable legislation – or rather the lack of a proper legislation, if we refer to PPPs – but mainly to the succeeding governments’ inability to follow a common path towards reaching this aim. With every change in the executive system, new objectives have been set, usually different from those of the preceding administration. While the much-expected PPP law might encourage investors to consider entering Romanian infrastructure projects, the need still remains for turning infrastructure into a much less politically-driven area.”
Jardine agrees that such projects “have long term positive impact on the development of Romania and the economy,” and says that the government’s failure to launch them is revealing, as “by necessity you need the commitment to these projects by a bold government that is willing to look beyond the short term and beyond the next election cycle.” He says, “we need a government that is committed to a longer-term vision for Romania and not short term immediate gratification or the next election cycle.”
Part of the problem, Jardine believes, is the amount of time necessary to bring infrastructure projects to fruition, which conflicts with the need for political advantage. “If a government initiates a particularly large infrastructure project,” he says, “there is a good chance it will not be successfully concluded while they are still in power. The successor government, even if from a different party, which may have actually opposed the project, may be rewarded with praise from the project’s successful completion.”
Nonetheless, in Jardine’s opinion, the long-term health of the country should supersede this thirst for short-term advantage. “It is important for all political parties and politicians to try to unite around basic common principles – i.e. its commitment to the EU and commitment to moving Romania forward as a country with citizens who are prosperous and enjoy a good quality of life with a protected environment and resources, good health care, and education. The Romania of the future should be better for our children than the Romanian of today is for us.”
Anca Mihailescu, the Co-Managing Partner of Ijdelea Mihailescu, describes the failure to launch necessary infrastructure projects as “one of the biggest blocks in the country’s overall development and particularly of the development of specific parts of the country.” Because infrastructure requires significant commitment from the government, she says, “probably, at least in the last years, the main reason for the lack of sustainable projects has been the political uncertainty triggered by what seems to be a never-ending changing of governments.”
The solution, Mihailescu says, may involve an increased use of public private partnerships. According to her, “everybody is waiting for PPP reform, especially considering that PPP has been actively implemented in other countries for many ground-breaking infrastructure projects. A new PPP law was adopted in Romania at the end of last year and it can be seen as a step forward in facilitating PPP projects but currently it is not functional mainly [because] the corresponding norms have not been enacted so far. We remain hopeful that the norms will be implemented and PPP projects will start to be implemented maybe starting with the second part of next year.”
The One-Eyed Man is King in the Land of the Blind
Of course, none of the lawyers we spoke to claim that Romania’s impressive economic indicators and persistent growth is a bad thing; and, indeed, there’s plenty of reason for hope.
Gabriel Zbarcea refers to the country’s attractiveness for foreign direct investment as “a big positive,” and suggests that one area showing real potential is the country’s defense industry, where – consistent with the country’s publicized commitment to spend two percent of its gross domestic product on defense every year for the next nine years – several notable deals have taken place in recent months. Such deals include the country’s recent agreement with US-base defense contractor Raytheon for maintenance of Patriot missile defense systems (described by Romania’s Ministry of the Economy as the first step towards the country’s acquisition of Patriot missile defense systems from Raytheon), a cooperation agreement with Airbus Helicopters for production of the H215M multi-role helicopter in Romania, and a cooperation agreement with General Dynamics to facilitate the in-country production of armed vehicles in partnership with Uzina Mecanica Bucharest for delivery to the Romanian military.
In addition, Zbarcea says, “there is a revitalization of the real estate market and a lot of work on banking matters – in particular NPLs, where 2017 may be one of the busiest years in terms of numbers.” Finally, although he agrees that there “is definitely room for a lot more infrastructure projects,” Zbarcea notes that a few projects have gotten off the ground in recent months, pointing in particular to the successful public procurement procedure this past spring for the widening of the southern section of Bucharest’s ring road and a separate process involving the construction of a new EUR 500 million bridge over the Danube in the Braila area of eastern Romania, which is expected to become one of the five largest bridges in Europe and which has been described in the media as “the biggest infrastructure project the country has seen in decades.”
And other areas are active as well. Ion Nestor, for instance, describes disputes, energy (in particular oil & gas), workout and restructuring, fiscal work (including transfer pricing), and data protection as particularly promising areas for his firm.
And some of them are likely to stay hot. Bryan Jardine – who notes with pride that his office has recently hired a new Partner, Maria Maxim, to lead its Data Protection Practice – says that work related to the GDPR won’t end with its implementation in May 2018, as “those companies that don’t comply or don’t appreciate the gravity of the legislation will soon realize if they are audited and/or fined by the DPA. The potential fines are significant and this is where companies will again need legal advice and support.”
Otherwise, many believe that Romania’s greatest asset may be its relative stability and political moderation – a rare commodity in the region these days. Zbarcea notes that the country’s attractiveness is in part due to the challenges investors might face in other markets in the region, such as Turkey, Poland, the Czech Republic, Ukraine, and Hungary.
Bryan Jardine also suggests that Romania is attractive in large part because it serves as the “last man standing” in the region, perceived to be relatively stable, in contrast to the perceived political hurdles in neighboring countries. Jardine says that, in this context, success is simply a matter of “not shooting ourselves in the foot.”
And in fact, Jardine says, deal-making is safer in Romania than before, as the risk associated with deals in the country has decreased considerably as a result of the legislative harmony that accompanied EU accession. According to Jardine, “it is fair to say that Romania now has a well-developed body of EU-based laws and regulations which bring harmony and consistency to the Romanian legal landscape. In addition, there are more insurance products available on the Romanian market (e.g. real estate title insurance, representation and warranty insurance, professional insurance, etc.) to mitigate investor risk around remaining legal uncertainties in the local market.”
Ultimately, according to Jardine, the country’s inherent prospects are extremely strong – if the government doesn’t interfere with them. “If the government simply maintains stable and sensible legislation and fiscal policies,” he says, “there is a potential for enormous FDI – looking for an investment destination and with a current lack of suitable alternative markets in the CEE/SEE region.”
We would like to thank the following lawyers for their contribution to this article:
- Ion Nestor, Managing Partner, Nestor Nestor Diculescu Kingston Petersen
- Bryan Jardine, Managing Partner, Wolf Theiss Romania
- Sergiu Gidei, Managing Partner, CEE Attorneys Boanta, Gidei si Asociatii
- Sebastian Gutiu, Managing Partner, Schoenherr Romania
- Anca Mihailescu, Co-Managing Partner, Ijdelea Mihailescu
- Gabriel Zbarcea, Managing Partner, Tuca Zbarcea & Asociații
This Article was originally published in Issue 4.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.