Romanian parties must form gov't or lose EU recovery funds
Pressure is mounting in Romania's corridors of power as four pro-EU parties attempt to create a governing coalition after Brussels escalated disciplinary action over the country’s deficit.
EC froze EUR 1.8bn RRF funds
The European Commission (EC) this month placed Romania under the excessive deficit procedure, warning that further delays risk triggering the suspension of EU funds.
Romania has the highest budget deficit in the EU, and the EC confirmed on 12 June that it has frozen the reallocation of EUR 1.8bn in Recovery and Resilience Facility (RRF) funds until a new cabinet is put in place.
The EC said it will not negotiate RRF reallocations with a caretaker government. Romania has missed several milestones tied to disbursement, including pension reform, digital infrastructure and public sector wage controls.
The IMF warned in May that Romania’s deficit could exceed 6% of GDP this year unless a credible adjustment programme is adopted. The Fund warned that Romania’s deficit path is “unsustainable without major policy shifts” and backed a mix of targeted cuts and increased tax compliance.
Romanian President Nicusor Dan has given the parties until 30 June to agree on a PM and adopt a credible plan to cut the deficit, which was 9.3% of GDP last year.
Coalition of the not so willing
More than six months since the December 2024 parliamentary election, Romania’s pro-European parties have failed to form a new government, despite their collective majority in Parliament.
The Social Democrats (PSD), National Liberals (PNL), Save Romania Union (USR) and Democratic Alliance of Hungarians in Romania (UDMR) together control 59% of seats but remain divided over their choice of premier and fiscal policy direction.
While the PSD insists on shielding pensions and public-sector wages, the USR and PNL have pushed for deeper cuts to state subsidies and procurement spending.
Bolojan blocked
The PSD initially proposed Ilie Bolojan, the council president of Bihor, west Romania, as its candidate for prime minister. Known for implementing strict cost-saving measures at the local level, the EU Bolojan sees as a credible reformer, and remains a front-runner for the premiership.
However, senior PSD figures have since withdrawn support, with leader Marcel Ciolacu warning that austerity “would destroy” the party's future electability. USR leaders also opposed Bolojan, calling him “a technocrat with no popular support”.
Alternatives who have failed to gain a cross-party consensus include European Commissioner for Transport Adina Valean and former Senate president and Moldovan National Bank Governor Anca Dragu.
Under Romania’s constitution, the president may dissolve Parliament if two prime ministerial nominations are rejected. Dan has yet to nominate a candidate.
Bolojan added further pressure this month by warning that spending cuts alone will not stabilise the deficit. “Without revenue-side adjustments, the numbers do not close,” Bolojan told local media on 2 June.
Parties fear political repercussions of tax increases
His remarks signal the likely return of tax hikes, an option viewed with deep suspicion by both business groups and the PSD’s voter base. Analysts say the political cost of endorsing new taxes could be enough to break fragile coalition talks.
The USR has called for early elections if no deal is reached by July. “This is not governance. It is obstruction,” USR deputy chair Elena Lasconi, who recently stood as a presidential candidate, said on 14 June.
Talks to revive the previous PSD-PNL coalition have also failed. A CURS poll published on 11 June showed support for that revival has dropped to 28%, down from 49% in 2022.
Romania’s political deadlock now risks becoming a fiscal emergency
Dan said last week that failure to deliver a detailed plan would likely result in a sovereign credit downgrade and an EU funding freeze. “There is no more time to waste,” Dan said in Bucharest, south Romania. “The political class must act responsibly or accept the consequences,” Dan added.
The warning follows the EC’s decision on 4 June, which opens the door to stricter monitoring and possible financial penalties unless corrective action is taken.
European Commission Vice President Valdis Dombrovskis said Romania’s fiscal slippage is “incompatible with EU rules” and urged authorities to adopt “immediate and durable” measures. Brussels is expected to evaluate Romania’s compliance shortly after the 30 June deadline.
Financial community watching closely
The lack of clarity has rattled investors. Analysts warned that further delays could damage investor confidence and weaken Romania’s credibility in the EU.
Romania is already experiencing a “marked deterioration in confidence” due to political uncertainty and lack of fiscal transparency, a June report from the Romanian Foreign Investors Council said.
Business leaders have urged the caretaker government to provide stability or step aside. “The risk premium is increasing every day this deadlock continues,” said Mihai Bogza, a consultant to foreign firm who served as the Romanian central bank's vice governor.
Rating agencies are watching closely. Credit agencies Fitch and S&P have both flagged Romania’s fiscal position as a source of concern, with reviews due in July and August. A downgrade from investment grade would raise borrowing costs and complicate access to capital markets.
For now, Dan’s 30 June deadline looms as the last chance to avoid a full-blown financial credibility crisis. “This is no longer just a coalition dispute,” said Bucharest-based political consultant Radu Magdin, describing the situation as a "governance vacuum with financial consequences".