The following text represents the opinion of Horia Braun, CEO of mutual fund manager Erste Asset Management, and is taken in full: A popular saying says that «the sum of vices remains constant.» Someone says, for example, if you stop smoking, you'll eat more and gain weight, if you stop eating, you'll become grumpy and grumpy or fall into other temptations, etc. It's a joke, obviously, but like any wise saying that has become «viral» in the popular consciousness, there is a substratum of wisdom there. I am not an expert in the interpretation of such expressions, but I suspect that one way of looking at things is that there is a balance in this world and in each individual, which manifests itself both physically and mentally, and the so-called «vices», in small and controlled doses, come to counterbalance or compensate for other chronic physical and/or mental imbalances, such as, for example, daily stress from work or other social interactions1. This principle of compensating some excesses with other excesses is not at all foreign to the macroeconomic body either. Let's take, for example, the external deficit of Romania: according to a basic macroeconomic identity, the value of the current account deficit of the balance of payments (the «official» name of the external deficit) is equal to the difference between investments and savings at the macroeconomic level. In turn, savings represent the difference between what the economy produces (GDP) and what the population and the Government consume. In other words, the external imbalance of our country measures our excess of investment and consumption compared to what we manage to produce, which, in popular words, measures how much we stretch beyond our comforter. This excess also manifests itself pecuniarily, as a difference between the revenues collected and the expenses incurred, a difference that can only exist if it is financed, and this financing can be done through the accumulation of debt (for example, bonds issued by the Romanian State or Romanian companies to foreign investors), through capital contribution (for example, foreign direct investments), through donations or grants (for example, non-refundable European funds), respectively from the reserves accumulated in the past (strictly, in the case of accounting currency deficit, it would be sales from the international reserve of the National Bank of Romania). If we want to dig deeper into the external deficit, we can break down the economy between the public and private sectors, and the latter between the companies and households. Thus, at the level of the public sector, the imbalance manifests itself through the budget deficit, which measures how much the Romanian Statute spends as a whole in addition to how much it collects from taxes, fees and voluntary contributions, including European funds. Like the external deficit, the budget deficit must be financed, this financing generally being achieved through the accumulation of public debt (through internal and external bond issues, but also through the contracting of loans, for example, from international financial bodies such as the IMF or the World Bank), and rarely through the sale of state assets (for example, privatization of companies with state capital). Finally, at the level of the private sector, comparing the consumption and investments made by the population and companies with the net income from taxes and fees, we will obtain a related surplus or deficit.Chart 1: The funding surplus/deficit of the various institutional sectors in Romania in the last 20 years (millions of EUR) Data source: Eurostat Graph 1 illustrates the evolution of the «excesses» of Romania's economy over the last 20 years2. The figures also tell the story of our recent economy: as a population, we spend more than we can actually afford based on the income we collect3. As a state, until last year, we had gone completely crazy: the financing requirement for the year 2024 was 33 billion euros, almost 3 times higher than in 2009, the year of the deepest recession of the last two decades. At the level of companies (non-financial and financial), it would seem that we are better off, there is a funding surplus, but this is not enough to cover the deficits of the population and the public sector, and, in addition, it masks another problem of Romanian companies, namely the lack of sufficient investments. In fact, based on the «compensation law», the weaker investments of the private sector were counterbalanced by a sharper increase in public investments, which, according to the figures published on the website of the Ministry of Finance, have increased by more than 2.3 times in the last 5 years. So, part of our public deficit still comes from investments, many of them in infrastructure, so with productive impact in the future. The entire public (budgetary) sector was also responsible for the partial balancing of the population's household balance sheet, which was significantly affected by the inflationary spike of 2022, the increases in salaries and public pensions compensating for a good part of the deterioration of purchasing power, but at the price of the deterioration of the public budget (Remember, vices transform, but do not disappear…). However, the law of compensation can be viewed not only from the angle in which the state compensates for part of the shortcomings of the private sector, but also from the other side, from which the state grabs more and more of society's resources, leaving less capital and labor available for the private sector to develop. This is because, on the one hand, the high deficit and the need to finance it induces a «hunger» for state financing, which pays high interest rates to investors in securities, redirecting a good part of the financial resources of the local public towards the financing of private enterprises. This phenomenon is labeled in English by the term «crowding out». A similar phenomenon also happens in the labor market, because the state apparatus accumulates an important proportion (probably between 20%-25%) of the total (official) employees in the economy, and the relatively high level of salaries in the public sector, or at least the high rate of growth of these salaries, made the private sector hardly keep pace and lose personnel, sometimes valuable, in favor of the public sector. There are kernels of truth to both points of view («the state helps and compensates» versus «the state grabs – and, to a good extent, wastes – all the resources») and probably, discussing them more deeply, we would enter the realm of political ideologies and beliefs (Left versus Right political). I do not propose this, nor to bore you with dry macroeconomic theory before the Holidays. However, I would dare to look a little into the future, because it seems interesting to me to speculate a little about what will happen in the case of the much-anticipated process of budget adjustment (that is, the reduction of the budget deficit) which has already been started and which will have to continue in the next period, if we do not want to enter the sights of the «bond vigilantes», i.e. the scrupulous and sophisticated investors who finance today, to a large extent, the deficits not only of Romania, but also of other countries (including the USA, Great Britain, France or Japan) with large financing needs. Thus, if the recurring needs of the state will begin to decrease gradually, one of 3 scenarios can happen. In the first, the need to finance the entire economy is reduced (our vices disappear little by little), a process which, unfortunately, implies an even more drastic slowdown in economic growth, if not a recession; a process, therefore, painful, as is the renunciation of any vice. In the second scenario, the country's need for financing decreases less, because the population's need for financing will increase in compensation. This means a relaunch of consumption and/or non-financial investments (for example, real estate) of the population, possibly financed by the banking sector, which will have somewhat greater resources released based on lower purchases of government securities. A third scenario also assumes that Romania's need for external financing adjusts more slowly, because, in parallel with the reduction of the public sector's need for financing, the company sector takes over the released resources and begins to invest more strongly in the expansion of its own businesses. Of course, the scenario that will unfold further will depend a lot on the kind of budgetary adjustment measures that will be taken, but, even from the current government rhetoric, it seems clear that the last scenario is by far the most desirable for the sustainable development of the economy. In order for it to happen, however, entrepreneurs need to «sin» more, falling into the «vice» of overconfidence in their own strength, of dreams that are difficult to fulfill and often of courage considered by others to be reckless. However, the law of compensation applied in the future says that, for some, perhaps not quite a few, the «vice» of overconfidence will turn into the «virtue» of progress. Have a happy Holidays and never hesitate to believe in yourself!
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