Following a series of op-eds by Leonardo Badea, BR sat down with the Deputy Governor of the National Bank of Romania for an exclusive interview to find out his take on the current economic crisis, its costs, but also the opportunities which could arise from the current context.
If we refer to the current pandemic crisis, paraphrasing, can we say that “this time is different”? Would it have helped us to pay more attention to what the previous crises have shown us?
Associating this famous quote to the current situation is indeed tempting, especially since it resonates very well for the experienced economists who have watched and participated in the debates of the last decades on the causes, manifestations and solutions of economic and financial crises. In fact, in a very recent interview Kenneth Rogoff admitted that we are facing an extraordinary situation for which “it is really hard to think of a historical parallel”.
Even though the majority of probably us agree that “this time is different”, I think we should be careful not to put such a simple label over a very complicated situation. It is in our best interest of finding the most appropriate solutions to exit the crisis to look at its details and characteristics on all sides. They are indeed different from those of other crises that we often remember regarding the cause that generated it and its early manifestations, by the fulminating closure of activities, the sudden collapse of supply and demand for broad categories of products and services, the complexity of the implications of the health crisis on the functioning of the modern economy and society, our inability to understand and reasonably anticipate its future developments and the irreversible transformations that it could cause.
But, beyond these many differences, I think there are also elements common to most other crises of the past, which if we can strive to understand better and that would help us to build solutions and defend ourselves from the effects that will come.
For example, we are facing a crisis of trust from both business and consumer side (so simultaneously on the supply and demand), but this in itself is not new, because both the latest and the most remote economic and financial crises we have experienced have had this component and as such we could lean more towards understanding it. Some tools for restoring trust are indeed specific to a health crisis, but others are generally valid and relate to human nature, to the reaction of an individual placed in a borderline situation that threatens his well-being and personal future, also for his family and community, and these are things that we should and could have learned better from many previous crises, especially how to counteract them.
Also, as with other crises that have had an economic manifestation in the past, we know that this time too, it is quite likely that at some point the financial sector will be affected in one form or another. It won’t happen immediately, but it will happen later in the course of the crisis, I’m inclined to think it’s almost inevitable. This gives us time to prepare, to understand by studying previous crises where and how the effects from the economy to the financial sector will spread and how to continue to have the necessary measures available (as we are already doing – see the recent recommendations of the European Systemic Risk Committee, the measures of the European Central Bank and national authorities, etc.), especially since this time the financial sector is entering into the crisis in a much consolidated position.
That is why, however, I believe that in a certain way, a subtle but significant way, some of what Carmen Reinhart and Kenneth Rogoff wrote in 2009 remains true. I mean not in the title of their book, but in the essence of its message, for those who had the patience read it in detail. We have a different crisis, but one which, in its development that we will see in the coming months and quarters, will also have manifestations and mechanisms common to other long-term and far-reaching crises of the past.
Is there a chance we could come out stronger, as a society and as an economy? How can such a crisis be successfully managed?
I join the voices that advocate for finding the most constructive way out of this crisis, which not only aims to restore normality of the previous periods (although if we look sincerely towards the last 10 years, we do not find true periods of peace and economic growth but only islands of positive evolution, located in certain geographical or rather geo-political areas, always threatened by risks and vulnerabilities and often interrupted by episodes of acute volatility), and have the courage to imagine and build a future economy and society more resistant to shocks (or at least to those that we have experienced so far). I believe that this desire is achievable and the debate of ideas has already begun. We need these ideas to circulate as much as possible and for state institutions and the private environment to work together to test and gradually implement the most valuable and useful conclusions that will result.
Several proposals have already been circulated, both at the general level, but also specifically for Romania. In general, they are about improving the approach to supply chains, strengthening public health systems, and facilitate remote working where possible. In Romania’s case, the aim should be to stimulate especially of those areas where we as an economy have competitive advantages (including natural ones) but also of the areas that we see as having potential in the future (green, digitalized, perhaps autonomous) global economy. In addition, we need to channel our scarce (financial) resources towards modernization (often this means digitalization and implementation of the latest technologies, but not only) in all areas of activity: agriculture, trade, services, industry, education, health, public administration, etc.
And I would like us not to forget an important economic lesson for Romania from the experience of the last few quarters: it matters how you enter a crisis, how balanced you are in terms of international position and internal balances. Therefore, as we think of new solutions to develop, streamline and strengthen the economy, at the same time we must have the consistency and determination to implement the old solutions, the ones we know but we did not always had enough strength to implement them: to have an adequate fiscal space and a budgetary structure as flexible as possible.
Indeed, being a crisis that first manifests itself in the economy, solutions must first stimulate the economy. I personally resonate with ideas that are circumscribed to the School of Neo-Keynesian Macroeconomic Thinking (“New Keynesian economics”) and I am a supporter of the beneficial role that moderate and carefully calibrated government programs can play in regulating inefficiencies and positively transform the economy, to alleviate the inequalities generated by (all types of) crises on the society. I believe in the relevance and impact of macroeconomic policies in overcoming crises, restoring balances and developing the economy. From this perspective I believe that fiscal policy plays a very important role in both the short and the long term, and monetary policy can contribute and support the improvement, in the short term, of acute imbalances generated by crises. The triangle is complemented by macroprudential policies, which, although they have only recently been developed, have already proved their usefulness, because today we have a financial system in Europe more apt to withstand shocks and support economic reconstruction, even if it will, probably inevitably, be affected to some extent.
However, to implement tax incentives requires fiscal space, the capacity to finance them, or unfortunately here we are not standing very well. Of course, stimulus measures are also financed by debt issuance, but this increases the long-term burden and can introduce new vulnerabilities. That is why the efficiency of programmes and the use of resources is very important during this period.
Surely every crisis has its costs. What will they be for Romania?
When we talk about the costs of the crisis, I prefer to avoid the widespread reflex of thinking immediately about the economy, GDP, losses, bankruptcies, non-performing loans, stock market decline, etc. Of course, all this is a first, statistical expression of the cost of a crisis.
But beyond that, the effects of crises are always suffered by the people, unfortunately. And our generation is already going through a third major crisis in just 15 years, after the global financial crisis triggered in 2007 and the sovereign debt crisis of some European states in 2010-2012. Their effects add up and become important, marked, with significant negative influences on the social and economic behavior of an entire generation, unfortunately exactly during its time of maximum potential to contribute to the development of society. Essentially, we are talking about many years largely lost/wasted from the lives of millions of people, and this is not just about lost well-being, but also about aspirations, plans for the future, hopes for personal development, all of them delayed by years or, in the case of many, permanently wasted. For “life is more than food and body is more than clothing” (Luca 12:21).
Crises usually affect human existence on several levels but let us not forget that they are first perceived at the personal and family level, then at the community level and finally at the state and global level. I think that we economists would find more energy and inclination to think and apply better solutions if we lose this reflex that when we hear the word “crisis” we couple start to think as statisticians, which leads us to impersonal and resolutory top-down approaches, from macro to micro, instead of realizing that the effects are the most intensely experienced by people on a personal, family and small communities level, which would naturally guide us to build a different, better type of answer to the crisis, more sustainable I think, from micro to macro.
That is why, while recognizing the primordial role of free markets in the functioning of the market economy and in a democratic society, I believe that we owe it to ourselves to make up for the (few but relevant) inefficiencies and proven limits of free competitive market economy mechanisms through macro-stability programmes.
The effect of crises to amplify inequalities is manifested not only at the level of individuals but also between countries. We thus understand the nature of the costs of this crisis for Romania as a country. Being less prepared and with fewer resources than other more advanced countries, we are likely to recover more slowly and risk prolonging the time that we will need to narrow the gap between us and the European averages.
However, crises also have this side that they can change previous developments (trends) and generate new economic and social choices that can completely modify the trajectory of an economy and society. That’s where the opportunity comes from. We already have a positive example to follow: the crisis has exponentially accelerated the trajectory of implementing digitalization in many aspects of economic and social life. What was expected to happen in the coming years has already been operationalized in a few months. This model could be taken forward in terms of reducing pollution, reorienting the structure of energy consumption, streamlining transport mechanisms, etc.
In the post-crisis period who wins and who loses? Do you see changes in global power poles?
Among equals, at the level of developed countries and the main poles of economic power, small differences in the structure of pre-crisis economies can turn into significant advantages and even long-term changes in the global hierarchy. But we are talking about very complex developments, over the long horizon, influenced by a huge number of variables, which is why it is difficult to predict and issue forecasts.
For now, looking objectively at the little information and statistical data available, it does not seem that there is a clear winner of the race to exit from the cone crisis generated by the COVID-19 pandemic. There are some examples of developed but smaller economies, say from the mid-range, that have managed the health crisis better and are apparently experiencing a more robust economic recovery, but among the big developed economies I still do not believe that there is a visible separation in the winners and losers.
Perhaps after we close the chapter of the health crisis, what will matter more will be the acces and the degree of adoption of new technologies, but in a combination (hard to predict now) with natural advantages (resources).
Making the transition back to what concerns us as a country, I would say that it is precisely from this perspective that we need to clarify quickly and commit firmly to those economic areas where we have international competitive advantages due to local specificity (still better technical education in European comparative terms – hence the potential for development by IT and engineering areas) and natural characteristics (the agri-food sector, transport, logistics, trade, mineral resources still inefficiently exploited).
Do you think the new crisis will further widen the gap between rich and poor? How can this problem, which has always generated conflicts and crises, be managed?
Increasing inequalities is a proven effect of crises. This is also true of pandemic crises, as demonstrated by several researches, both older and newer. While it may seem surprising, the pandemic we are now going through is not exceptional in exacerbating pre-existing inequalities. Throughout (distant) history, this scenario has been repeated not infrequently. A study published in May 2020 by Davide Furceri, Prakash Loungani, Jonathan Ostry and Pietro Pizzuto (researchers from the IMF and the University of Palermo) studied data on major epidemics that occurred in the last century and affected several countries/geographical areas. The authors argue that, on average, such a major epidemic lead to a significant and persistent increase in a country’s Gini coefficient (one of the most popular measures of inequality) with a considerable value, i.e. 1.25 percentage points on average in five years since that epidemiological crisis.
The results of that study confirm that episodes of major health crisis usually affect the poor population more acutely, depriving it of its financial reserves and its ability to shelter itself, while its net income is more vulnerable to the effects of the crisis. There are several ways to combat this harmful effect, but the most effective is likely to be robust and inclusive economic growth, which may not fully neutralize the phenomenon of increasing social polarization but at least has strongly positive effects on the standard of living of all social categories. Hence the need to stimulate the recovery of the economy as quickly as possible after the resolution of the health crisis and the conclusion that austerity policies (for the control of deficit and debt) are not a solution from this point of view. The authors of the mentioned study argue in favor of this hypothesis, the results of their research showing that the level of increase in the Gini coefficient after episodes of major epidemic proves to be very sensitive to the pace of post-epidemic economic growth (e.g. the increase in inequality is lower if economic recovery is more accelerated).
Moreover, more accelerated sustainable economic growth would also help to improve other important problems now facing the world’s economies as a result of the CoVID-19 pandemic, for example accelerated growing budget deficits and an increase in public debt levels relative to GDP.
What will be the impact of the current crisis on financial systems in general and banking systems in particular?
We can discuss the impact of the crisis on the financial system and banks mainly from two perspectives: the transformative effect of the business model and the impact on the financial soundness of the system.
With regard to the solvability and liquidity of Romanian banks, even though we are aware that some of the negative effects of the pandemic crisis on the population and companies will also indirectly spread to the banking system, from our assessments we currently have no concerns about the soundness and proper functioning of the system as a whole. As you know, both the National Bank as supervisory and regulatory authority and the National Committee for Macroprudential Supervision as a macroprudential authority, monitor and continuously carefully evaluate all relevant developments and are prepared to use all available instruments at any time to maintain financial stability. While we follow these things with the utmost seriousness, the conclusions of our analyses indicate a proper functioning of the banking system and that the potential threats identified are manageable, as you can also read in our most recent Stability Report published in June.
In terms of the effects on banks’ business model, it is increasingly clear that the entire banking ecosystem and how consumers interact with financial organizations have been shattered by the effects of the COFID-19 pandemic. In a while, we will look again at this period as a tipping point between the period before COVID-19 and the new normality, which will be born in the post coronavirus era. The pandemic is developing in a new, digitally oriented way of life from many perspectives. Most banks present in Romania are quite advanced in the adoption of new technologies. They may even be tempted to use them excessively at times, without being fully prepared yet, given the real need to improve operational efficiency. However, banks should not be tempted to completely cancel their physical presence. A hybrid of offline and online engagement is probably the best way forward.
The pandemic has accelerated most of banks’ digitalization initiatives. If the recession of 2008 generated a boost in the innovation of new financial technologies, the appetite for experimentation and a wave of fintech start-ups, this time it is more about achieving a real change in the model of operations and not so much about new products. In this regard, banks can learn from the digitization of other industries, such as manufacturing, retail and packaged consumer goods and utilities. In addition, we are seeing a growing focus on technological innovations related to voice, AI-powered chatbots, augmented reality, social virtual reality, hyper-personalization, gamification, secure video interactions, ecosystem digital games and more.
In the new normal, consumers will carefully choose how to spend their time in physical interactions. Bank branches, already a low-priority destination for most, are likely to struggle to take up some of that time. However, the network of physical branches remains particularly important for the existence of banks even in the new model dominated by online. Not only does a banking branch have a cultural, historical and prestigious value for communities, but it is also the ultimate bastion for key segments of the population that cling to cash. These are usually small businesses, the main element of local economies. In order to preserve the brand and the important link with communities, the banking branch model will probably have to be maintained but fundamentally transformed. We believe that banks need to break away from the traditional branch model and focus on how to provide specific, high-value physical interactions and experiences that can complement a digital banking core. In addition, digital technologies should also be used to enhance physical experiences and make services faster, safer and more convenient.
How do you see the re-establishment of Romania’s post-crisis economy? Will we be able to make those long-awaited changes to steer the economy towards profitability and sustainable development?
We must be aware that, at least in the next 2-3 years, the equation of stimulating economic development at the same time with the (inevitable) containment and gradual adjustment of pre-existing macroeconomic imbalances accentuated by the current crisis will be difficult to solve. Nothing will be easy because resources must be carefully allocated and spent with maximum efficiency in priority areas. A rethinking of the structure of budgetary revenues (and expenditures) is very necessary, as is increasing their share of GDP according to the model of most European countries. Macro-stabilisation programmes should include decisive actions aiming to improve the external position.
So, there will be years of work and effort for all of us, institutions, private environment, political class, civil society. We need a realistic programme accepted by everyone, which perhaps it would be a good idea to be drafted and adopted by using a mechanism similar to that in which the National Plan for the adoption of the Euro was put into place, but in a much shorter time, and to be implemented rigorously regardless of the political alternation. Perhaps it could even start from this euro adoption plan, and further adapting it to the new economic conditions generated by the pandemic crisis and developing it.
It is obvious that Romania needs a long-term development plan and strategy undertaken by everyone. What pillars should they be built on?
As mentioned above, I believe that this strategy should be developed contributingly and inclusively with the involvement of the recognised leaders from the largest communities of participants in social and economic life, on the model of the mechanism by which the National Plan for the Adoption of the Euro was written and assumed. It could start from the euro adoption plan, because it represents an important goal for Romania, but adapting it to the changes that have occurred in recent years and complementing/expanding it to address all the economic and social development needs of Romania, not just from the perspective of the adoption of the euro.
Even if I repeat myself in what I have said on other occasions, I believe that the three major priorities of such a strategy are: (I) modernising Romania in harmony with national specificity, (II) strengthening the process of integration into the European economic and social space while reducing the gap from the averages of the EU Member States (including the adoption of the euro) , (III) economic stimulation of strategic areas for the future of the country and of those sectors in which Romania has or could develop competitive advantages at international level due to its natural and specifict characteristics.
Each of these major priorities will need to be detailed by areas and sub-areas of activity, with strategic objectives and timetables for specific actions. There are many good ideas (born from very different sources and directions) that have already been brought up for public debate, both recently and in the period before the crisis, because the need for development is not suddenly discovered now, it is a constant for at least the last 30 years of living in democracy and market economy. These ideas must be collected, harmonized, improved in substance by associating them with specific actions and placed in the right place in the structure and timetable of the strategy, in order to reciprocally enhance each other. And even if we are talking about an economic development strategy, it must be supported also by transformations of the legislative framework, the education system and the healthcare system, etc.
Romania has advantages that it can make the most of it and that can make a difference to the long-term success of the exit from the crisis. We pride ourselves on one of the most modern telecommunications infrastructures, many specialists and leading companies in the field of IT solutions, a general attitude very favorable among the population in the adoption of new technologies. It would be a great loss not to make the most of these advantages or to neglect to maintain an advanced level by continuing to stimulate the assimilation of new technological developments.
Agricultural potential is another important advantage of Romania that should not be forgotten. In our country, agriculture is significantly dependent on climate developments and its contribution to GDP varies according to this factor. With the support of new technologies and investment support programmes, this dependency can be improved. With the raw material provided locally, also with the help of investment support programmes, Romania meets all the conditions to become a regional production center in the food industry, thus ensuring the food security of the population and improving the structure of agro-industrial exports (from raw materials to products intended for final consumption) with a positive effect on the trade balance and implicitly on the current account deficit.
One of the natural conditions that Romania benefits from is its strategic positioning along land trade routes. Development as a regional center of trade and logistics is an important strategic objective that should be included in the strategy because the development of physical infrastructure would bring benefits in almost all areas of activity. There are a number of other areas of the economy where Romania has a comparative advantage in foreign trade (e.g. according to 2018 UNCTAD Data Center) that are often overlooked and should all be targeted as a priority by government support programmes: production of furniture, prefabricated construction, footwear, plastics, electrical equipment and cables, bearings, car parts, rubber articles , leather, metal or PVC pipes and profiles, vegetable oils, hydrocarbons, synthetic fibres, tobacco, etc. To these, the strategic areas for the safety and health of the population must be added.
How do you see/what do you want Romania to look like in 30 years?
Invitations to 30-year forecasts are always tempting because they give free rein to the imagination, especially since they are unlikely to ever be verified or confronted by anyone.
Experience of similar exercises shows that people are generally tempted to overestimate the speed of technological advances and system transformations (of any kind) over long periods of time.
If we have the lucidity to look back for a similar period of time, we do indeed see that there have been profound transformations, but reality has not confirmed the more fanciful and radical estimates but rather the river of social evolution has continued in a wide but relatively predictable corridor, compatible with the reduced willingness of society to assimilate radical lifestyle changes. Let us preface the discussion about Romania in 30 years from now with a comparison between Romania in 1990 and today. Much has changed, most often for the better, but the way of life is not dramatically different. We still manage in almost the same way the most important concerns and passages of life, even though the environment and technology around us look fundamentally different.
For the future, the most important thing is to maintain the economic development effort towards the strategic areas. This will bring us growing well-being, that if it is managed through wise counter-cyclical and redistributive fiscal policies, will ensure the progress of society in general.
Starting with this perspective, I imagine that in 30 years’ time our children’s lives will be better and easier compared to ours, but not fundamentally different from today’s. Technological progress will probably enable them to ensure a better standard of living by working less physically but making more use of their creativity. They will probably have easy access to a high-level education and a much-improved health system. For this, however, we must not lose sight of ongoing actions to combat the deepening of inequalities and promote social equity. All modern technologies that are increasingly accessible will also allow for a higher level of human safety, if matched by improved legislation applied uncompromisingly. So, the state will respect its share of the social contract to a greater extent than it, unfortunately, does today. On the other hand, taxes are likely to be significantly higher and more differentiated by wealth. Social disparities will probably never be eliminated in a democratic market-based economy, because they are inherent, and that is not the goal anyway, but they need to be reduced so that we can ensure a permanent trend of improving the quality of life for all categories and further strengthening the middle class.
Made up of more prosperous, healthier and more educated Romanians, Romania in which we our kids will live in 30 years from now should be much more socially balanced and economically efficient, with a level of competitiveness closer to that of more established economies and a firm attachment to European cultural values.
A few years ago, when the crisis of the moment was the decision of the United Kingdom to leave the European Union and the pandemic shock was not to be seen on any risk map, I was defending Romania’s position to remain anchored to European construction, despite its imperfections. But there were also quite a few voices who saw things differently. What has happened in the meantime shows that we had then, as a country, the wisest choice and a fair conduct. I believe that the next 30 years will confirm the same thing: Romania’s place is to contribute as an equal partner to the strengthening of the European Union and its universal values, because by doing so it acts in the best long-term interest of its citizens. In the meantime, the European anchor will become even stronger with the adoption of the euro.
The economy and the financial system will be transformed at a faster rate than society as a whole will, and some financial mechanisms and instruments that we are not even thinking about today will become commonplace in 30 years. Cryptocurrencies probably have a place in the future of the financial system, even if not in the form we are discussing them today. However, financial intermediation will remain one of the pillars of the functioning of the economy, as will free markets, although it is difficult to predict today exactly in what form they will operate in 30 years’ time because history shows us that, as there are financial, economic and social cycles, the regulatory framework also evolves cyclically, not always in the same direction or with the same scale.
Obviously, there are several possible scenarios for what Romania will look like in 30 years. I always focus on positive scenarios because these are the ones I’m trying to contribute to. Less favorable alternatives are possible and that why we should remain careful and capable to prevent them. We hope that we will use this crisis to rebuild, produce something better and more humane. But we might slip into something worse. It is, largely, up to us. My research focuses on the fundamentals of the modern economy: global supply chains, wages and productivity. I look at how economic dynamics contribute to challenges such as climate change. I argue that we need a very different kind of economy if we are to build a more fair and environmentally friendly social future. In front of COVID-19, this has never been more obvious.
How do you appreciate the EU’s response to this crisis: can the recently adopted solutions be a Community binder or a new internal division factor? How can Romania benefit from the recent pact adopted by the European Commission, knowing that funds, even if made available to us, must be attracted by feasible projects?
I believe that the European Union’s response to this crisis has been a strong show of solidarity and cohesion in the face of the severe effects of a lightning crisis that has struck in a non-discriminatory way all the Member States. The support allocated to Romania is considerable, consisting of both grants and loans on more advantageous terms than the government could have obtained independently. Conditionalities are normal to exist, especially if we think that the net amounts allocated to Romania are ultimately the result of the contributions of other Member States. Even if they are richer, it is natural that their effort should not be waisted in vain but should be channeled towards achieving Union wide goals and strengthening common values. Absorbing these funds as much as possible is indeed a challenge (and a moral obligation towards our citizens and country, if you ask me) and we need to best organize ourselves.
European money comes complementary to national programmes but I do not see why it would be a contradiction to the fact that we need to use them in feasible programmes?! I have already mentioned before that all the resources at our disposal must be spent as efficiently as possible, and the destinations chosen with great care in order to maximize the drive effect on all axes and to stimulate development as much as possible. This rule is one of common sense and of fair economic judgment in the context of competition for the use of limited resources. I am convinced that there will be suitable projects, but I am somewhat more reserved about our administrative capacity to manage these projects. I fear that here we still have progress to make, to remove unjustified bureaucratic barriers, to reduce the too long waiting periods and the sometimes-burdensome formalities. Excessive bureaucracy is a shortcoming of Romania today (also in the case of some mechanisms of the European Union) that we must not shy away from recognizing or reducing.
After all, it is also a matter of approach. We should go with a constructive and positive approach, making the best use of all the opportunities and support that we receive, as intelligently and creatively as possible, always keeping an eye on our targets for the future, and not hindering ourselves at every shortcoming (no matter how justified it may be or not). Brilliant Romanian inventor Henry Coandă said that “many individuals in modern society are like ferrymen: they push and pull on the paddles, but they stand with their backs to the future.”