In capital allocation, Romania is no longer a market economy

The state borrows at around 7%, while interest expenses are growing four times faster than GDP. Banks hold 27.6% of their assets in claims on the state, private-sector lending is the lowest in the EU, and Pillar II pension savings depend on the budget.

Interest expenses of the general consolidated budget reached 50.63 billion lei in the first nine months of 2026, exceeding the 50.50 billion lei in interest paid throughout 2025, according to the Ministry of Finance's statement sent to BURSA on Monday, 26 October, and 2025 data published by BURSA. The general consolidated budget deficit fell to 78.3 billion lei (3.81% of GDP) in January-September 2026, from 102.47 billion lei (5.31% of GDP) in the same period of 2025, according to the Ministry of Finance.

My assessment is that, in terms of capital allocation, the Romanian economy no longer functions as a market economy. The interest rate of around 7% paid by the state is now organising the economy around the state: the state attracts capital denominated in lei, public investment is paid for mainly with European funds, and Pillar II participants are both creditors of the state and taxpayers who pay the interest, without being able to withdraw their money before retirement.

• Romania Pays Interest Rates 3.8 Percentage Points Above Germany's

The Theory of Interest, which I formulated in the book of the same name, starts from the idea that the interest rate determines which investments are worth making, the direction in which capital flows, and whether an economy converges with or diverges from other economies. According to the Theory of Interest, the interest rate has four components: the real interest rate, expected inflation, the risk premium, and a component made up of barriers between economies and differences in productivity between them.

On Monday, the Ministry of Finance borrowed 1.2 billion lei from banks, at yields of 6.68% for maturities in July 2030 and 7.10% for maturities in April 2035, according to official statements from the National Bank of Romania (NBR) and the Ministry of Finance. On Monday, the bid quote for Romanian 10-year government bonds was 7.19%, according to the NBR fixing, while the yield on German 10-year government bonds was 3.35%. The difference of around 3.8 percentage points reflects higher expected inflation in Romania, the risk premium, and barriers between the Romanian economy and euro-area economies, including the leu, a currency separate from the euro, and the exchange-rate risk borne by a foreign investor.

From the perspective of the Theory of Interest, an investment financed with borrowed lei must generate at least the yield on government securities, around 7% per year, plus the premium for the project's risk and its costs. The state offers this yield without the specific risk associated with a project. Government securities have their own interest-rate, inflation and sovereign-credit risks, which Pillar II funds bear. A saver or a bank in Romania compares any loan to a company with a government security yielding around 7% per year.

• Claims on the State Account for 27.6% of Banks' Assets

Claims on the state account for 27.6% of Romanian banks' assets, almost three times the European average of 9.7%, while private-sector credit amounts to only 22% of GDP, compared with an EU average of 66%, according to the NBR's Financial Stability Report, published by BURSA on 6 July 2026. Banking assets total 49% of GDP, placing Romania last in the European Union, according to the NBR's Financial Stability Report. NBR Deputy Governor Cosmin Marinescu noted in his analysis, "The Financial Intermediation Paradox”, published on his blog on 8 September 2026, that banks held around 230 billion lei in government securities in the first quarter of 2026, three times as much as ten years ago.

The NBR attributes the low level of lending mainly to credit demand and companies' financing structure: firms largely finance themselves and use trade credit as their main source of short-term financing, according to Agerpres. In my view, the NBR's explanation and the Theory of Interest are not mutually exclusive: a company borrows little and relies on self-financing when a bank loan in lei costs at least as much as the approximately 7% yield on government securities, plus the company's risk premium.

Pillar II pension funds hold around 129.7 billion lei in government securities denominated in lei, based on BURSA's calculations using the lists of securities published by the funds as of 30 June 2026 and 31 May 2026.

My assessment is that these figures show an economy in which capital denominated in lei does not flow towards projects offering the best return for their level of risk, but towards the state, which pays around 7% without the specific risk of a project. In a market economy, the price of capital is determined by demand from companies and households; in Romania, the price of capital in lei is dominated by the state's financing needs.

• Public Investment Depends on European Funds

Of the 107.77 billion lei spent on investment in the first nine months, 65.6% went towards projects financed by European funds under the 2021-2027 framework and the National Recovery and Resilience Plan (NRRP), while investment financed from national funds declined, according to the Ministry of Finance's statement. Reimbursements from the European Union and grants reached 48.95 billion lei, 39.8% more than in 2025, according to the Ministry of Finance.

The ministry explains the decline in investment financed from national funds by the exceptional payments made at the beginning of 2025 for outstanding obligations under national investment programmes, for the capital of Carpatica Feroviar România, and for defence. The Theory of Interest adds a fundamental explanation: borrowed lei cost the state around 7% a year, while a large share of European funding does not have to be repaid and carries no interest cost.

• European Funding Risks Making the Economy's Dependence Chronic

My assessment is that European funds introduce an administrative mechanism for selecting investments, separate from selection through the capital market: eligibility and funding conditions can take precedence over financial returns. Thus, almost two-thirds of the state's investments are financed outside the capital market, while the rest of the economy obtains financing at a price of capital dominated by the state's financing needs.

NBR economists Cristina Anghelescu, Tudor Grosu and David Orţan, together with Daniel Dăianu, warn in the study "European Funds and Public Investment in Romania: Implications of the End of the NRRP for Economic Growth”, published by the NBR in February 2026, that the end of the NRRP on 30 August 2026 risks causing an "investment shock”, with effects on economic growth and the balance of payments. The authors nevertheless estimate that several channels will probably mitigate the investment shock. The NBR economists' study estimates that structural and cohesion funds amounting to 1% of GDP raise economic growth by around 0.5 percentage points in the same year, and notes that the impact of European funds is limited in economies with weak institutions.

For businesses, a review of 30 studies from 13 EU member states, published in 2020 in the journal Small Business Economics by O. Dvouletý, S. Srhoj and S. Pantea, shows that public grants to small and medium-sized enterprises generally increase the survival rate, number of employees, assets and sales of supported firms, but have mixed effects on productivity.

European grants can help supported companies grow larger, but studies do not find a consistently positive effect on productivity. Do companies end up competing for eligibility rather than returns? My assessment is that the state's interest rate of around 7% and European grants together create an economy in which investment capital comes either from the state or from the European Union budget, while entrepreneurs who obtain financing on the market pay the highest price. Such an economy risks becoming dependent on European funds: if European funding declines, investment falls or the state finances it with loans at around 7%.

• Interest Expenses Are Growing Four Times Faster Than GDP

The interest paid by the state in the first nine months increased by 10.69 billion lei, or around 26.8%, while personnel expenses fell by 4.43 billion lei, according to the Ministry of Finance's statement and BURSA's calculations. Nominal GDP is growing by around 6.5% in 2026, based on BURSA's calculations using Ministry of Finance figures. The increase in interest expenses is therefore around 2.4 times greater than the reduction in personnel expenses.

Romania's public debt reached 58.9% of GDP at the end of 2025, up from 48.3% in 2022, according to Ministry of Finance data published by BURSA, amounting to around 1,124 billion lei, according to BURSA's calculations. The ratio of interest paid in 2025 to public debt at year-end was around 4.5%, according to our calculations.

BURSA's assessment is as follows. The state is replacing old debt, for which the ratio of interest to debt-an approximation of the average cost of debt-is around 4.5% a year, with new debt costing around 7% a year, more than the economy is growing. As old securities mature, the average cost of debt rises towards the cost of new debt.

• The State Cannot Cover Its Running Costs from Its Revenues

General consolidated budget revenues of 522.69 billion lei in the first nine months were insufficient even to cover expenditure excluding interest, including investment, of around 550.4 billion lei, according to Ministry of Finance data and BURSA's calculations. The primary deficit, excluding interest, was around 27.7 billion lei. BURSA's assessment is that the state is, in effect, paying all its interest with borrowed money: the deficit of 78.3 billion lei, covered by borrowing, exceeds the 50.63 billion lei in interest expenses. Every new loan adds interest costs in the years ahead.

How much must the primary deficit fall so that debt no longer grows faster than the economy? BURSA's assessment is that, if the average cost of debt reaches the economy's growth rate, debt will remain constant as a share of GDP, assuming a stable leu exchange rate, only if the budget excluding interest comes close to balance. According to the Ministry of Finance, the nine-month deficit of 3.81% of GDP includes interest equivalent to 2.5% of GDP; the remaining approximately 1.3% of GDP is the primary deficit that the state would then need to eliminate.

Finance Minister Alexandru Nazare said on Monday that the Government remains committed to its deficit target of 6.2% of GDP and that "the last quarter is decisive”. The 6.2% target allows for a deficit of around 49.1 billion lei in the final quarter of 2026, approximately 5.6 billion lei more than the deficit in the last quarter of 2025, based on BURSA's calculations using Ministry of Finance data and the 2025 deficit. If the final quarter matched that of 2025, the deficit for all of 2026 would be around 5.9% of GDP.

Why does the Ministry of Finance retain the target of 6.2% of GDP if a final quarter similar to that of 2025 would bring the annual deficit to around 5.9%? On Monday, Minister Alexandru Nazare said that "every decision during this period-from the budget revision to the drafting of the 2027 budget-will follow a simple principle: no new spending without secure revenue to cover it”. The press reported on Monday that the Government led by Luca Niculescu is preparing the first budget revision of the year this week, to cover urgent healthcare spending and expenses for the Department for Emergency Situations, and that a second revision is due at the end of November.

The Ministry of Finance has scheduled three government securities auctions for Thursday, 29 October, totalling 1.3 billion lei.

• Pillar II Participants Pay the Interest They Receive

BURSA estimates that Pillar II funds are entitled to around 6.6 billion lei in interest for the first nine months of the year on the 129.7 billion lei in government securities denominated in lei held in their portfolios, equivalent to around 13% of the general consolidated budget's interest expenses. This amount represents interest due for nine months, not money received during that period, and averages around 770 lei per participant before fees, based on the 8,543,556 participants reported by the Financial Supervisory Authority (ASF) for June 2026; this figure is not the participant's net return. The estimate uses the average coupon of 6.76% on the government securities denominated in lei listed by the funds.

The Theory of Interest regards a mechanism as suspect when accumulated obligations grow beyond the capacity to pay or when exit routes are closed, and as stable when participants can leave without disproportionate losses. Current data point to both signs as a trend. The interest paid by the state is growing more than twice as fast as the revenues from which it pays that interest: by around 26.8%, compared with 11.9%, according to the Ministry of Finance. Interest expenses have therefore reached around 9.7% of budget revenues in the first nine months of 2026, up from around 8.5% in the same period of 2025, based on BURSA's calculations using Ministry of Finance data. Pillar II participants cannot withdraw their money on demand before retirement, and the funds cannot sell a large share of the approximately 130 billion lei in securities within a short period without pushing down their prices: an increase of just 0.07 percentage points in the 10-year yield reduced the value of securities in the funds' portfolios by around 219 million lei on Monday, according to BURSA's calculations based on the NBR fixing.

My assessment is that Pillar II participants' savings depend on the state's ability to pay the same interest that participants finance as taxpayers. The pressure builds over time; the current figures do not indicate an imminent crisis.