The Price of Stability: Government Crisis in Romania

On 5 May, the four-party coalition government of Prime Minister Ilie Bolojan lost a vote of no-confidence in Romania’s parliament. This followed the resignation of the Social Democratic Party (PSD) from the coalition in protest over measures to consolidate the budget, which with a structural deficit of 8.6% of GDP in 2025 is the highest in the European Union.

In order to bring down the Bolojan government, PSD allied with the far-right Alliance for the Union of Romanians (AUR). On the surface, this broke the “cordon sanitaire” that Romanian parties have maintained on the national level. Yet cooperation between the post-communist centre-left and the far-right is not unusual in Central and Eastern Europe, where social democratic parties cater to a voter base that is older, more nationalist and socially conservative. 

Cholera or plague

However, the objective of PSD is not to form an alternative government with AUR but to increase its leverage over the coalition partners it has jettisoned; namely, the centre-right National Liberal Party (PNL), centrist Save Romania Union (USR) and Democratic Union of Hungarians in Romania (UDMR).

This appears to be backfiring. Prime Minister Bolojan, who is also the leader of PNL, has called the bluff of PSD and resolved for his party to enter opposition. This would force PSD into the uncomfortable position of either trying to form a coalition with AUR, or to support the holding of snap parliamentary elections for the first time since 1990.

The latter scenario poses a big danger to PSD, at least in relative terms. Although PSD support is holding steady in most polls, AUR has consolidated much of the populist vote and stands to double its vote share to 35% in the event of snap elections – the prospect of which it supports.

PSD will be hoping that PNL will replace Bolojan as leader with someone more open to compromise. This is a possibility, as President Nicusor Dan must designate a prime ministerial candidate and expressly favours a pro-European ruling majority. The president has the luxury of time. If PSD does not negotiate new coalition agreements, but is also unwilling to risk new elections, it might begrudgingly tolerate a minority government formed by PNL, USR and UDMR.

On the other hand, PNL, USR and UDMR will be tempted to position themselves as a bulwark against AUR in snap elections, with PSD falling between the gap. This would repeat the dynamics of the 2025 presidential election, when Dan himself defeated AUR leader George Simion in the runoff round. This prospect serves, if nothing else, as a means of cornering PSD.

A deeper malaise

Whatever the case, events in Romania mark a resumption of the political instability it has experienced since 2019. The cause of this instability has chiefly been the inability of the governing parties to sustain a consensus around reform. Since 2021, PSD and PNL opted for a marriage of convenience in order to control the distribution of €28.5 billion of EU funds under the Recovery and Resilience Facility (RRF). Yet they have continually kicked the can down the road on more difficult reforms, prioritising clientelist interests even as the quality of public services remained low. Perversely, the state’s ability to absorb RRF funds has thus been slow, as disbursement is explicitly linked to reform.

Popular disaffection grew as a consequence, creating an opening for Calin Georgescu, an alt-right outsider who unexpectedly won the first round of the 2024 presidential election. The result was annulled by the Constitutional Court after it transpired that Georgescu’s campaign had been supported by Russian funding, but Pandora’s box had been opened. In the rerun election the following year, George Simion inherited Georgescu’s mantle and won the first round with ease. But, concerned about Romania endangering its EU membership, centrist voters mobilised en masse to rally behind Nicusor Dan in the runoff round.

It was a near-death experience, a repeat of which Dan knew could only be prevented through painful housekeeping. The problem is that political instability is arguably baked into Romania’s economic model, which is based on keeping costs and taxes low in order to attract foreign direct investment. Capital spending and other forms of stimulus chiefly flows from the EU. The ratio of tax to GDP is among the lowest in the EU, amounting to 27-28%, far below the EU average of 41%. As such, budget revenues are relatively low, quickly driving up structural deficits when economic shocks from Covid-19 or wars in Ukraine and Iran hit.

Indeed, public debt increased from 35% to 60% of GDP between 2019 and 2025. This was fuelled in part by public wage increases and social transfers, with some of this spending poorly judged. But the crisis is more of revenues than of expenditure. The Fiscal Council has described the under-collection of revenues in dramatic terms, framing it as a “matter of national security.”

Yet addressing them necessitates tax rises which are likely to be very unpopular for a population whose nominal wage increases have been wiped out by high inflation, reducing purchasing power – as well as foreign investors enjoying Romania’s cost competitiveness. Furthermore, tax rises would need to coupled with parallel administrative reform to improve collection and reduce evasion, but this is easier said than done.

Outlook

The good news is that the Bolojan government had already done considerable heavy lifting as regards fiscal consolidation before PSD pulled the plug. The budget deficit is forecast to fall to some 6.5% of GDP in 2026, although this is uncertain owing to the economic fallout from the Iranian blockade of the Strait of Hormuz.

Yet more difficult reforms were not possible. PNL and its allies are opposed to reform of flat taxation, while PSD could not be persuaded to support reforms of the public sector. These included proposed changes to special pensions, restructuring of public sector employment to cut 20% of positions, and the listing of shares in state-owned enterprises on the stock exchange. It is no coincidence that pushing through these measures would have damaged the very post-communist networks on which PSD relies to safeguard its influence.

Meanwhile, the clock is ticking. There are €10 billion in untapped RRF funds which the parliament must unlock with reforms before 31 August, otherwise they will expire. Similarly, parliament must vote to approve a loan agreement of facilitate the disbursement of €16.6 billion in credits allocated to Romania from the EU’s Security Action for Europe (SAFE) facility, which is earmarked to flow to defence projects allocated to European corporates such as Rheinmetall.

On paper, Romania is a European success story. Per capita income has increased from 26% of the EU average in 2000 to 78% by 2024, the fastest rate of convergence of any large member state over the same period. The following year, it finally acceded to full membership of the Schengen area of free movement. In the Black Sea, it is poised to exploit Europe’s largest offshore reserves of gas, promising tens of billions of euros in revenues.

Yet the mercurial nature of its political class and economic model is persistently generating gridlock that inhibits its development potential.