Although they will weigh heavily only after 2019, when the exit of the UK from the European Union will have effectively completed, the effects of Brexit on Romania, as on the other Central and Eastern European countries are already threatening the future of their economies, depending on the solidity of their growth. Analysts do not dare to predict what will happen after the European Union will change its architecture.
For Romania, „the theoretical loss of EU structural and cohesion funds associated with Brexit in Romania is estimated at EUR 300-500 million per year, but this could materialise only after 2020,” says a recent report by Erste Group Research (EGR). Romania attracted almost EUR 15 billion so far, “thanks mainly to intensified efforts in recent years” and reached an absorption rate of 82%.
Hungary and Poland will be more affected just because they attract more European money. The exit of the UK will reduce the contributions to the EU budget and, for instance, Poland will experience this reduction more severely, if taking the allocation of EUR 82.5 billion for 2014-2020 as the reference.
In its turn, Hungary has a financing of EUR 29.6 billion allocated until 2020 and „even a small loss would mean a weaker growth perspective,” said the EGR report.
It is expected that the „after Brexit” EU budget would be less generous and although the officials from Brussels implies that France and Germany should cover a part of the lost British contribution, the theory of multi-speed Europe may also affect the allocations.
Thus, although Romania gets, theoretically, less money allocated than the main beneficiaries of the European funds from the region, the force of the impact could be higher.
The Romanian Government relies on a total financial allocation of about EUR 31 billion from the structural and investment funds (FESI), but for the period 2014-2023, which means also after the Brexit effects will have come true. And the Erste Group Research (EGR) estimation may prove optimistic.
The Brexit impact on the Czech Republic, for instance, could be about EUR 1 billion annually, but there will also be indirect effects due to changes in the architecture of the EU budget, focused on „sophisticated projects more than it is today,” predict the Austrian analysts.
How much more will Romania be affected by the new approach from Brussels, as long as the Romanian needs are still basic, like the highways?
In the December report on the financial stability, the National Bank of Romania (BNR) says that the systemic risk caused by Brexit is „moderate”. Which might mean a lot in the coded NBR terminology.
„The form and scale of the implications associated with Brexit in Romania are difficult to estimate now. They depend both on how the negotiations will be concluded between the European Union and the United Kingdom (what the scale of the changes will be compared to the current situation) and the EU’s capacity to adopt policies to continue the integration process. Although the consequences will become apparent only to a small extent in the near future, Romania should calibrate the policies on mid and long term based on the major challenges facing the Community,” says BNR in the above-mentioned report.
Exports and remittances
BNR considers that „trade exchanges between Romania and the United Kingdom are relatively low. The exports of the domestic companies to the UK represent less than 5% of the total, while the imports amount to about 2% of the total imports (data for January-August 2016) „.
However, the UK ranked fifth in 2015, both among the EU member states and in the general ranking, with a share of 4.36% of the total Romanian exports.
In 2015, Romanian exports to the UK were EUR 2.38 billion, up by 10.55% compared to 2014. This situation will deteriorate after Brexit and even in proportion to the „relatively low” size of the trade relations with the UK, the effects of their decrease will be seen in Romania’s economic growth, as impetuous as it is fragile.
The Czech Republic seems to have a more dramatic situation than Romania, with over 32% of its exports being in relation to the UK (EUR 8.4 billion). Hungary had exports to the United Kingdom amounting to EUR 3.9 billion, or 4% of the total, Poland – EUR 13 billion (6.6%).
Moody’s also analysed the share of the exports to the UK in the GDP of each country and considers that the direct Brexit’s exposure to them is limited.
Exposure of CEE countries’ exports to the UK
On the other hand, Romanians’ remittances from the UK are estimated at EUR 500 million per year and they will decrease because of the tightening British policies on immigration and acceptance of the foreign workforce.
Money sent home by Romanians from the UK represents 20% of the total remittances of Romanian workers from abroad in 2015 and they are „both remittances and income from employment,” according to BNR.
The Central Bank experts are, however, optimistic, as they believe that Brexit „could cause an increase in the registration applications, as those who failed to do that before will be motivated to take action to this effect before the UK leaves the European Union, in anticipation of possible future restrictions on the labour market in this country.”
Decreasing remittances should not critically affect the stability of the national currency, as long as transactions on the European foreign exchange market exceed two billion euros daily.
Bigger problems could have, again, the Poles and Hungarians. Poland was the fourth largest recipient of remittances from the UK in the world, in 2015, with about 1.4 billion pounds, and Hungary – the tenth, with about 400 billion pounds, according to the World Bank data. A pound was the equivalent of 1.3556 euros at 31 December 2015. Tuesday at noon, the exchange rate was 1.1528 euros per pound.
Risk in long-term
Analysts, either from the central bank, Erste Group, or Moody’s, believe that Brexit will have a limited impact in the short term, but it is uncertain what will happen from 2019 onward. In the long run, the already planned policies should become operational, or not. BNR has already launched its warnings.
„In the mid and long term, the exit of the UK from the European Union could have important effects for Romania because of a possible change of the EU architecture. It is important that the EU countries that have not adopted yet the euro to not be affected in their rights, compared to the Eurozone countries „, says BNR in its latest report on the financial stability.
On the other hand, „the uncertainty generated by the exit of the UK from the European Union is already contributing to diminishing the economic growth perspectives in Europe, against the background of the growing uncertainty in terms of both trade and financial relations with the UK and situation of the other countries from the European Union. In this regard, the effect on the domestic economy could become apparent in a declining external demand for the Romanian products and a decreasing capital flows from the FDI category, as a result of the negative impact on the GDP growth of the main Romania’s partners from the EU,” according to the report mentioned.
