„Continuing legislative harmonization with the European acquis and strengthening institutional capacities in the absence of a strategic vision of accelerated economic development of the Republic of Moldova will not allow achieving convergence indicators with the EU, an essential criterion for the Republic of Moldova to be ready for accession to the EU by 2030…”
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On 3 March 2022, Moldova submitted an application to join the European Union (EU). And on November 8, 2023, the European Commission recommended starting negotiations with Ukraine and Moldova. On Thursday, 14 December 2023, the European Council opened accession negotiations with the Republic of Moldova. At the same time, Moldova will have to fulfill the remaining conditions related to justice reform, combating high-level corruption, and de-oligarchization. These areas will remain priorities, as they are fundamental elements related to the rule of law and the political criteria of the EU. However, another critical criterion that will determine the speed of accession negotiations is the economic one. How prepared is Moldova today economically after 9 years of implementing the Association Agreement and the Deep and Comprehensive Free Trade Agreement with the EU? Next, we will analyze the current level of economic convergence between the Republic of Moldova and the EU in terms of 3 indicators - gross domestic product (GDP), external trade and public debt.
Gross domestic product
To estimate the level of economic growth that Moldova must achieve to join the EU, we can analyze recent examples of countries that have gone through this process, with the most relevant being Romania and Bulgaria. When Bulgaria and Romania began accession negotiations in 2000, on average, the per capita Gross Domestic Product was about 9.7% of the EU per capita GDP. When Romania and Bulgaria joined the EU in 2007, the per capita GDP as a percentage of the EU per capita GDP was 17.5% for Bulgaria and 24.9% for Romania. In 2022, Moldova's per capita GDP was 15% of the EU per capita GDP. Thus, as a starting point, we are better off than Romania and Bulgaria, and the current level justifies and confirms that it is the right time to launch negotiations.
However, if Moldova's economy were to continue growing at an annual rate of 4%, and the EU's economy at a rate of 1.5% annually (averages over the last 10 years), this would not be enough to reach the level of Romania and Bulgaria as a percentage of per capita GDP in the EU by 2030, what is the objective of the central authorities to be ready for eventual accession. For this to happen, Moldova's economy would need to grow by 6% annually, which is 50% more than the average of the last 10 years. Thus, cumulatively between 2023 and 2030, Moldova's economy would have to add 13 billion US dollars more (figure 1), compared to the scenario in which the economy would grow by only 4% annually - and convergence would not occur.
Figure 1. Scenarios for achieving economic convergence by 2030, billion dollars
Foreign trade
Exports to the European Union are vital for Moldova's economy, accounting on average for 64% of Moldova's total exports (average over the past six years). The EU has already become Moldova's most important trading partner. Compared to 2021, in 2022, exports from Moldova to the European Union increased from 1.9 billion US dollars to 2.5 billion in 2022. This underlines Moldova's dependence on the EU market as the main destination for its products, but also the opportunities offered by access to one of the strongest markets in the world. Romania's exports at the start of accession negotiations with the EU represented approximately 65.5%.
Public debt
A high level of public debt may indicate risks to a country's economic and financial stability, which may spill over into other markets. A sustainable level of public debt is crucial to maintain investor and financial market confidence. Although there are no strict criteria for EU accession in terms of public debt, as a checkpoint to determine Moldova's readiness to this indicator, we can use one of the Maastricht criteria, which refers to limiting public debt to 60% of GDP and capping the annual budget deficit at a maximum of 3% of GDP. These criteria ensure a certain uniformity in fiscal and economic discipline within the European Union.
At the end of 2022, the public sector debt in Moldova recorded a level of 36.1% of GDP, indicating a sufficiently large margin to attract additional funds, both in the domestic and external markets through the issuance of Eurobonds. This approach can provide rapid access to significant capital for large infrastructure projects.
If we analyze the current level of Moldova's GDP, in order to reach the debt limit of 60% of GDP, Moldova could borrow another 3.5 billion US dollars. This calculation is illustrative and exceeds the risk parameters set out in the Program "Medium-term State Debt Management", which guides the actions of the Ministry of Finance. However, calculations indicate that there is reasonable room for indebtedness for investment purposes. Obviously, such initiatives must be managed with great care and care to ensure the proper use of funds and to maintain long-term debt sustainability.
In this context, it is clear that a lot of investment will need to be made for economic convergence to take place. The draft budget law for 2023 provides only 2 billion lei for capital investments, which is just over 2% of the total planned expenses. But beyond the financial dimension, the bigger challenge is to design and develop projects to be financed by development partners and international financial institutions. Currently, there is no systematic mechanism for analyzing the costs and benefits of investment projects. They have more of an ad hoc aspect and no very clear prioritisation criteria.
To change the paradigm, it is necessary to identify three to four priority areas, such as infrastructure development, strengthening energy independence, or modernizing agriculture, where both domestic and external financial sources will be directed. Additionally, it is crucial to institutionalize a mechanism for analyzing the quality and sustainability of these projects. The result of the analysis should be the generation of a universal list of public investment projects, selecting those that produce the most benefits for the public interest. Large projects are needed, such as north-south and east-west highways, high-speed trains to Iași and Bucharest, or investments in agricultural technologies and irrigation systems. Otherwise, there is a risk of investing significant amounts in many small and narrowly impactful projects, such as the modernization of cultural centers in villages, diminishing both the efficiency of public funds and complicating economic alignment with the European Union.
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Stanislav Ghiletchi is Deputy Director for Research at the Institute for European Policies and Reforms (IPRE). Stanislav graduated from the London School of Economics and Political Science with a Master's degree in Public Policy and Administration.