EUROPE: Foreign investors help to pull Romania up the value chain By Christopher Condon and Stefan Wagstyl
In western Europe the prospect of Romania's accession to the European Union next year prompts fears of migrant workers moving west. But in the country itself the most visible element of EU integration is a rapid inward flow of foreign capital. This week, Renault, the French carmaker, said it would invest €100m ($128m, £67m) in a new Romanian engineering centre. It is not a large amount for a group that has already put more than €650m into the country - buying the run-down Dacia car plant and turning it into a modern production site for the successful Logan car. Employing cheap labour in a low-tech factory turning out economy cars for developing countries is one thing. Hiring 1,400 highly skilled engineers to work for the whole of Renault is another. It shows the economy is coming of age, and is ready for more sophisticated investments. Renault is not alone. Other multinationals are pulling Romania up the value chain, bringing in high-technology jobs. Hewlett-Packard of the US has announced plans to employ 1,200 at an outsourcing centre for Europe, the Middle East and Africa. Amazon, the US online retailer, recently decided to open its second software development centre in Romania, with 600 jobs. Foreign investors are helping to raise the value of Romanian exports, diversifying the country from a traditional reliance on textiles and shoes. These industries have seen their share of total exports drop from 34.8 per cent to 24.7 per cent since 2001 while cars, car parts and engineering products have raised their shares. Unemployment is at a post-communist low of 5.1 per cent. Boosted by reforms in economic policy, the administration and the courts, foreign direct investment is expected to top €6bn this year and gross domestic product growth to reach 6.5-7 per cent. EU accession on January 1 is expected to stimulate investment, especially from smaller companies, as it did in previous new members. "The fact of Romania joining the EU will be a kick to investors to look at this market, which will be the second largest after Poland among new member states," says Dirk Rütze, director of the German-Romanian Chamber of Commerce and Industry. Accession will make it easier for Romanians to work in other EU states, even though most countries will retain migrant labour controls. An estimated 2m migrants, out of a population of 22m, send home €3.5bn-€4bn annually. Despite the bright prospects, there are some clouds on the horizon. The chief short-term economic risk is the yawning current account deficit, which may reach 10 per cent of GDP this year. A worry is a rise in imports fuelled by consumer de-mand, much of it financed by a surge in consumer credit. With many Romanians borrowing in foreign currencies, economists worry about their exposure to exchange-rate fluctuations. The central bank has sought to tackle this with lending restrictions on foreign ex-change. But leu-denominated non-government lending is still expanding fast, rising 104 per cent in the year to September. While inflation has been cut from 46 per cent in 2000 to a forecast 6 per cent for 2006, wage pressures persist. Wages are rising 15 per cent this year, after a 25 per cent increase in 2005. The appreciation of the leu by about 10 per cent over the past year is hurting exporters. Longer-term, there are concerns that Romanians, having worked hard to join the EU, will slow planned reforms and even undermine what has been achieved. Corruption has been dented - those under investigation include a former prime minister - but the new independence of courts remains shaky. Big questions remain over Romania's ability to spend the increased EU funds available from next year. Like its neighbour Bulgaria, Romania faces "safeguard clauses" in its accession treaty that spell out EU's expectations and possible sanctions. Monica Macovei, the justice minister, says public expectations may prove a more effective pressure than EU monitoring. "People have waited 16 years [for these reforms]. It is very difficult to take this back." Also, infrastructure remains poor, even by east European standards. Foreign investment has so far concentrated on Bucharest and western Romania, where transport links with the EU are good. Romania is less developed than central Europe and has a weaker public administration. Yet the country has delivered surprises in the past. When in 1999 a caretaker prime minister took charge of a nation in financial crisis, few expected that seven years later an economically dynamic Romania would be on the verge of joining the EU. 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