Romania's leu: the price of keeping calm

FEW currency markets reward the patient observer. The Romanian leu, which the central bank steers within a narrow band year after year, has long been one of the calmer ones. So it was a jolt when, in the days after the government fell in early May 2026, the leu dropped roughly one per cent in a single day to a record low against the euro — a move almost unheard of for a currency that usually crawls. A Reuters poll now expects it to ease further over the next year. The interesting question is not by how much. It is why a currency that looks so quietly managed keeps slipping, and who ends up paying.

The immediate cause was political. Romania has run one of the European Union's largest budget deficits — close to 9% of GDP in 2024 — and has sat under an EU "excessive deficit procedure" since 2020, bound to a seven-year plan to squeeze the shortfall below 3% of output. The plan is deeply unpopular, because it means higher taxes on households already feeling inflation. In April the Social Democrats abandoned the governing coalition; in May parliament toppled the pro-European prime minister, Ilie Bolojan, in a no-confidence vote. Weeks were lost to stalemate before a new coalition scraped together, and with them went both time and, investors guessed, the will to keep cutting. The paralysis also put billions of euros in EU recovery money at risk.

The National Bank of Romania (BNR) is what holds the line, and it fights on two fronts. To keep a lid on prices it has held its policy rate at 6.5% since August 2024, and in August it lifted its forecast for year-end inflation to 6.1%, well above target. To steady the exchange rate it has sold reserves: more than €1bn in March, and an estimated €1.5bn–2bn in April, when the crisis was at its worst. The leu steadied only after all that firepower was spent.

Why defend so hard? Officially the BNR runs a "managed float", so the rate is meant to be a matter of indifference. In practice it is anything but, because Romanians are unusually exposed to the euro. According to the IMF, households hold about 35% of their deposits in foreign currency, and a significant share of corporate loans are in euros too. A sharp devaluation would quietly transfer wealth from leu savers to euro borrowers, feed the imported inflation the BNR is already fighting, raise the cost of servicing a large public debt, and leave banks with loans suddenly harder to repay. The managed crawl is thus a policy with identifiable winners and losers — and the losers are largely the people who pay the inflation. That is why the BNR treats even a one-day wobble as an emergency.

Seen this way, the Reuters forecast of a gentle slip is not a technical call on interest rates. It is a bet that Romania will not find the will to finish a seven-year fiscal contraction, and that the currency will carry part of the burden its politics cannot. Even the mild forecast has already proved optimistic: in December 2025 the same poll had the leu easing about 1% over the next year, towards 5.14 to the euro. By September it had already slid past that, to roughly 5.25 — the milder forecast undone by spring's politics. The leu nearly paid a harsher price in August, when Romania was spared a downgrade from the last rung of investment grade only because the budget deficit narrowed more than expected. Fitch and S&P Global keep the country at BBB-minus with a negative outlook, both warning that political instability threatens the deficit path beyond 2026. The narrowing is real. Whether it survives good times and an approaching election is another matter.

For all its apparent dullness, the leu offers a useful lesson about reading a "stable" currency. Its calm is not a market verdict on Romanian fundamentals; it is a buffer the central bank purchases with reserves it cannot replenish forever and with interest rates that are choking an economy already expected to shrink this year. A government that actually enforced the deficit plan could steady the currency without endless intervention. Another bout of paralysis would drain the buffer and force the depreciation the BNR has spent months refusing to choose. The direction of the leu is less a forecast of economics than a running tally of whether Romania's politics can keep its promises.