Excessive Deficit Procedure for Romania

The European Commission opened the Excessive Deficit Procedure for Romania.

Ştefan Stoica, 05.03.2020, 14:00

The inevitable has eventually happened: the European Commission opened the Excessive Deficit Procedure for Romania, announced the acting finance minister Florin Citu, who has been designated to form a new government. In mid February, an EC report wrote that Bucharest did not observe the deficit criterion defined in the Treaty, which is limited at 3% of the GDP and that opening the Excessive Deficit Procedure was justified.

According to the EC winter forecasts, Romania’s government deficit reached 4% of the GDP in 2019 and it is expected to go up to 4.9% in 2020 and to 6.9% in 2021. The increase in the budget estimates is mainly based on a forecasted pension rise by 40%, scheduled to take effect as of September 2020, and on a new pension recalculation scheduled for September 2021. The pension law is the main cause of the estimated rapid growth of the government deficit and of the risks posed to fiscal sustainability, the EC also shows, its comments being actually in line with the repeated warnings of the Romanian analysts and experts. They also speak about a possible budgetary quake if pensions are increased by the entire amount stipulated, and not in stages.

Moreover, the EC noticed that between December 2019 and January 2020 the Romanian authorities adopted new tax cuts and doubled child allowances. In other words, they put additional pressure on the budget, in an irresponsible populist move, the same experts claim. Still, the finance minister says that Romania has a sustainable and credible plan to reduce the deficit, which was negotiated and accepted by the European Commission.

One month ago, the Romanian authorities sent a letter to the Brussels officials in which they claim that the deterioration of the budget deficit in 2019 can be accounted for, to a great extent, through the increased expenses for personnel, social assistance and investments, while the share of revenues within the GDP remained greatly unchanged. Also, the Romanian authorities underline that the fiscal-budgetary strategy for the period 2020-2022 shows a gradual adjustment of the budget deficit on medium term, even if the percentage remains above the reference value of 3% of the GDP until 2021.

The EU recommends Romania to take measures in order to overcome the Excessive Deficit Procedure by 2022, the adjusted values being 3.6% for 2020, 3.4% for 2021 and 2.8% for 2022. According to the finance minister, during the talks with the EC representatives, he underlined the Romanian government’s firm commitment to applying a responsible and sustainable fiscal policy and that the reduction of the deficit should be made in such a way not to endanger the country’s economic growth. The draft recommendation of the Council of the EU is to be discussed and adopted at the meeting of the Economic and Financial Affairs Council (ECOFIN) on March 17. (translation by L. Simion)