The Romanian economy, reviewed by the European Commission

As part of the “European Semester” series, the European Commission has made public these days its Country Report on Romania. The document mainly assesses the progress made in terms of structural reforms, and looks at means to prevent and address macroeconomic imbalances.

The report starts by emphasising that, without structural reform and fiscal-budgetary consolidation, Romania’s dynamic economic growth risks “setting the stage for a hard landing.” The current economic boom was driven mainly by consumption, while investments remained modest.

The cyclical upswing of the economy continued in 2017, but is expected to ease off in 2018, the Report also reads. The growth of the real GDP accelerated in 2017, to reach the highest value since the economic crisis, against the backdrop of surging private consumption, encouraged by public and private sector salary increases and by indirect tax cuts.

Due to tax cuts, to wage hikes in the public sector and to pension increases, the public deficit is on an upward path, the Commission also says. Indirect taxes were lowered in 2017, and the income tax rate for individual taxpayers was cut as of January 2018. As regards expenditure, public sector salaries and pensions rose significantly in 2017 and are expected to grow further in 2018. Consequently, the nominal and structural deficits are on an increasing path.

On presenting the Report, the chief of the European Commission Representation in Bucharest, Angela Cristea, emphasised:

Angela Cristea: “The budget deficit is getting dangerously close to the 3% alarm level, while the structural deficit continues to deviate significantly from the average target of 1%. In 2016 it already stood at 2.2%, in 2017 it reached 3.3%, and this year it risks jumping to over 4%, hence the procedure that Romania is subject to, namely the significant deviation procedure, launched by the Commission with respect to the structural deficit target.”

Attending the Report launch organised by the European Commission Representation was also the Romanian Minister for Public Finances, Eugen Teodorovici. This is what he said with respect to the risk of missing the 3% target:

Eugen Teodorovici: “I am bound to pay attention to all the figures, to all the macroeconomic elements. This risk has been here ever since we set the 2.97% target for this year. Making sure that things do not deviate from the planned course is a matter of common sense and responsibility. And I am confident that at least the targets we have undertaken and on which the 2018 public budget was built, will be met… But even if it is very clear that the 2.97% threshold is not going to be exceeded, I, as a finance minister, am obliged to do everything in my power to curb spending and deficit. This is a daily concern for any finance minister, for any government.“

The rate of employment also went up by 0.7% in 2017. Here is Angela Cristea, the head of the European Commission Representation in Romania, with more on the issue:

Angela Cristea: “There is good news concerning employment figures in Romania. The country currently boasts the lowest unemployment rate in the past 20 years, way below the EU average. At the same time, we are presently facing labour availability issues, caused by the aging population as well as the combined effect by the reduced mobility on the domestic market and the increased mobility on the foreign one.”

According to the Country Report, Romania has made limited progress in implementing the recommendations made by the Commission in 2017, such as implementing the national fiscal-budgetary framework, bringing Romania’s fiscal system in line with the European one, and improving tax compliance. As regards the reform of the fiscal framework, Finance Minister Teodorovici told us the following:

Eugen Teodorovici: “The respective policy on the Fiscal Code and fiscal procedure may seem a little inconsistent. Let’s say there have been a lot of amendments in the past year. We came up with our own amendments as well, but they were only things that needed to be done in order to streamline the economy. I believe that no more amendments are needed now and we should wait until the end of this first semester this year. These two codes should be assessed by the Finance Ministry together with all stakeholders. We should look at these two documents page by page, and bring in the right amendments so that we may put together a fiscal framework at least comparable with its European counterparts. We’d like to leave these drafts open to public debate in July, August, September and October, and have a final revision at the end of the year. Then all we need to do is to give people time to understand the two Codes, allowing them to sink in, instead of further amending them. And as of January 1st 2019, these pieces of legislation should take effect. This is how we intend to put an end to this lack of coherence, so to say.”

The Country Report also notes the high level of poverty and the lack of mature social dialogue, as well as the persistent challenges in terms of social protection and inclusion. Unequal opportunity remains a challenge particularly in rural areas; economic inequality is still high while the redistribution of public funds and social services lies below the EU average. However, the document shows, some headway has been made in terms of public procurement and in fighting unreported employment and bribery in public healthcare.

(translated by: Ana-Maria Popescu, Daniel Bilt)