IP/08/925

Brussels, 13 June 2008

Commission encourages Romania to pursue budgetary consolidation as well as reforms

The European Commission today advised the government of Romania to pursue with determination the consolidation of government finances while remaining on the path of economic reforms. This two-pronged approach is necessary to address the growing imbalances in the economy, while allowing Romania to continue its fast convergence towards the average income levels in the EU. This is economic and budgetary policy advice under the revised Stability and Growth Pact agreed on in 2005 by all European Union countries.

"Romania needs a comprehensive strategy to accelerate structural reforms and fiscal consolidation. In particular, a credible medium-term expenditure planning and a multi-annual budget are urgently needed. Coupled with structural reforms, budgetary consolidation will help address the overheating of the economy and promote a more balanced catching up process with the rest of the EU" said Joaquín Almunia, Economic and Monetary Affairs Commissioner.

The Commission today adopted a recommendation providing advice on economic and budgetary policy in Romania. This is in accordance with the revised Stability and Growth Pact (SGP)^[1] which foresees that “the Commission will issue policy advice to encourage Member States to stick to their adjustment path towards the 'medium-term budgetary objective'”. Romania's medium-term objective (MTO) is a general government deficit of 0.9% of GDP in structural terms (i.e. cyclically adjusted and net of one-off and other temporary measures) to be achieved by 2011.

Romania recorded a nominal budget deficit of 2.5% of GDP in 2007, double that in 2005 and, according to the Commission's spring forecast, this is projected to increase to 2.9% in 2008 and 3.7% in 2009, under the customary no-policy-change assumption. The structural deficit is much higher and increasing from 3.4% of GDP in 2007 to a forecast 3.7% in 2008 and 4.1% in 2009.

This reflects an expansionary fiscal policy, notwithstanding some recent budgetary measures, and a lack of a credible and predictable-medium term framework.

This is unwise given strong economic growth averaging 6½% annually between 2003 and 2007 and the signs of overheating in the Romanian economy, with high and rising net external borrowing (from 10.4% of GDP in 2006 to 13.4% of GDP in 2007), rising inflation, strong wage growth against a background of growing labour shortages, and a rapid increase in household borrowing.

For Romania to maintain its rapid convergence process towards the average income level in the EU (its GDP per capita is 40% of the EU average), it will be crucial to address the growing macroeconomic imbalances and to implement wide-ranging structural reforms. Fiscal policy can play an important role in cooling down internal demand but this would require Romania to make further improvements in its budgetary planning and execution.

The Commission believes that reforms and budgetary consolidation should work together to address the overheating of the economy and promote a more balanced catching up process.

This is why the Commission is recommending that Romania take urgent action to implement a binding medium-term fiscal framework with a view to improving the quality of public finances. Romania should rigorously implement the policy invitations of the Council issued on 12 February 2008 on the updated convergence programme of Romania for the period 2007 to 2010 (i.e. it should notably aim for more ambitious budgetary targets, also to help containing external imbalances) and accelerate structural reforms. In particular, those structural reforms should include an integrated set of measures designed to increase employment, activity rates and productivity levels, especially by: accelerating reforms of the education system to respond better to labour market needs, reducing early school leaving, significantly increasing adult participation in education and training; and transforming subsistence/semi-subsistence farming into sustainable employment. They should also include measures to improve the business environment and to strengthen administrative capacity. This would allow Romania to increase its growth potential and strengthen its external competitiveness.

The text of the policy advice on Romania can be found at:
http://ec.europa.eu/economy_finance/thematic_articles/article12722_en.htm

^[1] See report titled ‘Improving the implementation of the Stability and Growth Pact’ adopted by the ECOFIN Council on 20 March 2005 and endorsed by the European Council in its conclusions of 22 March 2005. A subsequent Code of Conduct specifies that the Commission policy advice shall be given in accordance with Article 211.