European Commission sees “strongly deteriorating fiscal outlook” in Romania

European Commission sees “strongly deteriorating fiscal outlook” in Romania
The European Commission had strong words for the government in Bucharest (pictured).
By bne IntelliNews May 24, 2018

The European Commission, in the country-specific recommendation sent on May 23 to the Economic and Financial Affairs Council (Ecofin) for endorsement in June, is of the opinion that “significant further measures will be needed as of 2018” for Romania to comply with the provisions of the Stability and Growth Pact, in light of “a strongly deteriorating fiscal outlook”.

Expected to be endorsed by Ecofin in June, the recommendation is for Romania’s government to raise its public spending by no more than 5.1% in nominal terms, which is extremely restrictive given the current government’s plans, and would result in a 0.8%-of-GDP budget deficit correction.

Romania’s Finance Minister Eugen Teodorovici, in a comment after the EC’s recommendations, blamed the fiscal deviation on the government of technocrats that was in office in 2016 and he said that the fiscal consolidation will begin in 2019, with a 0.5%-of-GDP step. However, the European Commission estimates Romania’s budget deficit will slip well above the government’s targets in 2018-2019. The EC 2018 Spring Forecast projected general government deficits of 3.4% and 3.8% of GDP for 2018 and 2019, above the 3%-of-GDP treaty reference value.

The measures would be needed with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective, the EC commented in its recommendations. Ecofin has constantly issued recommendations to Romania, the last time in December 2018, to take measures with a view to returning to the Stability and Growth Pact. 

The recommendations have been made on the assumption that Romania will stick with its commitments, which is not obvious. Romania has so far ignored both the European Council’s forecasts indicating fiscal slippage above the 3% of GDP deficit limitation set under the Maastricht Treaty and Ecofin’s calls for convergence toward the 1% of GDP structural deficit medium-term target under the Fiscal Compact (the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union) signed in 2012.

In June 2017, Ecofin issued a recommendation for an annual structural adjustment of 0.5% of GDP under the Significant Deviation Procedure (SDP). On December 5, 2017 it found that Romania had not taken effective action in response to the recommendation of June 16, 2017 and issued a revised recommendation. The net primary government expenditures should not rise more than 3.3% y/y in 2018, corresponding to an annual structural deficit adjustment of 0.8% of GDP, it said. For 2019, the Commission recommended Romania (on May 23) to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 5.1%, corresponding to an annual structural adjustment of 0.8% of GDP.

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