The European Commission has concluded that Romania failed to comply with the national medium-term fiscal-structural plan agreed by both sides on November 21 2024 and initiated the process that may lead to disciplinary measures such as the suspension of funds under the cohesion and Resilience Facility on July 8. Technically, Romania must come up with convincing corrective actions by the end of the month in order to prevent disciplinary measures.

Romania’s budget deficit is heading towards 8.6% of GDP this year compared to a 7% of GDP target, the EC stressed. The EC’s analysis implies limited corrections are needed on the expenditures side (expected to deviate this year by only 0.1% of GDP compared to the target) but much stronger revenues aimed at achieving at least in part the 1.6% of GDP deficit deviation.

"It is a final message that we must take seriously, we have teams working on the package of [the fiscal consolidation] measures, it will be ready in a few days," Romanian Minister of Finance Tanczos Barna declared, before the government meeting of June 4 according to G4Media. “The European funds for Romania will not be suspended,” he added.

Romania has not taken effective action in response to the Council Recommendation of January 21, when the Council recommended the country to bring net expenditures in line with the trajectory envisaged under the seven-year fiscal consolidation plan and implement the set of reforms and investments that underpins the extension of the fiscal adjustment period to seven years – the European Commission (EC) concluded on June 4. 

The EC thus recommended that the Economic and Financial Affairs (ECOFIN) Council endorse the conclusion that Romania has not taken effective action at its June 20 meeting. The process envisages further recommendations made by the EC by the end of June, to be endorsed by the ECOFIN on July 8.

The European Commission’s key concern is Romania’s failure to take effective action and present the necessary measures together with its 2025 annual progress report, which should have been submitted to the Commission by April 30.

The EC also summarised the fiscal developments that should be explained by Romania’s annual progress report. In brief, the Commission found that Romania’s fiscal slippage from the planned net expenditure trajectory took place predominantly in 2024 (1.6% of GDP) and is likely to be much smaller  (0.1% of GDP) in 2025. This improvement, prompted by the fiscal corrective package endorsed by Romania at the end of 2024, has to be strengthened by further steps on the expenditures side in the annual progress report to be drafted by the end of the month.

Specifically, the EC found that Romania’s net expenditure grew by 19.9% y/y in 2024 compared to a target of 14.4% y/y. The EC projects Romania’s net expenditure growth to reach 5.4% y/y this year, compared to a 5.1% y/y target – a much smaller deviation that is also seen in the deviation measured as the net expenditures above the recommended maximum net expenditures as a ratio to GDP.

As a ratio to GDP, the deviation between the net expenditure growth rate forecast for 2025 and the recommended maximum amounts to 0.1% of GDP, the EC concludes. As a ratio to GDP, the deviation between the cumulative net expenditure growth for 2024 and 2025 and the recommended maximum amounts to 1.7% of GDP, it also said.

The European Commission will issue the next set of recommendations for Romania most likely by the end of June.

The Council will discuss the European Commission's conclusion probably on June 20 and is expected to accept, procedurally, the Commission's conclusion that Romania has not taken measures to correct the deficit, given the extent of the deviation.

"Today we will propose this to the Council under Article 126(8), namely that no effective measures have been taken. This will then be discussed at the ECOFIN Council on 20 June, and our expectations are that it will approve this conclusion," an EC official said at the press conference, according to Economedia.

Subsequently, the European Commission will return and issue a new recommendation for Romania on the new path to correct the excessive deficit for Romania. Most likely, this recommendation will be issued at the end of June. "Note that there was, as I have already mentioned, a slippage of approximately two percentage points of GDP in relation to the objectives that were set in the medium-term plan," the official stressed.

Under the worst case scenario, ECOFIN may trigger the process of cutting European funds to Romania on July 8.

If Romania does not take measures to correct the budget deficit by the ECOFIN Council in July, it risks triggering the procedure leading to cuts in European cohesion funds and the PNRR, the European official said.

"As for potential problems or implications for access to EU funding… Assuming that, on 20 June, the Council adopts an opinion that Romania has not taken effective action to correct its excessive deficit, this triggers what is called the macroeconomic conditionality framework. This is based on Article 10(1) of the RRF Regulation, which thus affects the funds under the recovery mechanism, but also on Article 19(7) of the Common Provisions Regulation, which reflects the fact that it affects the cohesion funds. On this basis, a process is opened that could ultimately lead to Romania losing access to EU funding from these sources," the EC official explained.