The European Commission has issued on Wednesday a recommendation to the Council, a report on the situation in each EU country. Regarding Romania, the EC is critical on the economic imbalances, lays stress on problems faced by education, health system, infrastructure, labour market, justice and on social discrepancies.
- The Commission’s analysis led it to conclude that Romania is experiencing macroeconomic imbalances. In particular, vulnerabilities are linked to diminishing cost competitiveness and a widening current account deficit in a context of an expansionary fiscal policy and an unpredictable business Recent legislative initiatives create risks for the functioning of the financial sector and may harm private investment.
- On 22 June 2018, the Council decided in accordance with Article 121(4) of the Treaty on the Functioning of the European Union (‘TFEU’) that a significant observed deviation from the medium-term budgetary objective occurred in Romania in 2017. In view of the established significant deviation, on 22 June 2018 the Council recommended Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 3.3% in 2018 and 5.1% in 2019, corresponding to an annual structural adjustment of 8% of GDP in each year. On 4 December 2018, the Council found that Romania had not taken effective action in response to the Council recommendation of 22 June 2018 and issued a revised recommendation. In the new recommendation the Council asked Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 4.5% in 2019, corresponding to an annual structural adjustment of 1.0% of GDP. In June 2019, the Council found that Romania had not taken effective action in response to the Council recommendation of 4 December 2018. Moreover, based on 2018 out-turn data Romania was found to be in significant deviation from the recommended adjustment in 2018.
- the Commission 2019 spring forecast projected a general government deficit above the 3%-of-GDP Treaty reference value in 2019 and in 2020. Overall, the Council is of the opinion that significant further measures will be needed as of 2019 to comply with the provisions of the Stability and Growth Pact, in light of a strongly deteriorating fiscal outlook, in line with the recommendation addressed to Romania in June 2019 with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective.
- Romania’s budgetary planning regularly ignores the provisions of the national fiscal framework. The national structural deficit rule requires compliance with or convergence to the medium-term budgetary objective of a structural deficit not exceeding 1% of In 2016 Romania departed from the medium-term budgetary objective and is on a divergent path since, in breach of the national deficit rule. The two 2018 budget amendments adopted in autumn 2018, departed once again from several auxiliary rules prohibiting increases in deficit and expenditure ceilings during the ongoing fiscal year. The 2019 budget, adopted by the government in February 2019 and approved by the Parliament in March, again departed from multiple fiscal rules, including the structural deficit rule.
- Tax compliance remains low. As regards Value Added Tax, the difference between theoretically expected and actually collected revenues remains very The large informal economy represents an additional challenge for tax compliance, while the high levels of undeclared work deprive the state budget of significant resources. Furthermore, the prevalence of cash payments facilitates tax evasion.
- After several years of continued efforts to consolidate the financial sector, financial stability was again strained in 2018 by a set of government and parliamentary legislative The tax on banks’ assets adopted by the government via an emergency ordinance at the end of December 2018, without impact assessment or stakeholder consultation, raised a number of serious concerns related to its negative impact on banks’ prudential situation, the conduct of monetary policy and ultimately investment and economic growth.
- The new pension law, adopted by Parliament in December 2018, is likely to pose risks to the sustainability of public finances. The pension point, i.e. the main parameter used for pension indexation, is set to increase by 15% in September 2019 and by 40% in September 2020.
- Challenges linked to the quality and inclusiveness of the education and training system have a negative impact on Romania’s inclusive growth potential. Spending on education remains one of the lowest in the EU.
- The labour market has been under increasing pressure, as the unemployment rate (4.2% in 2018) is very low, while the labour force is declining and skills shortages persist. Women’s activity rate, particularly for the young and middle-aged, is low.
- Despite recent improvements, poverty and income inequality remain high, and regional disparities are One in three Romanians is still at risk of poverty and social exclusion, with particular groups such as children, the Roma, people with disabilities and the elderly being more affected. Social services have insufficient quality and coverage, and uneven geographical distribution, not correlated with communities’ specific needs. Only around 20% of administrative territorial units have licensed social services.
- After years of moderate wage growth, Romania is experiencing one of the fastest rates of wage growth in the EU. This is driven by government policies increasing public and minimum wages, record low unemployment rate and structural labour supply shortages. The minimum wage continues to be set in a non-systematic manner, without an objective mechanism. Consecutive increases over the years resulted in one in three employees earning the minimum wage in 2017, a rate almost four times higher than in 2011.
- The healthcare system faces many Low funding, inefficient use of public resources and the lack of reform limit the effectiveness of the health system. Continued emigration has resulted in a sizeable shortage of doctors and nurses. Health infrastructure and the prevalence of informal payments remain sources of concern. Access to healthcare services for those living in rural areas and vulnerable groups is limited. These factors in turn have a negative impact on the people’s health which remains below the EU average, despite recent improvements.
- The quality of infrastructure, including in the transport, energy, waste and wastewater sectors remains poor and limits Romania’s growth prospects. Despite significant public investment after Romania joined the EU, its physical infrastructure remains underdeveloped. The general condition and reliability of the road and rail networks are very poor. The infrastructure is not keeping up with the traffic demand generated by an expanding economy.
- The conduct of public policy making has become increasingly unpredictable, weighing on the business environment. A recent example is the adoption through government emergency ordinance of a set of far-reaching measures affecting the functioning of the banking sector, the second pension pillar fund managers, energy and telecommunication companies, without stakeholder consultation or impact assessment.
- Developments throughout the past year have raised concerns with regard to the rule of law and strengthened previous serious concerns regarding the irreversibility and sustainability of Romania’s earlier progress on reforming its judicial system and tackling high-level These issues are the subject of monitoring under the Cooperation and Verification Mechanism. Amendments to three justice laws are now in force and contain a number of measures weakening the legal guarantees for judicial independence.
Recommendations for Romania to take action in 2019 and 2020 to:
- Ensure compliance with the Council recommendation of June 2019 with a view to correcting the significant deviation from the adjustment path toward the medium-term budgetary Ensure the full application of the fiscal framework. Strengthen tax compliance and collection.
- Safeguard financial stability and the robustness of the banking Ensure the sustainability of the public pension system and the long-term viability of the second pillar pension funds.
- Improve the quality and inclusiveness of education, in particular for Roma and other disadvantaged Improve skills, including digital, notably by increasing the labour market relevance of vocational education and training and higher education. Increase the coverage and quality of social services and complete the minimum inclusion income reform. Improve the functioning of social dialogue. Ensure minimum wage setting based on objective criteria, consistent with job creation and competitiveness. Improve access to and cost-efficiency of healthcare, including through the shift to outpatient care.
- Focus investment-related economic policy on transport, notably on its sustainability, low carbon energy and energy efficiency, environmental infrastructure as well as innovation, taking into account regional Improve preparation and prioritisation of large projects and accelerate their implementation. Improve the efficiency of public procurement and ensure full and sustainable implementation of the national public procurement strategy.
- Ensure that legislative initiatives do not undermine legal certainty by improving the quality and predictability of decision-making, including by appropriate stakeholder consultations, effective impact assessments and streamlined administrative procedures. Strengthen the corporate governance of state-owned enterprises.