EC starts the Excessive Deficit Procedure against Romania

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The European Commission has announced today in its Report on Romania that kicking off the Excessive Deficit Procedure against our country is “justified” as the Romanian Government did not succeed in complying withe the 3% deficit enshrined in the Treaty reference value.

“According to the Fiscal Strategy of the government, the headline general government deficit in 2019 is planned to have increased to 3.8% of GDP, above and not close to the 3% of GDP Treaty reference value. The planned excess over the reference value is considered to be neither exceptional nor temporary. The general government gross debt remains well below the 60% of GDP reference value.

The analysis presented in this report includes the assessment of all relevant factors, which according to the Treaty and the SGP are to be taken into account in the steps leading to the decision on the existence an excessive deficit whenever the government debt-to GDP ratio does not exceed the reference value.

The relevant factors in the current case do not provide mitigating elements and thus do not change the assessment. Overall, the analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 should be considered as not complied with, and that an EDP is thus warranted. “

EC argued that Data notified by the Romanian authorities on 30 September 2019 and subsequently validated by Eurostat show that the general government headline deficit in Romania reached 3.0% of GDP in 2018, while debt stood at 35.0% of GDP. For 2019, the notification planned a general government headline deficit of 2.8% of GDP.

“Taking into account the revised GDP figures announced by the national statistical office after the publication of Eurostat’s press release, the headline ratios slightly changed, with the deficit standing at 2.9% of GDP and debt at 34.7% of GDP in 2018. On 10 December 2019 the government adopted and sent to the Parliament its Fisca Budgetary Strategy for 2020-22 (the Fiscal Strategy), with an accrual deficit target of 3.8% of GDP in 2019. The planned figure for the 2019 deficit provides prima facie evidence of the existence of an excessive deficit in Romania.”

The Commission explained that the increased deficit is mostly prompted by “ the significant pension increases enacted in Romania in the summer 2019, in particular an increase in pensions of 40% scheduled for September 2020 and a further upward recalculation of pensions scheduled for September 2021.”

Moreover, between December 2019 and January 2020 the authorities adopted new tax cuts (reductions of excise duties on fuel and of social security contributions on part-time workers and a removal of special taxes on banking and energy sectors) and doubled the child allowance (due to enter into force from August 2020). In the Fiscal Strategy, the government projects a general government deficit of 3.6% of GDP in 2020 and 3.4% in 2021.

The EC further notes that “real GDP has been growing robustly in recent years, driven by consumption. Potential GDP growth is high but projected to gradually decline, due to decelerating total factor productivity growth and negative demographic trends. Romania has made limited progress with respect to structural reforms.”

One of the Commission’s warnings point that Romania faces “high fiscal sustainability risks in the medium and long term, driven by high fiscal deficits and costs of aging. ”

Romanian FinMin reacts

Romanian Liberal Finance minister Florin Citu has promptly reacted, saying that they had been aware of this risk since the moment Liberals came to power in November last year. “We could not avoid the EDP  procedure. The report refer to 2019. If the PSD government had taken proper actions since 2017, we wouldn’t have been in this situation. It was known since last year that macroeconomic imbalances had increased. The report clearly shows how PSD has ruined the economy in the past 3 years. This what happens when you’re ignoring warnings,” FinMin Citu argued.

Citu warned several days that Romania will enter an excessive deficit procedure, most probably in March.

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