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EC: Romania’s economic sentiment drops to lowest level in two years

Update: EC warns Romania of a significant budgetary deviation in 2017, says judicial independence is still being challenged

The European Commission (EC) has taken the next steps in the 2018 cycle of the European Semester of economic policy coordination.

On this occasion, the officials in Brussels have sent warnings to Romania and Hungary on the existence of a significant deviation from the adjustment path toward the medium-term budgetary objective in 2017 and related recommendations for Council recommendations, as a press release informs.

For Romania, which is already subject to a significant deviation procedure, EC recommends that the Council issue a decision on non-effective action and a recommendation to take measures in 2018 and 2019 to correct the significant deviation.

Based on the Commission 2018 Spring forecast and the 2017 outturn data validated by Eurostat, the observed deviation from the required structural adjustment path in 2017 was above the threshold of significance of 0.5 percent of GDP according to both indicators in both countries.

In case of Romania, on 16 June 2017, the Council decided that a significant observed deviation from the MTO occurred in Romania in 2016. On 5 December 2017 the Council found that Romania had not taken effective action in response to that recommendation concerning 2017. In 2017, the growth of net primary government expenditure was well above the expenditure benchmark, pointing to a significant deviation. The structural balance deteriorated to -3.3 percent of GDP from a position of -2.1 percent of GDP in 2016, also pointing to a significant deviation from the recommended structural adjustment. An overall assessment leads to the conclusion that the observed deviation from the requirements of the preventive arm of the SGP in 2017 is significant.

In the event of a significant observed deviation from the adjustment path towards the medium-term budgetary objective (MTO) in a Member State, a warning is addressed to that Member State. Within one month of the date of the adoption of the warning, the Council should address a recommendation to the Member State concerned to take the necessary policy measures to correct the significant observed deviation. The regulation foresees that the recommendation will set a deadline of no more than five months for the Member State to address the deviation. Within that deadline, the Member State should report to the Council on action taken in response to this recommendation.

The EC warns that this situation is mainly due to the increases in expenditure on the compensation of public employees.

”The deterioration compared to 2017 is largely driven by increases in expenditure on the compensation of public employees, enacted in summer 2017 and which entered into force in January 2018. Since the Commission autumn 2017 forecast, which was the basis for the Council Recommendation of 5 December 2017, the authorities have partially reversed the past systemic pension reform by lowering the proportion of social contributions transferred to the second pension pillar from 2018. This cut is set to have a positive short-term effect on government revenues and thus on the general government balance. However, that fiscal gain is set to dissipate in the long term as the social contributions diverted from the second pillar are be accompanied by an obligation to pay old-age pensions in the future.

This leads to the conclusion that Romania’s response to the Council Recommendation of 5 December 2017 has been insufficient. The fiscal effort falls short of the annual structural adjustment of 0.8% of GDP for 2018, corresponding to a nominal growth rate of net primary government expenditure that does not exceed 3.3% in 2018,” the Commission says.

Corruption mentioned again: Judicial independence is being challenged

Developments throughout the past year have largely brought into question the irreversibility and sustainability of Romania’s substantial progress on reforming its judicial system and tackling high-level corruption, the EC also mentions. ”Judicial independence is being challenged and pressure being put on the judicial institutions and on the legal framework for fighting corruption, while progress on remaining challenges is being further held back. The implementation of the 2016-2020 national anti-corruption strategy developing further measures to prevent and fight corruption is progressing at technical level but more tangible political support is needed, as corruption and governance issues in the public sector persist at all levels and are among the top challenges for the business environment”.

The European officials say that although corruption and judicial reform are not covered in the country-specific recommendations for Romania, they are relevant for the development of a positive socio-economic environment in the country.

About Anca Bernovici