with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania

Recommendation for a

COUNCIL RECOMMENDATION

with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective



in Romania

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 121(4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, and in particular the second sub-paragraph 10(2), thereof,

Having regard to the recommendation of the Commission,

Whereas:

(1)In accordance with Article 121 of the Treaty Member States are to promote sound public finances over the medium term through the coordination of economic policies and multilateral surveillance in order to avoid the occurrence of excessive government deficits.

(2)The Stability and Growth Pact (SGP) is based on the objective of sound government finances as a means of strengthening the conditions for price stability and for strong sustainable growth conducive to employment creation.

(3)In June 2017 and June 2018 the Council found in accordance with Article 121(4) of the Treaty that in, respectively, 2016 and 2017, there had been a significant observed deviation from Romania’s medium-term budgetary objective or from the adjustment path towards it. In view of those established significant deviations the Council issued Recommendations for Romania to take the necessary policy measures to address them. The Council subsequently found that Romania had not taken effective action in response to those Recommendations. In its most recent Recommendation, adopted on 4 December 2018 the Council recommended that Romania 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.

(4)In 2018, based on the Commission 2019 spring forecast and the 2018 outturn data validated by Eurostat, the growth of net primary government expenditure was well above the expenditure benchmark, pointing to a significant deviation by a large margin (deviation of 2.4% of GDP). The structural deficit was not reduced, remaining broadly stable at around 3.0% of potential GDP, also pointing to a significant deviation from the recommended structural adjustment (a deviation of 0.8% of GDP). The size of the deviation indicated by the structural balance is negatively impacted by a revenue windfall, by a higher GDP deflator and by higher underlying estimate of potential GDP growth as compared to the medium-term average underlying the expenditure benchmark. On the other hand, the size of the deviation indicated by the structural balance is positively impacted by low public investment expenditures, which are smoothed out in the expenditure benchmark. Irrespective of that difference, both indicators confirm a significant deviation from the requirements of the preventive arm of the SGP in 2018.

(5)On 5 June 2019, following an overall assessment, the Commission considered that a significant observed deviation from the adjustment path toward the medium-term budgetary objective exists in Romania and issued a warning to Romania in accordance with Article 121(4) of the Treaty and the first subparagraph of Article 10(2) of Regulation (EC) No 1466/97.

(6)In accordance with the second subparagraph of Article 10(2) of Regulation (EC) No 1466/97 the Council is to address a recommendation to the Member State concerned to take the necessary policy measures. Regulation (EC) No 1466/97 provides that the recommendation will set a deadline of no more than five months for the Member State to address the deviation. On that basis a deadline of 15 October 2019 for Romania to address the deviation appears appropriate. Within that deadline, Romania should report on action taken in response to this Recommendation.

(7)Based on the output gap projections of the Commission 2019 spring forecast, Romania will remain in normal economic times in 2019 and 2020. Romania's general government debt ratio is below the 60% of GDP threshold. Henceforth, the minimum required structural effort prescribed by Regulation (EC) No 1466/97 and the commonly agreed adjusment matrix under the SGP, which factors in the prevailing economic circumstances and possible sustainability concerns, amounts to at least 0.5% of GDP for both 2019 and 2020.

(8)Romania's structural deficit has gradually increased, from 0.1% of GDP in 2015 to 1.7% of GDP in 2016, 2.9% of GDP in 2017 and 3.0% of GDP in 2018. An additional and persistent effort necessary to correct for the cumulated deviation and to bring Romania back on an appropriate adustment path following the persistent slippages accumulated since 2016 should complement the minimum adjustment requirement. An additional effort of 0.5% of GDP in 2019 and 0.25% of GDP in 2020 seems appropriate given the magnitude of the observed significant deviation from the recommended adjustment path towards the medium-term budgetary objective. Such an effort would be in line with the adjustment recommended for 2019 by the Council on 4 December 2018. It will accelerate the adjustment back towards the medium-term budgetary objective.

(9)The required improvement of the structural balance by 1.0% of GDP in 2019 and 0.75% of GDP in 2020 is consistent with the nominal growth rate of net primary government expenditure not exceeding 4.5% in 2019 and 5.1% in 2020.