Communication from the Commission to the Council on Romania's medium term economic strategy
Date: 2000-07-19
Institutions: European Commission
Subjects: Romania, accession to the European Union, economic policy, economic situation

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 19.7.2000
COM(2000) 463 final

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL

on Romania's Medium Term Economic Strategy

COMMUNICATION FROM THE COMMISSION
TO THE COUNCIL

on Romania's Medium Term Economic Strategy

1.

INTRODUCTION

On 13 October 1999, in its Composite Paper on progress towards accession by the
candidate countries, the Commission recommended that, in the case of Romania,
accession negotiations be opened upon the fulfilment of certain conditions. In addition
to the issue of child care institutions, the Commission proposed that the opening of
negotiations with Romania “…will be conditional upon a further assessment of the
economic situation before negotiations are formally opened, in the expectation that
appropriate measures will have been taken to address the macro-economic situation.”

In December 1999, at its Summit in Helsinki, the European Council decided to invite
Romania to begin Accession Negotiations. The Presidency Conclusions stated that "It
emerges that some candidates will not be in a position to meet all the Copenhagen
criteria in the medium term. The Commission's intention is to report in early 2000 to
the Council on progress by certain candidate States on fulfilling the Copenhagen
economic criteria.".

In subsequent contacts with the Romanian Government, the Commission explained
that a positive assessment of Romania's commitment to take strong actions to address
macro-economic problems should be based on progress in two areas: a) continued
successful implementation of the existing short-term adjustment programmes agreed
with the International Monetary Fund and the World Bank, as well as with the EU and
b) establishment of a medium term economic strategy (MTES) geared to EU
accession and approved by the Romanian authorities, in close co-operation with the
European Commission and the International Financial Institutions.

In the context of the EU accession process, the aim of the MTES is to commit the
authorities to undertake the necessary reforms, which would establish the sound
microeconomic and macroeconomic foundations for the resumption of sustainable
growth and for meeting the Copenhagen economic criteria in the medium term.

The Medium Term Economic Strategy was adopted by the government on 16 March
2000. This strategy was endorsed by all political parties, the government and the
President of Romania. The Strategy was reinforced by a more detailed Action Plan
that was adopted by the government at the end of May 2000.

In the process of elaboration of the MTES and the Action Plan by the Romanian
authorities, the services of the Commission, in close co-operation with the staff of the
International Monetary Fund and the World Bank, have provided technical advice,
notably through joint comments on successive drafts of the strategy and the Action
Plan.

2

At the General Affairs Council of 20 March 2000, the Commission gave a progress
report and informed the Council that it would provide an assessment of the MTES
once the implementing arrangements (i.e. the Action Plan) were finalised. The present
Communication meets this commitment. It briefly recalls the developments that have
led to the establishment of the MTES and the Action Plan, makes an assessment of
both documents and stresses key issues for the future, notably how to monitor the
implementation of the MTES and the Action Plan.

2.

THE MEDIUM TERM ECONOMIC STRATEGY AND THE ACTION PLAN.
DESCRIPTION AND ASSESSMENT.

The Medium Term Economic Strategy and the Action Plan are complementary
documents that were both adopted by the government. The MTES document sets the
very broad strategic orientations;
elaborated in co-operation with
it was
representatives of political parties, trade unions, employers' associations and other
representatives of the civil society (including churches and industrial federations). At
the time of the adoption of the MTES by the government on 16 March, the President
of Romania, the Prime Minister and the leaders of the 16 main political parties
adopted a Political Declaration in which they reaffirm their backing to accession to
the European Union and pledge to support the implementation of the principles of the
MTES as one crucial element in the country's EU accession efforts.

The document makes a good analysis of the existing situation of the economy and
identifies the main structural,
institutional and macroeconomic weaknesses. The
overall key objective of the strategy is to ensure that the Romanian economy is ready
for accession by 2007. Four broad intermediate objectives are identified: 1) the
clarification of ownership rights; 2) the adoption of the missing economic regulations
to fill existing legal gap and inconsistencies; 3) the improvement
in financial
discipline and 4) the reduction of the informal sector.

However,
the document did not contain a policy matrix or an implementation
timetable. In the nature of a document produced by a consensus approach, operational
policy prescriptions were not covered in detail and some key policy areas were
entirely overlooked. Examples of these areas where greater detail would have been
useful are competition, privatisation, structural adjustment, and accelerating the
privatisation of large enterprises.

In these circumstances, the adoption of the Action Plan at the end of May 2000,
together with a macroeconomic scenario underlying the economic strategy,
represented a considerable improvement and a commendable effort by the
government to produce a detailed and coherent implementation plan for the MTES.

The Action Plan addresses the difficult and pressing issues of economic reform in a
constructive and realistic manner. It spells out specific economic reforms and
provides a timetable for their implementation. In addition, it is coherent with other
international commitments of the Romanian government in the area of economic
policies, in particular the International Monetary Fund's Stand-by arrangement and the
World Bank's Structural Adjustment Loans.

3

The main goal of the Action Plan is to achieve lasting macroeconomic stabilisation in
2-3 years, through a combination of strict macroeconomic policies and structural
reforms in the enterprise and financial sectors. According to the macroeconomic
framework, real GDP growth should reach 6% in 2004. This would be accompanied
by a reduction of inflation to 9% in December 2004, a stabilisation of the fiscal deficit
at 3% of GDP over the entire 2000-2004 period and the reduction of unemployment to
about 9% of the labour force by 2004. In addition, for achieving the economic
potential of the country, preparing for EU accession and addressing the medium
term/long term challenges of the country, the Action Plan spells out a number of
important reforms, notably in health care, pension system, education, infrastructure
development, etc.

In general, macroeconomic policy measures are appropriate. In the area of fiscal
policy, the main objectives of the Action Plan are the need to better control public
expenditures, improve fiscal policy sustainability and reduce payment arrears in the
economy.

In the monetary and exchange rate area, the Action Plan stresses the need for strict
monetary policy in the short term in order to tackle inflation, create a stability-
oriented monetary environment and prepare for making progress on nominal and real
convergence.

The measures outlined in the areas of fiscal and financial sector reform, privatisation,
restructuring of public utilities and trade policy are particularly important and
appropriate. Their determined and timely implementation would be key to
strengthening the microeconomic foundations for a resumption of sound and stable
growth.

The assessment of the Commission is that most of the measures contained in the
Action Plan are appropriate. The Commission has certain technical reservations on
their consistency with the macroeconomic framework. However, when implemented,
the measures will serve to increase legislative certainty, win Romania increased
credibility on financial markets, both internally and externally, and, in turn, help to
improve the overall economic situation of the country and increase the well-being of
its population. Such changes will support Romania’s efforts to join the European
Union. The Commission realises that carrying out many of these reforms will be a
difficult process and will make sure that its pre-accession oriented financial assistance
will address these issues.

3.

FOLLOW-UP

The Medium Term Economic Strategy and of the Action Plan adopted by the
Romanian government
important and welcome steps to devise and
implement more coherent economic policies that would support and lend additional
credibility to their pre-accession efforts.

represent

However, developments over the last ten years show that sustained and coherent
implementation of economic programmes has been extremely difficult in Romania.
Indeed, the lack of a clear medium term strategy in recent years has been a key factor
leading to the failure of the successive adjustment programmes of the International

4

Financial Institutions. In addition, the recent troubles in the financial sector clearly
demonstrate the need to implement the reforms set out in the MTES in a full and
timely manner.

The scale and extent of the economic problems in Romania are very substantial. The
Commission considers that the sustained implementation of the MTES and the Action
Plan would allow Romania to not only improve the living standards of the Romanian
population but also to improve its chances of meeting the Copenhagen economic
criteria for accession to the European Union. In this sense the implementation of the
reforms outlined in the MTES and the Action Plan can be seen as a fundamental
element
implementation of these
reforms will have the additional advantages of enhancing the capacity of Romania to
attract much-needed foreign direct investment as well as funds from the international
financial community. On the other hand, failure to implement these reforms would
have unfavourable consequences on the pre-accession process and the capacity of
Romania to fulfil the commitments made in the accession negotiations.

in the authorities’ pre-accession strategy. Full

As a consequence, the Commission attaches particular importance to the monitoring
of the implementation of the MTES, in close co-operation with the International
Financial Institutions and the member States. The Commission intends to take
progress in the implementation of the MTES and the Action Plan into account in the
Regular Reports on Romania's progress towards membership, in the regular meetings
of the institutions of the Europe Agreement as well as when it will consider the
disbursement of the second tranche of the EC macro-financial assistance loan, worth
EURO 200 million, granted by the Council in November 1999.

In addition, the Commission intends to:

• Set up an independent monitoring group which would report to the Romanian

government;

• Set up an international

the
International Monetary Fund and the World Bank will be invited to contribute
together with the Commission’s representatives;

to which representatives of

review process,

• Organise regular consultations between the international monitoring group and the
Romanian authorities, with a view to review the implementation of the MTES and
the Action Plan.

5