COMMUNICATION FROM THE COMMISSION TO THE COUNCIL Assessment of the action taken by Lithuania and Romania  in response to the Council Recommendations of 16 February 2010 with a view to bringing an end to the situation of excessive government deficit
Date: 2010-09-21
Institutions: European Commission
Subjects: Lithuania, Romania, budget deficit, budgetary control, public debt, public finance

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EUROPEAN COMMISSION 

Brussels, 21.9.2010 
COM(2010) 495 final 

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of the action taken by Lithuania and Romania 

in response to the Council Recommendations of 16 February 2010 with a view to 
bringing an end to the situation of excessive government deficit  

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL 

Assessment of the action taken by Lithuania and Romania 

in response to the Council Recommendations of 16 February 2010 with a view to 
bringing an end to the situation of excessive government deficit  

1. 

THE APPLICATION OF THE STABILITY AND GROWTH PACT IN THE CURRENT CRISIS 
SITUATION 

The vast majority of EU Member States currently have general government deficits above the 
3%  of  GDP  reference  value  set  in  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU). The origin of the often strong deterioration in the deficit as well as the debt positions 
must  be  seen  in  the  context  of  the  unprecedented  global  financial  crisis  and  economic 
downturn in 2008/09. Several factors are at play. First, the economic downturn brought about 
declining  tax  revenue  and  rising  social  benefit  expenditure  (e.g.  unemployment  benefits). 
Second,  recognising  that  budgetary  policies  have  an  important  role  to  play  in  the  current 
extraordinary  economic  situation,  Member  States  implemented  a  European  Economic 
Recovery Plan (EERP). The Plan stipulated that the stimulus should be differentiated across 
Member States to reflect their different positions in terms of public finance sustainability and 
competitiveness.  Finally,  several  Member  States  took  measures  to  stabilise  the  financial 
sector, some of which have impacted on the debt position or constitute a risk of higher deficits 
and  debt  in  the  future,  although  some  of  the  costs  of  the  government  support  could  be 
recovered in the future. 

In  October  2009,  capitalizing  on  first  signs  of  a  recovery  in  sight,  the  European  Council 
endorsed a fiscal exit strategy based on the following principles: (i) The exit strategy should 
be coordinated across countries in the framework of consistent implementation of the Stability 
and Growth Pact. (ii) There is a need for timely withdrawal of the fiscal stimulus. Provided 
that  the  Commission  forecasts  continue  to  indicate  that  the  recovery  is  strengthening  and 
becoming self-sustaining, fiscal consolidation in all EU Member States should start in 2011 at 
the  latest.  Specificities  of  country  situations  should  be  taken  into  account,  and  a  number  of 
countries need to consolidate before then. (iii) In view of the challenges, the planned pace of 
the fiscal consolidation should be ambitious, and will have to go well beyond the benchmark 
of 0.5% of GDP per annum in structural terms in most Member States. (iv) Important flanking 
policies  to  the  fiscal  exit  will  include  strengthened  national  budgetary  frameworks  for 
underpinning  the  credibility  of  consolidation  strategies  and  measures  to  support  long-term 
fiscal sustainability, as emphasised by the SGP. In addition, structural reform efforts should 
be  strengthened  to  enhance  productivity  and  to  support  long-term  investment.  These 
principles  for  fiscal  exit  have  been  put  into  operation  in  the  recommendations  issued  in  the 
context of the excessive deficit procedures as well as in the latest round of annual assessment 
of  Stability  and  Convergence  Programmes.  The  deadlines  for  correction  and  required 
structural efforts have been differentiated across Member States, taking into account country-
specific circumstances.  

The  stimulus  measures  in  the  context  of  the  EERP  coupled  with  the  measures  taken  to 
stabilise  the  financial  sector  have  prevented  an  economic  meltdown  and  laid  the  foundation 
for  a  recovery.  The  Commission  services'  spring  2010  forecast  and  in  particular  also  the 

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September  2010  interim  forecast  confirm  the  outlook  of  gradual  recovery  consistent  with 
withdrawal of fiscal stimulus.  

On 16 February 2010, the Council addressed (revised) recommendations under Article 126(7) 
TFEU to Lithuania and Romania with a view to bringing the situation of an excessive deficit 
to an end by 20121. These recommendations were based on the Commission services’ autumn 
2009 forecast and on the agreed principles of the fiscal exit strategy. The Council set the date 
of 16 August 2010 for taking effective action in response to the recommendations.  

According to Regulation (EC) No 1467/972 and the revised Code of Conduct3 a Member State 
should  be  considered  to  have  taken  effective  action  if  it  has  acted  in  compliance  with  the 
Article  126(7)  TFEU  recommendation.  The  Code  of  Conduct  states  that  the  assessment  of 
effective  action  should  in  particular  take  into  account  whether  the  Member  State  concerned 
has  achieved  the  annual  improvement  of  its  cyclically  adjusted  balance,  net  of  one-off  and 
other  temporary  measures,  initially  recommended  by  the  Council.  In  case  the  observed 
adjustment  proves  to  be  lower  than  recommended,  a  careful  analysis  of  the  reasons  for  the 
shortfall should be made. In case of a multi-annual adjustment, the Code of Conduct specifies 
that the assessment should mainly focus on the measures taken in order to ensure an adequate 
fiscal adjustment in the year following the identification of the excessive deficit. 

Against  this  background,  the  Commission  has  made  an  assessment  of  action  taken  by 
Lithuania and Romania in response to the Council’s recommendations4.  

In particular, for Romania, the implementation of additional fiscal consolidation measures of 
around  5%  of  GDP  on  an  annual  basis  has  put  Romania  on  track  to  achieve  the  2010 
government  deficit  target  agreed  in  the  context  of  the  multilateral  financial  assistance 
programme. Large carry-overs from the 2010 consolidation measures and planned additional 
savings on the expenditure side should allow a further reduction of the deficit to below 5% of 
GDP in 2011. The measures taken are an important step towards restoring a sustainable fiscal 
position and macroeconomic stability. At the same time, significant risks exist. In particular, it 
will be crucial that fiscal consolidation measures remain in place and that their effects are not 
offset  by  other  policies.  Moreover,  the  authorities  should  continue  to  rigorously  implement 
the reforms agreed in the context of the multilateral financial assistance programme.  

Lithuania  has  implemented  significant  corrective  fiscal  measures  as  planned  in  the  2010 
budget,  estimated  to  generate  savings  of  above  3%  of  GDP.  The  authorities  also  adopted 
several  measures  for  2011  and  have  outlined  in  some  detail  the  consolidation  strategy 
necessary for a correction of the excessive deficit by 2012, as recommended by the Council. 
However,  considerable  adjustment  is  still  needed  in  the  coming  years.  The  2011  budget 
should include further significant measures, thereby also replacing temporary measures with 
more  lasting  and  structural  measures.  If  economic  and  budgetary  conditions  turn  out  better 

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4 

An overview of all past and ongoing EDP procedures is available at: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm 
OJ L 209, 2.8.1997, p. 6. 
“Specifications  on  the  implementation  of  the  Stability  and  Growth  Pact  and  guidelines  on  the  format 
and  content  of  stability  and  convergence  programmes”,  endorsed  by  the  ECOFIN  Council  of  7 
September 2010, available at: 
http://ec.europa.eu/economy_finance/sgp/deficit/legal_texts/index_en.htm. 
For Malta, which also received recommendations under Article 126(7) TFEU on 16 February 2010, the 
assessment  has  been  postponed  until  after  the  presentation  2011  budget,  in  view  of  the  Council’s 
recommendation to Malta to put an end to the excessive deficit situation by 2011. 

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than previously expected, it would be important to aim at accelerating the consolidation and 
overachieving  the  targets.  Proposals  to  strengthen  the  enforceability  of  the  medium-term 
fiscal  framework  and  the  budget  execution  monitoring,  as  well  as  structural  reforms 
(especially of the social security system), are welcome, but the authorities are invited to step 
up their efforts in these areas. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure are needed at present.  

2. 

LITHUANIA 

2.1. 

The excessive deficit procedure and most recent recommendations 

On  7  July  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Lithuania  in 
accordance  with  Article  104(6)  of  the  Treaty  establishing  the  European  Community  (TEC). 
The  most  recent  Council  Recommendation  under  Article  126(7)  TFEU  was  adopted  on  16 
February 20105.  

The Council recommended Lithuania to put an end to the present excessive deficit situation 
by 2012. The Lithuanian authorities should bring the general government deficit below 3 % of 
GDP  in  a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term  framework. 
Specifically,  to  this  end,  the  Lithuanian  authorities  should:  (a)  implement  rigorously  the 
corrective  measures  planned  in  the  budget  for 2010  and  adopt  additional  measures,  if 
necessary, to achieve the envisaged-consolidation; (b) ensure an average annual fiscal effort 
of  at  least  2¼%  of  GDP  over  the  period  2010-2012,  notably  by  containing  primary  current 
expenditure; (c) specify and adopt the additional measures necessary to achieve the correction 
of the excessive deficit by 2012, cyclical conditions permitting, and accelerate the reduction 
of the deficit if economic or budgetary conditions turn out better than currently expected; to 
this  end  adopt  and  swiftly  implement  the  planned  structural  reforms  entailing  significant 
budgetary savings.  

In addition, to limit risks to the adjustment, Lithuanian authorities should enhance the medium 
term  budgetary  framework,  including  by  strengthening  fiscal  governance  and  transparency 
and  reinforcing  expenditure  discipline,  through  enforceable  ceilings,  as  well  as  improve  the 
monitoring  of  the  budget  execution  throughout  the  year.  The  medium  term  budgetary 
framework  needs  to  be  enhanced  by  introducing  necessary  forward-looking  elements  and 
mechanisms to avoid pro-cyclicality. 

The  Council  established  the  deadline  of  16  August  2010  for  the  Lithuanian  government  to 
take effective action to implement the recommended fiscal consolidation in 2010 as planned 
in  the  budget  for  2010  and  to  outline  the  consolidation  strategy  that  will  be  necessary  to 
progress  towards  the  correction  of  the  excessive  deficit.  The  assessment  of  effective  action 
will  take  into  account  economic  developments  compared  to  the  economic  outlook  in  the 
Commission services' autumn 2009 forecast. 

5 

All EDP-related documents for Lithuania can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

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2.2. 

Assessment of effective action taken 

is  more  favourable 

According to the Commission services' spring 2010 forecast, the outlook for real activity in 
Lithuania 
its 
recommendations  in  February  2010.  After  a  very  sharp  recession  in  2009,  with  real  GDP 
falling by 14.8%, real GDP is expected to fall by 0.6% in 2010 and to grow by 3.2% in 2011, 
while in autumn 2009 the Commission services projected a fall of 3.9% and growth of 2.5%. 
The expected recovery of Lithuania’s economy was recently confirmed, with annual growth 
turning positive in the second quarter of 2010 (+1.3%). 

than  expected  at 

the  Council 

issued 

time 

the 

The  government  deficit  reached  8.9%  of  GDP  in  2009  due  to  a  very  severe  downturn  and 
despite substantial consolidation measures of around 8% of GDP adopted during 2009, which 
was still a better outcome than the 9.8% of GDP expected by the Commission services and the 
authorities  in  autumn  2009.  This  is  explained  by  a  lower  expenditure  ratio  by  almost  3 
percentage points of GDP, partly offset by lower-than-expected revenue ratio by 2 percentage 
points.  

Regarding  2010,  the  authorities  broadly  implemented  the  deficit-reducing  measures  planned 
in the budget for 2010 as recommended by the  Council. The  significant savings package of 
above  3%  of  GDP  included  in  the  2010  budget  was  implemented  by  the  authorities  in  the 
course  of  the  year.  Hence  sizeable  cuts  in  expenditure  have  been  put  in  place  as  foreseen, 
particularly  in  government  current  spending  (1.7%  of  GDP),  including  notably  the  public 
sector wage bill, and as regards social benefits, among them pensions and maternity benefits 
(1.3% of GDP). On the revenue side changes are limited to a full year effect of the VAT rate 
increase in September 2009 (0.7% of GDP), a reduction in the corporate income tax rate and 
some increases in non-tax revenues. Some other expenditure items such as interest payments 
and  capital  expenditure,  due  to  national  co-financing  of  EU  funds,  are  set  to  increase.  The 
deficit target for 2010 of 9.5% originally envisaged in the 2010 budget was changed to 8.1% 
of GDP in the February 2010 convergence programme, reflecting the clearly more favourable 
economic developments compared to what assumed in the budget. The Commission services' 
spring 2010 forecast projects a somewhat higher deficit of 8.4% of GDP. The difference with 
the new official target is largely due to lower nominal growth projected in the spring forecast. 
Overall, the budgetary results seem to be slightly better than planned and the budgetary target 
put  forward  by  the  Lithuanian  authorities  in  the  February  2010  convergence  programme 
appears achievable. 

likely 

the  structural  effort 

to  significantly  underestimate 

The  calculation  of  the  fiscal  effort  undertaken  by  the  Lithuanian  authorities  is  strongly 
affected  by  the  large  revisions  in  potential  growth  following  the  strong  growth  of  the 
Lithuanian economy before the crisis. The latest estimates using the standard methodologies 
are 
these  exceptional 
circumstances, as they produce a relatively small deterioration in the output gap in 2010, and 
are unlikely to fully reflect the behaviour of budgetary components in this very extreme cycle. 
This  implies  that  only  a  marginal  part  of  the  ongoing  deterioration  in  the  government 
revenues  and  expenditures  is  imputed  to  the  cyclical  component.  Given  the  small 
improvement  in  the  nominal  budget  balance  expected  in  2010,  the  effects  described  above 
result in a change in the structural balance in 2010 of just ⅓% of GDP. However, most recent 
estimates of revenue developments suggest a deterioration of close to 2% of GDP in 2010, in 
spite  of  the  government  taking  a  number  of  revenue-increasing  discretionary  measures  in 
order  to  contain  the  shortfall.  At  the  same  time,  the  government  managed  to  reduce  total 
expenditure,  in  spite  of  the  cyclical  increase  in  unemployment  expenditure.  The  above 
considerations  and  the  estimated  fiscal  impact  (using  the  bottom-up  method)  of  the 

in 

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consolidation  measures  undertaken  in  the  2010  budget  and  currently  under  implementation 
suggest that the structural effort in 2010 could be close to if not higher than the 2¼% of GDP 
(on average over 2010-2012) recommended by the Council.  

Despite the sizeable fiscal consolidation already implemented in 2009 and 2010, a significant 
further  adjustment  is  needed  in  the  coming  years  to  achieve  the  correction  of  the  excessive 
deficit  by  2012.  In  this  respect,  the  2011  budget  is  an  important  step  to  deliver  an  essential 
part  of  the  necessary  consolidation.  The  authorities  have  already  adopted  several  measures 
affecting  2011,  ahead  of  the  preparations  of  the  2011  budget,  however,  most  of  them  are  a 
continuation of existing measures, and some remain of temporary nature. The cuts in public 
employee  wages,  which  have  been  decreased  several  times  in  2009,  reducing  both  the  base 
and  the  coefficients,  were  extended  to  2011,  prolonging  the  estimated  savings  of  0.5%  of 
GDP achieved in the previous year, but leaving doubts as to its continuation in the future if 
the economic conditions improve. Also, the reduction in transfers to the second-pillar pension 
funds, previously reduced only for the period of 2009-2010, was extended until the economic 
situation  improves.  This  represents  savings  of  around  0.6%  of  GDP  in  the  short  term, 
although it affects negatively the long-term sustainability of the public finances and being a 
temporary measure it does not contribute to the structural consolidation. The reduced sickness 
leave  benefits  have  also  been  extended  (0.1%  of  GDP).  In  addition  to  the  prolongation  of 
measures already decided in previous years, budgetary savings would be generated by some 
structural changes, which include reduced maternity benefits from July 2011. The full effect 
of  this  change  is  estimated  to  generate  savings  of  around  0.35%  of  GDP  in  2011  and  of 
around  0.7%  of  GDP  annually  in  the  following  years.  As  the  above-mentioned  measures 
extending the validity of earlier cuts were already included in the Commission services' spring 
forecast,  except  the  reduction  in  the  transfers  to  the  second  pillar  pension  funds,  the  deficit 
projections for 2011 by the Commission are not changed significantly by the measures taken 
so  far,  and  additional  measures  of  around  1⅔%  of  GDP  appear  still  needed  to  achieve  the 
required  consolidation  in  2011.  Therefore,  the  2011  budget  should  include  further 
consolidation measures to reach a deficit of below 6% of GDP in line with the targets set out 
in  the  February  2010  convergence  programme  and  to  comply  with  the  Council's 
recommendation.  

Replacing temporary measures with more lasting and structural measures, would contribute to 
strengthening the quality of the consolidation, thus supporting the long-term sustainability of 
public finances. Furthermore, considering the large adjustment in the coming years, it would 
be  important  for  the  government  to  aim  at  accelerating the consolidation  and  overachieving 
the  targets  to  the  extent  that  the  economic  and  budgetary  conditions  turn  out  better  than 
previously expected. The next convergence programme should provide essential details of the 
fiscal strategy underpinning the necessary consolidation until 2012.  

The February 2010 convergence programme targets a gradual reduction of the deficit to 3% of 
GDP  by  2012,  the  correction  deadline  set  by  the  Council.  To  reach  the  targets,  quantified 
consolidation  efforts  on  both  revenue  and  expenditure  side  of  the  budget  are  envisaged  but 
still need to be backed up by specified measures as recommended by the Council.  

Regarding  the  Council's  recommendation  to  strengthen  the  budgetary  medium-term 
framework,  a  new  concept  paper  on  the  reform  of  the  budget  planning  and  execution 
framework  has  been  prepared  and  is  currently under discussion, aiming at its submission in 
autumn 2010. In particular, a number of measures to increase transparency and monitoring of 
the  budgetary  process  by  presenting  and  publishing  government  budget  indicators  based  on 
the ESA 95 classifications are being discussed. Fiscal stance and fiscal impulse indicators are 

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to  be  introduced  in  the  budgetary  preparation  process.  So  as  to  improve  enforcement,  an 
automatic obligation to implement an anti-inflationary fiscal policy, based on the output gap 
indicators,  is  proposed.  Implementation  of  these  measures,  especially  as  regards  the 
monitoring of the budget execution, as well as a strengthening of the multi-annual budgetary 
framework  needs  to  be  stepped  up  in  view  of  ensuring  compliance  with  the  Council 
recommendation over the next years. 

As  recommended,  Lithuania  is  also  further  advancing  with  implementation  of  structural 
reforms. A concept paper on the social security reform was adopted in June 2010; the reform 
is to take place in two stages. The first stage is nearly completed and among other measures, it 
includes  a  gradual  increase  in  retirement  age  as  of  2012  to  improve  the  long-term 
sustainability of public finances. The Parliament still has to vote on this measure in autumn.  

On  27  August  2010,  the  Lithuanian  authorities  submitted  a  voluntary  report  on  the  action 
taken in response to the Council recommendation of February 2010. The report referred to the 
measures  implemented  in  2010,  which  would  allow  achieving  the  envisaged  consolidation, 
outlined measures under preparation in view of adoption of the 2011 budget and reiterated the 
commitment  to  take  further  measures  to  correct  the  deficit  by  2012.  It  also  provided 
information  about  the  progress  on  structural  reforms  and  enhancing  the  medium-term 
budgetary framework.  

2.3. 

Conclusions 

On  current  information  it  appears  that  Lithuania  has  taken  action  representing  adequate 
progress  towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the 
Council.  In  particular,  Lithuania  has  implemented  in  2010  significant  corrective  fiscal 
measures as planned in the 2010 budget, estimated to generate savings of above 3% of GDP.  

As  considerable  adjustment  is  still  needed  in  the  coming  years  in  order  to  bring  the  deficit 
below 3% of GDP in 2012, further measures underpinning the envisaged consolidation will be 
needed  in  the  outer  years.  The  Lithuanian  authorities  already  adopted  several  measures  for 
2011 and have outlined in some detail the consolidation strategy that is necessary to progress 
towards  the  correction  of  the  excessive  deficit  by  2012,  the  deadline  recommended  by  the 
Council.  The  2011  budget  to  be  adopted  in  autumn  should  include  further  significant  and 
lasting  measures  necessary  to  reach  the  fiscal  targets  presented  in  the  convergence 
programme. Replacing temporary measures with more lasting and structural measures, would 
contribute  to  strengthening  the  quality  of  the  consolidation,  thus  supporting  long-term 
sustainability of public finances.  

Furthermore, in line with the Council recommendation and considering the large adjustment 
in  the  coming  years,  it  would  be  important  for  the  government  to  aim  at  accelerating  the 
consolidation  and  overachieving  the  targets  to  the  extent  that  economic  and  budgetary 
conditions  are  turning  out  better  than  previously  expected.  The  Lithuanian  authorities  have 
initiated work to strengthen the enforceability of the medium-term fiscal framework and the 
budget execution monitoring. The government also pursued structural reforms, especially of 
the social security system, which should improve long-term sustainability of public finances. 
These  measures  are  welcome  and  the  authorities  are  invited  to  step  up  their  efforts  in  these 
areas. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Lithuania are needed at present. The Commission will continue 

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to closely monitor budgetary developments in Lithuania in accordance with the Treaty and the 
SGP, in particular in the light of the fragile situation of public finances. 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 
Output gap1 
(% of potential GDP) 
General government balance 
(% of GDP) 
Primary balance 
(% of GDP) 
Cyclically-adjusted balance1 
(% of GDP) 
Structural balance2 
(% of GDP) 
Government gross debt 
(% of GDP) 

Notes:  

2007 

2008 

2009 

2010 

2011 

2012 

COM  
CP 
COM  
CP 
COM  
CP 
COM  
CP 
COM  
CP 
COM  
CP 
COM  
CP 

9.8 
n.a. 
10.1 
n.a. 
-1.0 
n.a. 
-0.3 
n.a. 
-3.7 
n.a. 
-3.1 
n.a. 
16.9 
n.a. 

2.8 
2.8 
9.0 
8.8 
-3.3 
-3.2 
-2.6 
-2.6 
-5.7 
-5.6 
-5.6 
-6.0 
15.6 
15.6 

-15.0 
-15.0 
-8.2 
-7.7 
-8.9 
-9.1 
-7.9 
-7.8 
-6.7 
-7.0 
-7.1 
-7.2 
29.3 
29.5 

-0.6 
1.6 
-8.6 
-5.9 
-8.4 
-8.1 
-6.8 
-6.2 
-6.1 
-6.5 
-6.8 
-6.8 
38.6 
36.6 

3.2 
3.2 
-6.4 
-2.9 
-8.5 
-5.8 
-6.6 
-3.6 
-6.8 
-5.0 
-6.8 
-4.8 
45.4 
39.8 

n.a. 
1.2 
n.a. 
-1.7 
n.a. 
-3.0 
n.a. 
-0.6 
n.a. 
-2.6 
n.a. 
-2.3 
n.a. 
41.0 

1 Output gaps and cyclically-adjusted balances according to the programmes as recalculated by 
Commission services on the basis of the information in the programmes. 
2 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Source: Commission services’ 2010 spring forecast (COM) and February 2010 convergence 
programme update (CP) 

3. 

ROMANIA 

3.1. 

Excessive deficit procedure and most recent recommendations 

On  7  July  2009,  the  Council  decided  that  an  excessive  deficit  existed  in  Romania  in 
accordance  with  Article  104(6)  TEC.  The  most  recent  Council  Recommendation  under 
Article 126(7) of the TFEU was adopted on 16 February 20106.  

The Council recommended Romania to put an end to the present excessive deficit situation by 
2012.  The  Romanian  authorities  should  bring  the  general  government  deficit  below  3%  of 
GDP  in  a  credible  and  sustainable  manner  by  taking  action  in  a  medium-term  framework. 
Specifically,  to  this  end,  Romania  should:  (a)  implement  the  fiscal  measures  in  2010  as 
planned in its budget law and continue consolidation in 2011 and 2012; (b) ensure an average 
annual fiscal effort of 1¾ % of GDP over the period 2010-2012; (c) specify the measures that 
are  necessary  to  correct  the  excessive  deficit  by  2012,  cyclical  conditions  permitting,  and 
accelerate the reduction of the deficit if economic or budgetary conditions turn out better than 
currently expected. 

To limit risks to the adjustment, the Council also recommended that the Romanian authorities 
continue implementing the measures to improve fiscal governance agreed in the framework of 
the  multilateral  financial  assistance  programme.  In  particular,  the  Council  considered  that 

6 

All EDP-related documents for Romania can be found at the following website: 
http://ec.europa.eu/economy_finance/sgp/deficit/countries/index_en.htm. 

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adoption  and  implementation  of  the  Fiscal  Responsibility  Law  would  greatly  enhance  the 
credibility and predictability of public finances through, among others, the creation of a fiscal 
council, setting up a binding medium-term fiscal framework, ensuring more cautious revenue 
forecasts  and  establishing  limits  on  budget  revisions  during  the  year.  The  Council 
recommended Romania to adopt and implement the draft pension reform to improve the long-
term sustainability of public finances, while safeguarding adequate replacement rates. 

The Council established the deadline of 16 August 2010 for Romania to take effective action 
to implement the fiscal consolidation measures in 2010, as planned in the 2010 budget, and to 
outline the consolidation strategy towards the correction of the excessive deficit. It specified 
that  the  assessment  of  effective  action  will  take  into  account  economic  developments 
compared to the economic outlook in the Commission services' autumn 2009 forecast.  

3.2. 

Assessment of effective action taken 

In July 2010 the Commission services updated their macroeconomic forecast for Romania in 
the  context  of  the  implementation  of  the  multilateral  (EU/IMF/WB)  financial  assistance 
programme.  The  new  forecast  projects  real  GDP  to  contract  by  1.9%  this  year,  which  is  a 
substantial downward revision compared to the 0.5% GDP increase projected in the Autumn 
2009 Commission services' forecast and the 1.3% increase expected at the time of the Council 
Recommendation  under  Article  126(7)  TFEU  in  February  2010.  The  worse  than  expected 
economic conditions reflect the negative impact of financial turbulences in the region in the 
first two quarters of 2010, the floods in the northern part of Romania in the spring, and the 
expected  short  term  demand  effects  of  the  additional  fiscal  consolidation  measures 
implemented  by  the  government  in  July  2010.  In  July  2010,  the  Commission  services  have 
also revised the growth projection for 2011 downward to 1.5% from 2.6% at the time of the 
Article 126(7) recommendation.  

The  fiscal  consolidation  measures  included  in  the  2010  budget  law  were  implemented  as 
planned.  However,  these  measures  did  not  deliver  the  expected  savings  and,  with  the 
worsening  of  economic  conditions,  the  fiscal  situation  continued  to  deteriorate.  During  the 
multilateral  financial  assistance  mission  in  May  2010,  it  appeared  that  under  unchanged 
policies  the  2010  government  deficit  target  of  6.4%  of  GDP  would  be  missed  by  a  large 
margin  (about  3  percentage  points  of  GDP),  mostly  due 
to  substantial  revenue 
underperformance. The 2010 government deficit target was revised upward to 7.3% of GDP. 
To reach the revised target, the authorities took additional consolidation measures including a 
25% reduction in public wages, a 15% reduction in social spending excluding pensions and an 
increase in the main VAT rate from 19% to 24%. In addition, the authorities decided to cut 
spending on goods and services by 10% and early retirements were frozen from 1st June 2010 
until after the pension reform is in effect (1 January 2011). Social contributions and personal 
income  tax  bases  were  broadened,  and  a  turnover  tax  on  medical  suppliers  and  distributors 
was  introduced.  The  authorities  also  committed  to  further  reduce  personnel  in  the  coming 
months,  on  top  of  cuts  in  the  first  half  of  2010  exceeding  25000  jobs.  The  consolidation 
measures agreed since the adoption of the Council Recommendation in February 2010 add up 
to  about  5%  of  GDP  on  an  annual  basis  and,  assuming  continued  rigorous  budgetary 
execution, place the country on track to reach the revised 2010 government deficit target.  

The authorities aim to further reduce the general government deficit in 2011 to below 5% of 
GDP. Provided that the fiscal austerity package implemented in 2010 remains fully in place 
the carryover from the 2010 fiscal consolidation measures (about 2½% of GDP) and planned 
additional savings  on the expenditure side (in 2011  the authorities plan  to  reform the social 

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assistance  system,  reduce  energy  subsidies,  freeze  pensions  in  nominal  terms,  and  further 
reduce  public  employment)  should  be  sufficient  to  reach  this  target,  assuming  rigorous 
budgetary  execution.  Overall,  under  unchanged  policies  the  consolidation  measures  adopted 
and planned by the authorities should lead to improvements in the structural balance by some 
3% of GDP in both 2010 and 2011, above the average of 1¾% recommended by the Council. 

The authorities' Medium Term Budgetary Strategy for 2011-13 targets a deficit of 3% of GDP 
in  2012,  in  line  with  the  Council  Recommendation.  Assuming  that  the  fiscal  consolidation 
package  for  2010-11  is  fully  implemented  and  moderate  expenditure  restraint  in  2012,  this 
objective  appears  attainable.  A  fiscal  effort  –  as  measured  by  the  improvement  in  the 
structural  balance  –  of  about  1%  of  GDP  would  be  needed  in  2012,  under  the  assumptions 
made above, to reduce the headline government deficit to 3% of GDP.  

In parallel with fiscal consolidation, Romania has made progress with the implementation of 
structural  reforms.  A  Fiscal  Responsibility  Law  was  adopted  by  Parliament  on  30  March 
2010.  A  Fiscal  Council  has  been  created  and  is  now  operational  –  it  examined  the  2011-13 
medium term budgetary strategy during the summer. A draft pension reform had been adopted 
by the government and is planned to be passed in Parliament by mid-September. The reform 
would strongly improve the long term sustainability of government finances, while preserving 
minimum  social  standards.  Progress  has  also  been  made  regarding  the  wage  reform  in  the 
public sector, but important follow-up legislation remains to be adopted.  

Finally, the authorities have placed increasing the absorption of EU Funds at the top of their 
priorities'  list  in  order  to  address  the  exceptionally  low  absorption  rate  (around  1.5%). 
Measures have been taken to strengthen the administrative capacity of the relevant structures, 
streamline administrative procedures, increase the effectiveness of public procurements, and 
facilitate access to project co-financing through special guarantee facilities. The effectiveness 
of these measures remains however to be verified.  

3.3. 

Conclusions 

On  current  information  it  appears  that  Romania  has  taken  action  representing  adequate 
progress  towards  the  correction  of  the  excessive  deficit  within  the  time  limits  set  by  the 
Council.  

In particular, the implementation of additional fiscal consolidation measures of around 5% of 
GDP on an annual basis (including a 25% cut in public wages, a 15% cut in social benefits 
excluding pensions and an increase in the VAT rate from 19% to 24%) has put Romania on 
track to achieve the 2010 government deficit target agreed in the context of the multilateral 
financial  assistance  programme  (7.3%  of  GDP).  In  addition,  the  large  carry-overs  from  the 
2010 fiscal consolidation measures and the planned additional savings on the expenditure side 
should  allow  a  further  reduction  of  the  deficit  to  below  5%  of  GDP  in  2011.  Moreover, 
Romania  remains  committed  to  reducing  its  deficit  below  3%  of  GDP  in  2012,  and  this 
objective appears attainable.  

The  measures  taken  by  Romania  following  the  Council  Recommendation  are  an  important 
step towards restoring a sustainable fiscal position and macroeconomic stability. At the same 
time, significant risks exist. In particular,  it  will be crucial going forward to ensure that the 
implemented fiscal consolidation measures remain in force and that their effects are not offset 
by  other  policies.  Moreover,  the  authorities  should  continue  to  rigorously  implement  the 
reforms agreed in the context of the multilateral financial assistance programme.Declarations 

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about  new  costly  policy  initiatives  and  changes  to  the  consolidation  package  should  be 
avoided. These tend to fuel uncertainty, at a time when Romania needs to reassure investors 
regarding the predictability of its policies. 

In  view  of  the  above  assessment,  the  Commission  considers  that  no  further  steps  in  the 
excessive deficit procedure of Romania are needed at present. The Commission will continue 
to closely monitor budgetary developments in Romania in accordance with the Treaty and the 
SGP, in particular in the light of the fragile situation of public finances. 

Comparison of key macroeconomic and budgetary projections 

Real GDP 
(% change) 

Output gap2 
(% of potential GDP) 

General government 
balance 
(% of GDP) 

Primary balance 
(% of GDP) 

Cyclically-adjusted 
balance2 
(% of GDP) 

Structural balance3 
(% of GDP) 

Government gross debt 
(% of GDP) 

Note:  

COM Spring 2010 
Update COM 
forecast1 
CP 
COM Spring 2010 
Update COM 
forecast 
CP 
COM Spring 2010 
Update COM 
forecast 
CP 
COM Spring 2010 
Update COM 
forecast 
CP 
COM Spring 2010 
Update COM 
forecast 
CP 
COM Spring 2010 
Update COM 
forecast 
CP 
COM Spring 2010 
Update COM 
forecast 
CP 

2007  2008  2009  2010  2011  2012 
n.a. 
6.3 

-7.1 

7.3 

0.8 

3.5 

6.3 

6.3 
7.4 

7.4 

7.3 

7.3 
9.3 

9.2 

-7.1 

-1.9 

1.5 

-7.0 
-1.8 

1.3 
-3.9 

2.4 
-3.4 

4.4 

3.7 
n.a. 

-1.2 

-6.2 

-7.6 

-6.4 

7.4 
-2.5 

9.5 
-5.4 

-1.7 
-8.3 

-3.3 
-8.0 

-3.7 
-7.4 

-2.7 
n.a. 

-2.5 

-5.4 

-8.3 

-6.9 

-4.4 

-3.0 

-2.5 
-1.8 

-5.5 
-4.7 

-8.0 
-6.8 

-6.3 
-6.2 

-4.4 
-5.4 

-3.0 
n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

-1.8 
-4.7 

-4.8 
-8.2 

-6.5 
-7.8 

-4.5 
-6.9 

-2.6 
-6.4 

-1.6 
n.a. 

-4.7 

-8.2 

-7.9 

-5.0 

-2.1 

-1.0 

-4.7 
-4.7 

-8.5 
-7.7 

-7.5 
-8.3 

-5.2 
-7.1 

-3.2 
-6.4 

-2.1 
n.a. 

-4.7 

-7.7 

-8.4 

-5.2 

-2.1 

-1.0 

-4.7 
12.6 

-8.5 
13.3 

-7.5 
23.7 

-5.2 
30.5 

-3.2 
35.8 

-2.1 
n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

12.6 

13.6 

23.0 

28.3 

29.4 

29.7 

1 Updated forecast prepared in July 2010 by the Commission services in the framework of the multilateral 
financial assistance programme to Romania. 

2 Output gaps and cyclically-adjusted balances calculated by Commission services. 

3 Cyclically-adjusted balance excluding one-off and other temporary measures. 

Sources: Commission services' forecast from July 2010 in the context of the Balance of Payment 
assistance programme, Commission services’ 2010 spring forecast (COM) and March 2010 
convergence programme update (CP) 

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