Recommendation for a COUNCIL DECISION establishing that no effective action has been taken by Romania in response to the Council Recommendation of 5 December 2017
Date: 2018-05-23
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Romania, budget deficit, economic policy, economic reform, financial control, gross domestic product, multilateral surveillance, public finance, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 432 final  Recommendation for a COUNCIL DECISION establishing that no effective action has been taken by Romania in response to the Council Recommendation of 5 December 2017 {SWD(2018) 366 final}  
 
 
Recommendation for a 

COUNCIL DECISION 

establishing that no effective action has been taken by Romania in response to the 
Council Recommendation of 5 December 2017 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union,  
Having regard to Council Regulation (EC) No 1466/971, and in particular Article 10(2), fourth 
subparagraph, thereof, 

Having regard to the recommendation from the European Commission, 

Whereas:  

(1) 

(2) 

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On  16  June  2017,  the  Council  decided  in  accordance  with  Article  121(4)  of  the 
Treaty  on  the  Functioning  of  the  European  Union  ("TFEU")  that  a  significant 
observed  deviation  from  the  adjustment  path  toward  the  medium-term  budgetary 
objective  existed  in  Romania.  In  view  of  the  established  significant  deviation,  the 
Council  on  16  June  2017  issued  a  recommendation2  for  Romania  to  take  the 
necessary  measures  to  ensure  that  the  nominal  growth  rate  of  net  primary 
government expenditure3 does not exceed 3.3% in 2017, corresponding to an annual 
structural adjustment of 0.5% of GDP.  
On 5 December 2017 the Council concluded4 that  Romania  has  not  taken effective 
action in response to the Council Recommendation of 16 June 2017. On that basis, 
on 5 December 2017 the Council issued a revised recommendation5 for Romania to 
take  the  necessary  measures  to  ensure  that  the  nominal  growth  rate  of  net  primary 
government expenditure does not exceed 3.3% in 2018, corresponding to an annual 
structural adjustment of 0.8% of GDP. It also recommended that Romania uses any 
windfall gains for reduction of its deficit and that budgetary consolidation measures 
should secure a lasting improvement in the general government structural balance in 
a growth-friendly manner. The Council established a deadline of 15 April 2018 for 
Romania to report on the action taken in response to this recommendation. 

OJ L 209, 2.8.1997, p. 1. 
OJ C 216, 6.7.2017, p. 1. 
Net primary government expenditure is comprised of total government expenditure excluding interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  four-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 
OJ L 340, 20.12.2017, p. 49 
OJ C 439, 20.12.2017, p. 1 

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(3) 

(4) 

(5) 

(6) 

(7) 

On  10  and  11  April  2018,  the  Commission  undertook  an  enhanced  surveillance 
mission  in  Romania  for  the  purpose  of  on-site  monitoring  under  Article  -11(2)  of 
Council  Regulation  (EC)  No  1466/97.  After  having  transmitted  its  provisional 
findings  to  the  Romanian  authorities  for  comments,  the  Commission  reported  its 
findings to the Council on [23] May 2018. These findings were subsequently made 
public. The Commission report finds that the Romanian authorities do not intend to 
act  upon  the  Council  Recommendation  of  5  December  2017.  The  authorities 
confirmed to the mission that their target for 2018 remains the headline deficit of just 
below  3%  of  GDP.  Given  a  positive  and  increasing  output  gap,  this  indicates  a 
further  deterioration  of  the  underlying  structural  deficit,  contrary  to  the  Council 
recommendation and reflects a clearly expansionary fical policy. 

On  20  April  2018,  after  the  deadline  established  by  the  Council,  the  Romanian 
authorities  submitted  a  report  on  action  taken  in  response  to  the  Council 
Recommendation  of  5  December  2017.  In  the  report,  the  authorities  reiterated  that 
their target for 2018 remains a headline deficit of just below 3% of GDP. The fiscal 
impact of the reported measures falls significantly short of the requirement stated in 
the Council Recommendation. 

Based  on  the  Commission  spring  2018  forecast,  the  growth  of  net  primary 
government  expenditure  is  set  to  amount  to  10.8%,  well  above  the  expenditure 
benchmark of 3.3%. The structural balance is set to deteriorate by 0.5 % of GDP in 
2018, reaching a deficit of 3.8% of GDP. This is the opposite of the recommended 
structural  improvement  of  0.8%  of  GDP  relative  to  2017.  Therefore,  both  pillars 
point  to  a  deviation  from  the  recommended  adjustment  by  a  wide  margin.  The 
expenditure benchmark points to a deviation of 2.4% of GDP. The structural balance 
confirms this reading, indicating a somewhat smaller deviation of 1.8% of GDP. The 
size of the deviation indicated by the structural balance is negatively impacted by the 
higher  underlying  estimate  of  potential  GDP  growth  as  compared  to  the  medium-
term  average  underlying  the  expenditure  benchmark.  Taking  this  into  account,  the 
overall  assessment  confirms  a  deviation  from  the  recommended  adjustment  by  a 
wide margin. 

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. 

to 

leads 

the  conclusion 

This 
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, 

that  Romania's 

response 

to 

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HAS ADOPTED THIS DECISION:  

Article 1 

Romania  has  not  taken  effective  action  in  response  to  the  Council  Recommendation  of  5 
December 2017. 

This Decision is addressed to Romania. 

Done at Brussels, 

Article 2 

For the Council 
The President 

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