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
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) 430 final  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 {SWD(2018) 366 final}  
 
 
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 
policies1, and in particular 10(2), second sub-paragraph, thereof, 

Having regard to the recommendation of the Commission, 

Whereas: 

(1) 

(2) 

(3) 

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According  to  Article  121  of  the  Treaty  on  the  Functioning  of  the  European  Union, 
Member States shall 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. 

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. 

On 16 June 2017, the Council recommended Romania to take the necessary measures 
to  ensure  that  the  nominal  growth  rate  of  net  primary  government  expenditure2  does 
not exceed 3.3% in 2017, corresponding to an annual structural adjustment of 0.5% of 
GDP,  thereby  putting  the  country  on  an  appropriate  adjustment  path  toward  the 
medium-term  budgetary  objective.  On  5  December  2017  the  Council  concluded  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 
recommendation  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. 

OJ L 209, 2.8.1997, 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. 

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(4) 

(5) 

(6) 

(7) 

(8) 

In  2017,  based  on  the  Commission  2018  spring  forecast  and  the  2017  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 3.3% of GDP). The structural balance deteriorated to -3.3% of GDP from 
a position of -2.1% of GDP in 2016, also pointing to a significant deviation from the 
recommended  structural  adjustment  by  a  large  margin  (deviation  of  1.7%  of  GDP). 
The size of the deviation indicated by the structural balance is negatively impacted by 
a  higher  point  estimate  for  potential  GDP  growth  compared  to  the  medium-term 
average  underlying  the  expenditure  benchmark,  as  well  as  by  a  drop  in  public 
investment, which is 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 2017. 

On 23 May 2018, following an overall assessment, the Commission considered that a 
significant  observed  deviation  from  the  medium-term  budgetary  objective  exists  in 
Romania  and issued a warning to Romania  in accordance with  Article 121(4) TFEU 
and 10(2), first-sub-paragraph, of Regulation (EC) No 1466/97. 

According  to  Article  10(2),  second  sub-paragraph,  of  Regulation  (EC)  No  1466/97, 
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. The  regulation foresees 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  2018]  for  Romania  to  address  the  deviation  appears 
appropriate. Within that deadline, Romania should report on action taken in response 
to this recommendation.  

Based on the output gap projections of the Commission 2017 spring forecast, Romania 
will  remain  in  normal  economic  times  in  2018  and  2019.  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 matrix of 
requirements,  which  factors  in  the  prevailing  economic  circumstances  and  possible 
sustainability concerns, amounts to 0.5% of GDP for both 2018 and 2019.  

Romania's  structural  deficit  has  increased  by  2.1%  of  GDP  in  2016  and  by  1.2%  of 
GDP in 2017, to 3.3% of GDP in 2017. An additional and persistent effort necessary 
to  correct  for  the  cumulated  deviation  and  to  bring  Romania  back  on  an  appropriate 
adustment  path  following  the  slippages  in  2016  and  2017  should  complement  the 
minimum  adjustment  requirement.  An  additional  effort  of  0.3%  of  GDP  seems 
appropriate  given  the  magnitude  of  the  observed  significant  deviation  from  the 
recommended  adjustment  path  towards  the  medium-term  budgetary  objective  and  it 
will accelerate the adjustment back towards the medium-term budgetary objective.  

(9) 

The required improvement of the structural balance by 0.8% of GDP in both 2018 and 
2019  is  consistent  with  the  nominal  growth  rate  of  net  primary  government 
expenditure not exceeding 3.3% in 2018 and 5.1% in 2019. 

(10)  The Commission 2018 spring forecast projects a further deterioration of the structural 
balance by 0.5% of GDP in 2018 and by a further 0.4% of GDP in 2019. Therefore, a 
structural improvement of 0.8% of GDP in both 2018 and 2019 translates into the need 
to  adopt  measures  of  a  total  structural  yield  of  1.3%  of  GDP  in  2018  and  additonal 
measures  of  a  structural  yield  of  1.2%  of  GDP  in  2019  compared  to  the  current 
baseline in the Commission 2018 spring forecast. 

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(11)  The Commission 2018 spring forecast projects a general government deficit of 3.4% 
of  GDP  in  2018  and  3.8%  of  GDP  in  2019,  which  is  above  the  3%  of  GDP  Treaty 
reference  value.  The  required  structural  adjustment  seems  also  appropriate  to  ensure 
that Romania respects the 3% of GDP Treaty reference value in 2018 and 2019 with a 
margin. 

(12)  The  failure  to  act  upon  earlier  recommendations  to  correct  the  observed  significant 
deviation and the risk of exceeding the Treaty reference value call for urgent action to 
put Romania’s fiscal policy back on a prudent path.  

(13) 

It is appropriate that this recommendation should be made public. 

(14) 

In  order  to  achieve  the  recommended  budgetary  targets,  it  is  crucial  that  Romania 
adopts and strictly implements the necessary measures and monitors the development 
of current expenditure closely, 

HEREBY RECOMMENDS: 

(1) 

(2) 

(3) 

Romania should take the necessary measures to ensure that the nominal growth rate 
of net primary government expenditure does not exceed 3.3% in 2018 and 5.1% in 
2019, corresponding to an annual structural adjustment of 0.8% of GDP in each year, 
thereby  putting  the  country  on  an  appropriate  adjustment  path  toward  the  medium-
term budgetary objective.  

Romania  should  use  any  windfall  gains  for  deficit  reduction.  Budgetary 
consolidation  measures  should  secure  a  lasting  improvement  in  the  general 
government structural balance in a growth-friendly manner. 

Romania  should  report  to  the  Council  by  [15  October  2018]  on  action  taken  in 
response  to  this  recommendation.  The  report  should  provide  sufficiently  specified 
and  credibly  announced  measures,  including  budgetary  impact  of  each  of  them,  as 
well as updated and detailed budgetary projections for 2018-2019. 

This recommendation is addressed to Romania. 

Done at Brussels, 

For the Council 
The President 

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