COMMISSION STAFF WORKING DOCUMENT Country Report Romania 2019 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011
Date: 2019-02-27
Institutions: European Commission, Secretariat-General
Subjects: Romania, economic situation, education, investment, labour market, macroeconomics, public finance, social policy, structural adjustment, tax system

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 27.2.2019  SWD(2019) 1022 final  COMMISSION STAFF WORKING DOCUMENT Country Report Romania 2019    Including an In-Depth Review on the prevention and correction of macroeconomic imbalances Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2019 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2019) 150 final}  
 
 
CONTENTS 

Executive summary 

1.  Economic situation and outlook 

2.  Progress with country-specific recommendations 

3.  Overall findings regarding imbalances, risks and adjustment issues 

4.  Reform priorities 

4.1.  Public finances and taxation 
4.2.  Financial sector 
4.3.  Labour market, education and social policies 

4.4.   Competitiveness reforms and investment 

Annex A: Overview Table 

Annex B: Commission Debt Sustainability Analysis and fiscal risks 

Annex C: Standard Tables 

3 

7 

15 

18 

22 

22 
27 
31 
42 

61 

66 

67 

Annex D: Investment Guidance on Cohesion Policy Funding 2021-2027 for Romania  73 

References 

LIST OF TABLES 

Table 1.1: 
Table 2.1: 
Table C.1: 
Table C.2: 
Table C.3: 
Table C.4: 
Table C.5: 
Table C.6: 

Key economic, financial and social indicators - Romania 

Assessment of 2018 CSR implementation 

Financial market indicators 

Headline Social Scoreboard indicators 

Labour market and education indicators 

Social inclusion and health indicators 

Product market performance and policy indicators 

Green growth 

LIST OF GRAPHS 

Graph 1.1:  GDP growth and demand-side components 
Graph 1.2:  GDP growth and supply-side components 

1 

80 

14 
16 
67 
68 
69 
70 
71 
72 

7 
7 

 
 
 
 
Labour market overview 

Contribution to potential growth 

Contributions to headline inflation 

Disparities across Romanian regions 

Current account breakdown and capital account 

Loans to households and non-financial corporations 

10 year government bond yield: Romania and peers 

Graph 1.3: 
Graph 1.4: 
Graph 1.5:  Gross fixed capital formation 
Graph 1.6: 
Graph 1.7: 
Graph 1.8: 
Graph 1.9:  General government balance and output gap 
Graph 1.10: 
Graph 1.11: 
Graph 2.1:  Overall multiannual implementation of 2013-2018 CSRs to date 
Graph 4.1.1:  Drivers of change of general government balance 
Graph 4.1.2:  Degree of progressivity of labour income taxation in EU Member States, 2017 
Graph 4.1.3:  Redistributive power of the tax and benefit systems in EU Member States, 2016 
Graph 4.1.4:  General government debt projections (% of GDP) 
Graph 4.3.1: 
Inactive female population by reason for inactivity 
Graph 4.3.2:  Activity and employment rates for selected groups 
Graph 4.3.3:  Productivity and labour costs (GDP deflator) 
Graph 4.3.4:  People at risk of poverty or social exclusion by degree of urbanisation 
Graph 4.3.5:  Redistributive power of social transfers 
Graph 4.3.6:  Spending on healthcare by Member State, 2016 
Graph 4.4.1:  Nominal unit labour costs, growth breakdown 
Graph 4.4.2:  Evolution of unit labour costs by sector 
Graph 4.4.3:  Evolution of public and private wages 
Graph 4.4.4:  Export market share growth 
Graph 4.4.5:  RON-denominated export price evolution 
Graph 4.4.6:  Real effective exchange rate growth 
Graph 4.4.7:  Breakdown of the trade balance 
Graph 4.4.8:  Net international investment position 
Graph 4.4.9:  FDI flows by investment type 
Graph 4.4.10:  R&D intensity 2000, 2007, 2017 and 2020 target 
Graph 4.4.11:  Quality of public infrastructure index, Romania and regional peers 

LIST OF BOXES 

Box 2.1: EU funds and programmes contribute to addressing structural changes and to fostering 

growth and competitiveness in Romania 

Box 3.1: MIP assessment matrix (*) – Romania 2019 

Box 4.2.1: Second pension pillar in Romania 

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 

Box 4.4.1: Investment challenges and reforms in Romania 

2 

8 
8 
9 
9 
10 
10 
11 
12 
12 
15 
22 
23 
23 
25 
33 
33 
34 
36 
37 
40 
42 
42 
43 
44 
44 
45 
45 
46 
46 
49 
51 

17 
20 
30 
32 
50 

 
 
 
 
EXECUTIVE SUMMARY 

Romania’s  economic  growth  model,  based  on 
consumer spending, affects the country's ability 
to  reach  EU  living  standards  in  a  sustainable 
way.  The  near  halving  of  GDP  growth  in  2018, 
largely due to a  slowdown in consumer spending, 
has  revealed  the  limits  of  Romania’s  economic 
growth model. Strong wage increases, a decreasing 
work  force  and  skills  shortages  risk  undermining 
the  country’s  ability  to  compete  internationally. 
Moreover,  investors’  confidence  is  being  eroded 
by  persistent  legislative  instability,  unpredictable 
decision-making,  low  institutional  quality  and  the 
fight  against 
continued  weakening  of 
corruption.  Inequality  and  poverty  remain  high, 
with 
increasing  regional  disparities.  Ensuring 
continuity  with  past  reforms  and  shifting  the 
growth model to investment could set the economy 
on  a  sustainable  path  towards  convergence  with 
EU living standards and help reduce inequality (1).  

the 

in  2018, 
Despite  the  substantial  slowdown 
growth  remains  robust.  After  a  7 %  advance  in 
2017, real GDP growth (i.e. adjusted for inflation) 
slowed down to an estimated 4 % in 2018. Higher 
inflation  dented  disposable  income  and  consumer 
spending,  which  is  the  main  driver  of  economic 
growth.  Strong  growth  in  imports  of  consumer 
goods,  which  outpaced  exports,  caused 
the 
country’s  current  account  deficit  to  continue  to 
widen.  

lowest  unemployment  rate 

The  labour  market  is  under  increasing  stress. 
in  a  decade 
The 
(3.8 %),  a  declining  labour  force  and  persistent 
skills shortages have brought Romania close to full 
employment,  which  makes  recruitment  difficult 
and drives  wage  growth. Employees’ earnings are 
low  compared  to  the  EU  average  but  the  strong 
growth  since  2016,  also  driven  by  hikes  in  the 

(1)  This  report  assesses  Romania’s  economy  in  light  of  the 
European Commission’s Annual Growth Survey published 
on 21 November 2018. In the survey, the Commission calls 
on  EU  Member  States  to  implement  reforms  to  make  the 
European  economy  more  productive, 
resilient  and 
inclusive.  In  doing  so,  Member  States  should  focus  their 
efforts  on  the  three  elements  of  the  virtuous  triangle  of 
economic  policy  –  delivering  high-quality  investment, 
efforts  on  productivity  growth, 
focusing 
reforms 
inclusiveness  and 
institutional  quality  and  ensuring 
macroeconomic  stability  and  sound public  finance.  At  the 
same 
the  Alert 
the  Commission  published 
Mechanism  Report  that  initiated  the  eighth  round  of  the 
macroeconomic 
procedure.  The  Alert 
Mechanism  Report  found  that  Romania  warranted  an  in-
depth review, which is presented in this report. 

imbalance 

time, 

minimum  wage  and  public-sector  wages,  risk 
putting  pressure  on  competitiveness 
if  not 
accompanied  by 
corresponding  productivity 
increases. 

The  public  deficit  has  been  increasing,  driven 
mostly by spending on wages and tax cuts. Tax 
rates have been repeatedly cut while public wages 
have significantly increased since 2015 and are set 
to  increase  further.  At  the  same  time,  public 
investment fell to a post-EU accession low in 2017 
and is set to rebound only slowly. As a result, the 
public  deficit  has  substantially  increased  since 
2015  and  is  forecast  to  break  the  3 %  of  GDP 
threshold required under the  Stability and Growth 
Pact,  pushed  up  also  by  increases  to  pensions.  In 
June 2018 the Council launched a new significant 
deviation procedure addressed to Romania (2). The 
structural  deficit  is  projected  to  remain  broadly 
stable  at  around  3.4 %  until  2019  and  to  increase 
considerably in 2020. 

Financial  sector  stability  has  been  put  under 
strain.  Recent  parliamentary  and  government 
measures  have  created  risks  to  the  stability  of  the 
financial  sector.  These  could  negatively  impact 
lending  and  limit  the  impact  of  monetary  policy, 
and  may  reverse  several  years  of  continuous 
improvement.  In addition, changes to the  rules on 
privately 
increased 
unpredictability  and  may  have  undermined  their 
long-term  viability.  This  in  turn  may  curtail  the 
development  of  capital  markets  and  deprive  the 
economy  of  an  important  source  of  long-term 
investment financing. 

managed 

pensions 

Public and private investment in infrastructure, 
inclusion  and 
education,  healthcare,  social 
innovation  would  improve  productivity  and 
long-term  growth.  Public  investment  has  been 
subdued in recent years and is expected to recover 
only  slowly  while  private  investment  could  be 
affected  by  increasing  uncertainty.  Investments  in 
transport,  energy  and  environmental  infrastructure 
would strengthen the economy’s long-term growth 
potential and would have a positive impact on the 
population’s  standard  of  living.  The  education 
system  does  not  sufficiently  prepare  people  for 
employment  and  better  social  integration.  Making 

(2)  https://www.consilium.europa.eu/en/press/press-

releases/2018/06/22/hungary-and-romania-called-on-to-
correct-significant-budgetary-deviations/ 

3 

 
 
                                                           
                                                           
Executive summary 

requirements 
framework, 

under 

the 

national 

fiscal 

  The minimum wage continues to be set by the 
government in an ad hoc manner, while the law 
setting a minimum inclusion income  is not yet 
in force; 

  The  decision-making  process  remains  highly 
unpredictable,  with  complex  and  sometimes 
controversial legislation being adopted through 
emergency decrees, without impact assessment 
or stakeholder consultation; 

  The  corporate  governance  of  state-owned 

enterprises is at risk of being weakened. 

Regarding  progress  towards  its  national  targets 
under  the  Europe  2020  strategy,  Romania  is 
performing  well  on  employment  rates,  national 
greenhouse  gas  emissions,  renewable  energy, 
energy  efficiency  and  tertiary  education.  R&D 
investment  and  early  school  leaving  remain  some 
distance away from their respective targets. 

Romania  performs  poorly  on  most  of  the 
indicators  of  the  Social  Scoreboard  supporting 
the  European  Pillar  of  Social  Rights.  The  high 
economic  growth  has  translated  into  better  job 
prospects  and  increased  household  disposable 
incomes.  However,  Romania  still  has  a  high 
number  of  early  school  leavers  and,  although 
decreasing, a  high number of young people not in 
education,  employment  or  training.  This  raises 
concerns  about  equal  opportunities  and  access  to 
employment.  Romania  has  not  yet  achieved  a 
mature  social  dialogue,  and  its  Social  Scoreboard 
indicates  a  critical  situation  on 
performance 
reducing poverty. 

The  main  findings  of  the  in-depth  review  in  this 
report  and  the  related  policy  challenges  are  as 
follows. 

and 

composition 

  Romania’s  current  account  deficit  has  been 
raises 
widening 
its 
concerns.  From  a  nearly  balanced  position  in 
2014,  the  current  account  deficit  increased  to 
3.2 %  of  GDP  in  2017  and  is  forecast  to 
deteriorate further. Imports of consumer goods 
have  increased  much  faster  than  those  of 
capital and intermediate goods. This means that 

sure  that  Romania’s  work  force  achieves  its  full 
potential  means  investing  also  in  social  inclusion 
and  healthcare.  Increased  public  and  private 
financing  of  innovation  would  help  Romania’s 
economy  move 
towards  higher  value  added 
activities.  Annex  D  identifies  key  priorities  for 
support  by  the  European  Regional  Development 
Funds,  the  European  Social  Fund  Plus  and  the 
Cohesion  Fund  over  2021-2027,  building  on  the 
analysis  of 
investment  needs  and  challenges 
outlined in this report. 

Romania  has  made 
addressing 
recommendations.  There  has  been 
progress in the following areas: 

limited (3)  progress 
2018 

in 
country-specific 
limited 

the 

  Efforts 

to  strengthen 

tax  compliance  and 
collection  were 
the 
to  updating 
limited 
guidance  on  the  registration  of  certified  cash 
registers and the use of risk assessment to audit 
taxpayers.  

  On  public  procurement,  the  creation  of  a 
central purchasing body and the transition to e-
procurement  are  welcome  developments,  but 
other  reform  commitments  were  stopped  or 
even reversed; 

  Social dialogue remains largely formalistic.  

  Access to quality education is very unequal and 
the  acquisition  of  basic  and  digital  skills  is 
limited;  

 

the  healthcare  system, 

In 
the  roll-out  of 
community care centres suffered further delays, 
limiting  prospects  for  shifting  to  outpatient 
care;  

  Limited  progress  was  made  on  public 
and 
investment 
prioritisation, while the take-up of EU funds is 
slow.  

preparation 

project 

There has been no progress in the following areas: 

  Fiscal  policy,  including  the  adoption  of  the 
annual  budget,  continues  to  depart  from  the 

(3)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
country-specific recommendation is presented in Annex A. 

4 

 
 
                                                           
Executive summary 

  Labour and skills supply are not keeping up 
with the fast-changing needs of the economy. 
The  limited  availability  of  skilled  labour, 
population  ageing,  weak  internal  mobility  and 
continued  emigration  are  limiting  economic 
growth. Despite labour shortages, certain social 
groups,  including  the  Roma,  have  difficulties 
entering  the  labour  market.  Schemes  to  help 
people 
little  focus  on 
comprehensive  solutions,  including  upskilling 
and  reskilling.  Minimum  wage  levels  continue 
to  be  set  without  a  comprehensive  predictable 
mechanism and the number of collective wage 
bargaining  agreements  is  low,  especially  at 
sector level. 

into  work  provide 

in 

  Despite  recent  improvements,  poverty  and 
income inequality remain high, and regional 
disparities  are  deepening.  One 
three 
Romanians is still at risk of poverty and social 
exclusion,  with  particular  groups  such  as 
children, the Roma, people with disabilities and 
the  elderly  being  more  affected.  Income 
inequality  is  one  of  the  highest  in  the  EU, 
reflecting in part the low redistributive capacity 
of  the  tax  and  benefit  system.  Inequality  of 
opportunity  is  also  high.  Social  services  have 
insufficient  quality  and  coverage,  and  uneven 
territorial  distribution.  The  limited  integration 
of  employment,  education,  health  and  social 
services  does  not  allow  for  a  sustainable 
inclusion of diverse disadvantaged groups enter 
employment and escape social exclusion. After 
repeated delays, the law which will increase the 
adequacy  of  the  minimum  inclusion  income  is 
expected to enter into force in April 2019.  

  The 

only 
system 

insufficient  capacity  of  the  public 
administration 
development 
limits 
opportunities. Red tape and the lack of quality 
public  services  continue  to  harm  investment, 
but  the  reform  of  the  public  administration  is 
public 
progressing 
procurement 
enhanced 
transparency,  monitoring  and  supervision. 
Scattered resources, fragmented responsibilities 
between  different  services  and  levels  of  the 
public  administration 
ineffective 
delivery  of  public  services.  Funding  of  public 
services is uneven across regions, counties and 
local 
smaller  administrative  units,  while 

slowly.  The 
requires 

lead 

to 

the  deterioration  in  the  current  account  is 
driven  more  by  consumption  than  investment, 
which  will  not  support  long-term  economic 
growth.  

  Rising  labour  costs  may  hurt  Romania’s 
ability  to  compete  internationally.  The  cost 
of  labour  per  unit  of  goods  and  services 
produced has increased strongly since 2016, as 
wage  increases  have  outpaced  productivity 
growth, albeit less so in industrial sectors open 
to international trade. Coupled with the gradual 
depreciation  of  the  national  currency,  the 
impact on Romania’s cost competitiveness has 
so  far  been  limited  and  has  allowed  it  to  gain 
export  market 
the 
pressure  on  private-sector  wages  due  to  high 
levels  of  employment,  minimum  wage  hikes 
and spillovers from public wage increases may 
make  Romania’s  economy  less  competitive  in 
the  future.  In  addition,  trade  tensions  may 
weaken demand for Romania’s exports. 

shares.  Nevertheless, 

  Risks 

to 

the 

financial 

sector  have 
substantially  increased.  The  functioning  and 
stability  of  the  financial  sector  and  the  long-
term financing of the economy may be harmed 
by  recent  legislative  initiatives  including  a 
retroactive cap on mortgage interest rates and a 
tax  on  banks’  assets  linked  to  the  interbank 
interest  rate.  Moreover,  new  rules  targeting 
privately  managed  pensions  may  hinder  the 
development  of  what  is  still  a  very  small 
capital market in Romania. 

of 

  The  business  environment  and  investment 
decisions  are  being  hurt  by  unpredictable 
relevant 
policymaking.  Consultation 
stakeholders is limited and impact assessments 
are  lacking  or  are  of  low  quality.  Recent 
legislation  on  the  financial  sector,  privately 
the  energy  and 
managed  pensions  and 
telecommunication  sectors  could  hinder  future 
investment 
increase 
uncertainty, making the economy less attractive 
to national and international investors. 

opportunities 

and 

Other key structural issues analysed in this report, 
which point to particular challenges for Romania’s 
economy, are the following. 

5 

 
 
authorities’ 
predictability. 

revenues 

lack 

stability 

and 

  The weak performance of the education and 
training  system  is  not  helping  Romania  to 
catch up with the EU. Spending on education 
remains  one  of  the  lowest  in  the  EU.  Low 
in  early  childhood  education 
participation 
hampers  the  development  of  cognitive  and 
social skills. Early school leaving remains high, 
and attainment levels in basic skills are low and 
not  improving.  Rural-urban  disparities  persist 
and  vulnerable  groups,  including  the  Roma, 
continue  to  have  limited  access  to  quality 
inclusive  mainstream  education.  The  quality 
and 
relevance  of  higher 
education  and  vocational  education  and 
training  face  challenges,  while  access  to  adult 
learning is limited. 

labour  market 

  The 

system 

healthcare 

faces  many 
challenges. Low funding and an inefficient use 
of  public  resources  limit  the  effectiveness  of 
the  health  system.  Continued  migration  has 
resulted  in  a  sizeable  shortage  of  doctors  and 
nurses. Health infrastructure and the prevalence 
of 
informal  payments  remain  sources  of 
concern. Access to healthcare services for those 
living  in  rural  areas  and  for  vulnerable  groups 
is limited. These in turn have a negative impact 
on the population’s health status. 

accession,  physical 

  Despite  significant  public  investment  after 
infrastructure 
EU 
remains 
general 
underdeveloped.  The 
condition  and  reliability  of  the  road  and  rail 
networks  are  very  poor.  In  addition,  energy, 
waste,  water  and  waste  water  infrastructure 
to  show  deficiencies.  Substantial 
continue 
challenges 
change 
adaptation,  risk  prevention,  disaster  resilience 
and air pollution.  

remain  over 

climate 

  Romania’s  modest  performance  in  research 
and innovation limits growth prospects. The 
country lacks a coherent strategy to help firms 
move  towards  higher  value  added  activities. 
Public  and  private  spending  on  research  and 
development  is  one  of  the  lowest  in  the  EU, 
resulting in a low quality of the public science 
base  and  a  low  innovative  capacity.  Links 
are 
between 

business 

science 

and 

Executive summary 

underdeveloped,  while  technology  imports  are 
not 
home-grown 
being 
innovation.  

substituted 

by 

is  only 

  The  corporate  governance  of  state-owned 
enterprises 
loosely  applied.  The 
legislation  in  this  field  could  be  weakened 
through  forthcoming  legislative  amendments 
before  Parliament.  Appointments  of  interim 
boards are a recurrent practice, departing from 
the spirit of the corporate governance laws.  

setbacks. 

significant 

laws.  The 

key 
come  under 

  Progress  in  the  fight  against  corruption  has 
suffered 
The 
independence  of  judges  and  prosecutors  has 
been  weakened  by  recent  amendments  to  the 
anti-corruption 
justice 
institutions  have 
increased 
pressure, raising concerns about their ability to 
continue  the  fight  against  corruption.  The 
ongoing amendments to the Criminal Code and 
Code  of  Criminal  Procedure  could  further 
weaken  the  fight  against  corruption  and  other 
serious crimes, undermining progress achieved 
over the past 10 years. 

6 

 
 
 
 
1.  ECONOMIC SITUATION AND OUTLOOK 

services  accounted  for  a  stable  38 %  of  GDP. 
Industry  and  trade  represented  24 %  and  18 %, 
respectively.  In  terms  of  contribution  to  growth, 
business  services  are  estimated  to  have  accounted 
for  1.3  pps,  followed  by  industry  with  1  pp.  and 
trade  with  0.6  pps  (Graph  1.2).  The  slowdown  in 
exports registered in 2018 is taking a particular toll 
on the performance of trade and industry. 

Graph 1.2:  GDP growth and supply-side components 

GDP and potential growth 

Economic growth has slowed down but remains 
robust. Real GDP is estimated to have grown 4 % 
in 2018, down from a peak of 7 % in 2017 (Graph 
1.1).  The  slowdown  has  been  driven  mainly  by  a 
deceleration  in  private  consumption  due  to  high 
inflation,  fuelled  by  energy  prices,  and  the  fading 
of the effects of public policies aimed at increasing 
disposable income. However, private consumption 
continued  to  be  the  main  driver  of  growth. 
Investment  remained  broadly  stable  and  net 
exports became more negative as exports continue 
to decelerate faster than imports, affected by price 
hikes and the slow-down of external demand. 

Graph 1.1:  GDP growth and demand-side components 

Source: European Commission 

is  forecast 

in  2018,  but 

Potential  growth  has  been  driven  mainly  by 
total  factor  productivity.  Potential  GDP  growth 
has strengthened in recent years, to reach 4.5% in 
2017. (Graph 1.3). It is estimated to have remained 
strong 
to  decrease 
progressively.  Total  factor  productivity  has  been 
the main contributor to potential growth, despite a 
slight  slow down in 2018. Labour  made  a  modest 
but  positive  contribution  in  2018  due  to  lower 
structural  unemployment  and  a  higher  labour 
participation rate. After 2018 however, total factor 
productivity is expected to slow down and labour’s 
contribution  to  potential  growth  to  worsen  due  to 
slower growth of the working age population. 

Source: European Commission 

Growth is expected to remain broadly stable in 
the medium run. Real GDP is projected to remain 
below 4 % in 2019 and 2020 (Graph  1.1). Private 
consumption  is  set  to  continue  being  the  main 
driver  of  economic  activity,  although  slower 
increases in wages and a tighter credit environment 
could restrain its evolution. The contribution of the 
external  sector  to  growth  is  forecast  to  remain 
negative  but  to  improve  as  the  growth  of  exports 
remains  broadly  stable  while  import  growth  is 
projected  to  decrease,  following  the  slowdown  in 
consumption.  Investment  is  expected  to  increase 
somewhat more than in 2018. 

On  the  supply  side,  the  economic  deceleration 
was more evenly distributed across sectors. For 
the  first  three  quarters  of  the  year,  business 

7 

-8-6-4-2024681011121314151617181920pps.Private consumptionPublic consumptionNet exportsInventoriesGFCFReal GDP (y-o-y%)forecast-8-6-4-202468101112131415161718Q1-Q3pps.Net taxes on productsBusiness servicesTrade, transportationConstructionIndustry (except construction)Agriculture, forestry and fishingReal GDP (y-o-y % change) 
 
 
 
 
1. Economic situation and outlook 

Graph 1.3:  Contribution to potential growth 

7.7 %  in  Sud-Vest  Oltenia,  despite  a  reduction  in 
the gap across regions from 6.9 pps in 2016 to 4.8 
pps  in  2017.  Regional  socio-economic  indicators 
show  a  major  divide  between  a  growing  capital 
that mainly attracts skilled labour in higher value-
added  sectors  and  the  rest  of  the  country  where 
employment  is  concentrated  in  lower  value  added 
sectors in a context of outward migration. 

Graph 1.4:  Disparities across Romanian regions 

Source: European Commission 

Regional disparities 

country  are 

Despite  convergence  towards  the  EU  average, 
disparities  within 
still 
the 
significant.  Romania's  GDP  per  capita  has 
increased  from  slightly  more  than  40 %  at  EU 
accession,  in  2007,  to  more  than  60 %  of  the  EU 
average  in  2017.  Differences  across  regions  are 
substantial.  In  2016,  the  Bucuresti-Ilfov  region 
recorded  a  GDP  per  capita  in  Purchasing  Power 
Standards  of  EUR  40 400,  1.4  times  the  EU 
average  and  almost  4  times  that  of  the  Nord-Est 
region, the country’s poorest region. Excluding the 
capital  region,  GDP  per  capita  is  half  the  EU 
average.  Bucuresti-Ilfov  also  registers  twice  the 
EU average in terms of investment as a percentage 
of GDP and 1.5 times the national average (Graph 
1.4  and  Section  4.4.4).  When  considering  all  EU 
regions,  Romanian  regions  with  initially  lower 
levels  of  GDP  per  capita  have  experienced 
comparatively  higher  growth  rates  since 
the 
country's accession. 

Disparities are also felt in the labour market. In 
2016, 
labour  productivity  divergence  across 
regions  was  one  of  the  highest  in  the  EU. 
Bucuresti-Ilfov  registered  the  highest  productivity 
(22 %  above  the  EU  average),  while  productivity 
in the Nord-Est region is only one-third of the EU 
average  (Graph  1.4).  Average  productivity  for  all 
regions  excluding  the  capital  is  only  half  the  EU 
average. The regional unemployment rate  in 2017 
varied  significantly,  from  2.9 %  in  Nord-Est  to 

8 

Grey areas represent the range of disparities across regions. 
(1) GDP per capita in PPS 
(2) Difference in index points 
(3) Percentage of GDP 
Source: European Commission 

Investment 

and 

20.2 % 

respectively. 

Romania  continues  to  have  one  of  the  highest 
investment  ratios  in  the  EU.  In  2017,  total 
investment  accounted  for  22.6 %  of  GDP,  above 
the  EU  and  neighbouring  countries'  averages  of 
20.1 % 
Private 
investment,  which reached 20 % of GDP in 2017, 
is  estimated  to  have  increased  somewhat  despite 
concerns about fiscal and legislative instability and 
unpredictability 
(see  Section  4.4.2).  Public 
investment,  by  contrast,  remains  subdued,  partly 
due  to  the  slow  uptake  of  projects  under  the  EU 
financing  period  (see  Section  4.4.2).  In  2017, 
public investment  fell to a post-EU accession low 
of 2.6 % of GDP, just at the EU average but below 
neighbouring countries (Graph 1.5). However, it is 
estimated  to  have  slightly  recovered  in  2018  and 
forecast to progressively recover in coming years.  

-2,0-1,00,01,02,03,04,05,06,07,08,09,0060708091011121314151617181920212223Rate of change y-o-y (%)forecastCapital Accumulation ContributionTFP ContributionTotal Labour (Hours) ContributionPF Potential Growth20406080100120140160180200220GDP percapita (1),2016GDP percapitachange (2),2010-16Investmentrate (3),2010-15Population growth,2010-16Productivity,2016Unemploy-ment rate,2017Index, EU 28=100EU28Non-capital regionsCapital regionMS average 
 
 
1. Economic situation and outlook 

Graph 1.5:  Gross fixed capital formation 

and,  to  a  much  lesser  extent,  the  government. 
Corporations are net lenders. 

Graph 1.6:  Current account breakdown and capital 

account 

Source: European Commission 

to  more 

challenging 

could  be  hit  by 

increasing 
Investment 
uncertainty.  Levels  of 
investment  could  be 
heavily  affected  by  the  susceptibility  of  private 
financial 
investment 
conditions  and  the  government’s  under-execution 
of 
initially  budgeted  projects.  The  persistent 
unpredictability of policymaking creates a climate 
instability  which  could  hinder  business 
of 
confidence and investment decisions (see Sections 
3  and  4.4).  Moreover,  the  recent  emergency 
ordinance (4)  introducing  a  set  of  far-reaching 
fiscal  measures (see  Section  3) may affect private 
investment  in  energy  and  communication  and  the 
financial sector's capacity to finance the economy. 

External position 

The  current  account  deficit  widened  further  in 
2018. The deficit is estimated to have worsened to 
4.3 % of GDP due mainly to the deteriorating trade 
balance  (Graph  1.6).  As  a  result,  the  current 
account balance is increasingly diverging from the 
economy’s  fundamentals (5),  which  for  Romania 
imply  a  balanced  current  account.  The  export 
market  share  is  estimated  to  have  remained  on  a 
gentle  upward path in 2018. This evolution  is  felt 
in 
lending/borrowing,  which  became 
negative already in 2017 when the current account 
deficit  started  to  widen  markedly  and  the  capital 
account  balance  almost  halved.  By  sector,  the  net 
borrowing  needs  come  mainly  from  households 

the  net 

(4)  Government emergency ordinance 114/2018 
(5)  For  details  regarding  the  estimation  of  current  accounts’ 
fundamentals, see Coutinho, Turrini and Zeugner (2018). 

9 

Source: European Commission 

nominal  GDP 

The net international investment position is still 
growth 
improving.  Strong 
facilitated  a  further  improvement  in  the  net 
international investment position to an estimated  -
47.8%  of  GDP  in  2017  and  -44.8 %  in  Q3-2018. 
However, progress has slowed down as a result of 
the  widening  current  account  deficit  and  some 
deceleration  in  nominal  GDP  growth  (see  Section 
4.4). 

Inflation and monetary policy 

Inflation  reached  a  post-crisis  peak  in  2018. 
Inflation  as  measured  by  the  harmonised  index  of 
consumer  prices  turned  positive  in  2017  and 
continued to increase throughout 2018, to reach an 
annual average of 4.1 %. This is the result of both 
internal  and  external  factors.  Internally,  inflation 
accelerated  at  the  beginning  of  2018  as  the  effect 
of the January 2017 tax cuts faded away. Increases 
in  the  excise  tax  on  energy  products  in  autumn 
2017  further  added 
trend. 
to 
Internationally,  the  hike  in  food  prices  and,  to  a 
larger  extent,  of  energy  prices,  further  spurred 
headline  inflation  (Graph  1.7).  In  2018,  Romania 
had the highest inflation rate in the EU, well above 
is 
the  euro  area  average.  Headline 
expected  to  moderate  to  3.3 %  and  3.1 %  in  2019 
and  2020,  respectively,  on  account  of  weakening 

increasing 

inflation 

the 

051015202530350708091011121314151617181920% of GDPRomania govRomania privateEU excl RO govEU excl RO totalEU13-RO govEU13-RO totalforecast-25-20-15-10-505101502030405060708091011121314151617181920% of GDPforecastCapital accountSecondary income balancePrimary income balance  Trade balance - services  Trade balance - goodsTrade balanceCurrent account balance (CA)Net lending/borrowing (CA+KA) 
 
                                                           
 
1. Economic situation and outlook 

domestic  demand.  Core  inflation  has  remained 
more stable, at an average of 2.7 % for the  whole 
of 2018. 

Graph 1.7:  Contributions to headline inflation 

for companies in filling job vacancies and finding 
the relevant skills on the labour market. As such, it 
could  limit  potential  GDP  growth.  The  labour 
market  continues  to  be  characterised  by  weak 
social dialogue, with a very limited involvement of 
social partners in policy-making. 

Graph 1.8: 

Labour market overview 

Source: European Commission 

In  2018 
the  National  Bank  of  Romania 
tightened  its  accommodative  monetary  policy. 
As  inflation  increased,  the  key  monetary  policy 
rate was raised three times by a total of 0.75 pps in 
the first months of 2018, to 2.5 %. These were the 
first hikes in 10 years. Since May 2018, however, 
the  National  Bank  of  Romania  has  kept  the  rates 
constant,  anticipating  the  return  of  the  annual 
inflation  rate,  as  measured  by  the  consumer  price 
index,  to  within  the  Bank's  target  of  2.5 %±1  pp, 
reaching 3.3 % in December 2018. 

The  conduct  of  monetary  policy  is  increasingly 
constrained  by  fiscal  policy  measures.  The 
recent introduction of a tax on banks’ assets linked 
to the interbank rate (ROBOR) is likely to limit the 
room  for  manoeuvre  of  the  monetary  policy.  It 
may  also 
the 
objective of maintaining price stability and that of 
safeguarding financial stability (see Section 4.2). 

introduce  a  conflict  between 

Labour market, poverty and social exclusion 

continued 

conditions 

Labour  market 
to 
improve, supported by robust economic growth. 
The  activity  rate  increased  to  72.3%  in  2017, 
exceeding  the  pre-crisis  level  of  68.7 %.  The 
unemployment rate in December 2018 (3.8 %) is at 
its lowest level in a decade (Graph 1.8). However, 
the  shrinking  workforce 
the  context  of 
unfavourable demographics represents an obstacle 

in 

(1) Activity rate and employment rate (% of population), 
total, ages 20-64; Unemployment rate and long-term 
unemployment rate (% of labour force), total, ages 15-74; 
Youth unemployment rate (% of labour force), total, ages 
15-24; NEET: Not in education, employment, or training (% of 
population), total, ages 15-24 
Source: European Commission 

Wages  and  unit  labour  costs  continued  to 
increase at a rapid pace in 2018. The record low 
labour  supply 
rate,  structural 
unemployment 
shortages and public policies increasing public and 
minimum wages (6) are forcing a correction in the 
labour  market.  Overall,  wages  are  estimated  to 
have  increased  further  in  2018,  also  due  to  the 
impact of the 2017 change in the structure of social 
contributions,  which  shifted  the  burden  almost 
entirely  to  the  employees.  As  a  result,  unit  labour 
costs have grown on average 8.1 % annually since 
2016.  These  developments  imply  the  risk  of  a 
competitiveness 
that  productivity 
loss  given 
developments  can  no  longer  compensate  for  such 
wage increases (see Section 4.4.1).  

(6)  The  minimum  wage  rose  to  RON  1 900  (c.  EUR  413)  in 
2018 (a net increase of 9 % when accounting for the effect 
of the shift in the social security contribution), and further 
to  RON  2 080  (c.  EUR  450)  in  January  2019.  For 
university  graduates  with  at  least  one  year  of  work 
experience  the  minimum  wage  was  set  at  RON  2 350  (c. 
EUR 510) (see Section 4.3.1). 

10 

-4-20246810y-o-y % changeServicesProcessed food incl.alcohol, tobaccoUnprocessed foodNon-energy industrial goods6566676869707172737405101520253020012002200320042005200620072008200920102011201220132014201520162017%%Activity rate 20-64 (rhs)Unemployment rate 15-74 (lhs)Long-term unemployment rate 15-74 (lhs)Youth unemployment rate 15-24 (lhs)NEET rate 15-24 (lhs) 
 
 
                                                           
1. Economic situation and outlook 

The  structural  deficit (7)  is  projected  to  remain 
broadly  stable  at  around  3.3 %  to  3.4 %  of 
potential GDP until 2019 and to increase to 4.5 % 
in  2020  (Graph  1.9).  In  June  2018  the  Council 
launched  a  new  significant  deviation  procedure 
addressed to Romania. 

Graph 1.9:  General government balance and output gap 

Despite  the  growing  labour  shortages,  some 
groups  are  not  fully  integrated  in  the  labour 
market. Participation rates remain particularly low 
for  people  with  low  education  attainment,  and 
among  women  and  people  with  disabilities.  The 
share  of  young  people  not 
in  education, 
employment  or  training,  while  on  a  decreasing 
path since 2015, remained relatively  high in 2017 
at  15.2 %.  A 
term 
large  part  of 
unemployed either remain unemployed (73.2 %) or 
fall  into  inactivity  (13.2 %).  The  active  labour 
market  measures  in  place  do  not  sufficiently 
address  upskilling  and  integrated  service  delivery 
(see Section 4.3.1).  

long 

the 

High  poverty  and  inequality  rates  hamper 
Romania's  ability  to  achieve  inclusive  growth. 
Although  decreasing,  poverty  and  inequality  rates 
remain  very  high.  Income  inequality  has  declined 
over the past 2 years but remains one of the highest 
in the EU, reflecting in part the weak redistributive 
capacity of the tax and benefit system. More than 
1.5  million  people  earn  under  EUR  3  per  day 
(Friedrich-Ebert-Stiftung,  2018)  and  3.9  million 
people  suffer  from  severe  material  deprivation. 
Opportunities are unequal, in many respects. High 
poverty  levels  are  associated  with  unemployment, 
low  education  attainment,  high  intergenerational 
transmission  of  poverty  and  regional  disparities. 
The  share  of  children  living  in  poverty  or  social 
exclusion (4 out of 10) is one of the highest in the 
EU. Socioeconomic status greatly affects students' 
performance,  deterring  sustainable  growth  in  the 
long-run  (see  Section  4.3.3).  The  education  and 
care  systems  are  not  conductive  to  sufficiently 
independent  living  and  to  the  employability  of 
people with disabilities (see Section 4.3.2).  

Public finances 

The public deficit is projected to widen, mostly 
due to increases in current spending. In its 2018 
Autumn  Forecast,  the  Commission  projected  the 
headline deficit to increase from 2.9 % of GDP in 
2017  to  3.3 %  of  GDP  in  2018,  mostly  driven  by 
public  wage  increases.  The  headline  deficit  was 
projected  to  increase  slightly  further  in  2019,  to 
3.4 %,  and  then  to  jump  to  4.7 %  in  2020  due  to 
significant  increases  to  old-age  pensions.  The 
pension  point,  i.e.  the  main  parameter  used  for 
pension  indexation,  is  set  to  increase  by  15 %  in 
September 2019 and by 40 % in September 2020. 

Source: Eurostat, European Commission 2018 Autumn 
Economic Forecast 

The  tax  cuts  and  expenditure  increases  are 
being financed with public  debt.  Because of the 
widening  of 
the  general 
the  public  deficit, 
government  debt  is  projected  to  increase  from 
35.1 % of GDP in 2018 to 38.2 % of GDP in 2020. 
Assuming  no  policy  change,  public  debt 
is 
projected  to  increase  to  above  60 %  of  GDP  in 
2029  (see  Section  4.1.4).  The  financing  cost  of 
public debt has been steadily increasing since mid-
2017 to levels well above those observed for peer 
countries (Graph 1.10). 

(7)  Defined as the deficit corrected for the business cycle and 

one-off operations. 

11 

-6-4-20211121314151617181920output gap (% of potential GDP)headline balance (% of GDP)structural balance (% of potential GDP)% forecast 
 
 
                                                           
1. Economic situation and outlook 

Graph 1.10:  10 year government bond yield: Romania and 

Graph 1.11:  Loans to households and non-financial 

peers 

corporations 

Source: European Commission 

Source: National Bank of Romania 

Financial sector 

Consumer credit accelerated in 2018. The stock 
of  loans  denominated  in  Romanian  lei  (RON) 
continued  to  increase  for  both  households  and 
corporations.  The  domestic  currency  increased  its 
share  of  the  loans'  stock  to  65.9  %  in  November 
2018,  up  from  a  low  of  35.6  %  in  May  2012. 
Credit  to  non-financial  corporations,  albeit  still 
increasing,  has  somewhat  decelerated  in  2018 
compared  to  2017  (Graph  1.11).  Meanwhile, 
household lending has picked up on the back of an 
increase  in  the  growth  of  consumer  credit  and 
mortgage  lending,  although  the  latter  registered  a 
slight slowdown. As of January 2019, a new macro 
level  of 
prudential 
households’ indebtedness (see Section 4.2). 

regulation 

limits 

the 

Banking sector stability is threatened by recent 
legislative  changes.  Capital  adequacy  at  system 
level  continued  to  increase  and  stood  at  almost 
20 %  at  the  end  of  September  2018.  As  banks 
increased  locally  collected  deposits  and  reduced 
dependency on parent funding, the loan-to-deposit 
ratio  declined  to  around  76 %  at  end-September 
2018.  The  share  of  non-performing  loans  in  total 
loans  fell  below  6 %,  but  sales  of  impaired  assets 
declined significantly as of March 2018 following 
changes 
in 
December  2018,  Parliament  adopted  several  laws, 
not  yet  enacted  (including  retroactively  capping 
interest rates in loan contracts), which are expected 
to  hamper  the  disposal  of  non-performing  loans 
and negatively impact the already very low level of 
financial 
in  Romania.  More 
worryingly,  the  newly  introduced  tax  on  banks’ 
assets  could  have  a  long-  lasting  damaging  effect 
on  banks’  ability  to  finance  the  economy,  on  the 
conduct  of  monetary  policy  and  ultimately  on 
economic growth (see Section 4.2). 

the  Fiscal  Code.  Moreover, 

intermediation 

to 

increased 

second  pension  pillar  was 

further 
The 
weakened.  In  December  2018,  the  government 
significantly 
the  minimum  capital 
requirements  for  second  pillar  pension  funds’ 
management  companies  operating  in  Romania, 
while  substantially  reducing  the  allowed  level  of 
the  administration  fees.  Moreover,  participants 
with  at  least  5  years  of  contributions  are  now 
allowed  to  opt  out  of  the  second  pillar.  These 
the 
changes,  following  a  2018  reduction 
proportion  of  the  contributions  accruing  to  the 
second  pension  pillar,  significantly  weaken  the 

in 

12 

-10123456GermanyRomaniaPolandCzech RepublicHungaryBulgaria-15-10-505101520 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18y-o-y % changeLoans to households (HH), totalLoans to households (HH), housingLoans to households (HH), consumer and other loansLoans to non-financial corporations 
 
 
1. Economic situation and outlook 

second pension pillar, with negative consequences 
for  future  pension  adequacy,  the  development  of 
the 
long-term 
financing of the economy (see Section 4.2). 

local  capital  market  and 

the 

Housing market 

The  growth  rate  of  house  prices  is  slowing 
down,  but  developments  vary  at  sub-national 
level. Housing demand has been adversely affected 
by  higher  lending  costs  and  overall  higher  prices. 
House  prices increased by 5.7 % in Q3-2018,  less 
than the same period of the previous year (6.2 %). 
The  deceleration  continued  in  the  first  quarters  of 
2018 on the back of volatile demand, especially in 
the  residential  segment,  due  to  the  tightening  of 
both  public  (the  Prima  Casă  programme)  and 
private  credit  conditions.  Substantial  regional 
differences persist. House prices advanced by less 
than  6 %  in  Bucharest  in  Q3-2018,  but  some 
counties saw double-digit increases. 

13 

 
1. Economic situation and outlook 

Table 1.1: 

Key economic, financial and social indicators - Romania 

(1) NIIP excluding direct investment and portfolio equity shares 
(2) domestic banking groups and stand-alone banks, EU and non-EU foreign-controlled subsidiaries and EU and non-EU 
foreign-controlled branches. 
(3) The tax-to-GDP indicator includes imputed social contributions and hence differs from the tax-to-GDP indicator used in the 
section on taxation. 
Source: Eurostat and ECB as of 31-1-2019, where available; European Commission for forecast figures (Winter forecast 2019 for 
real GDP and HICP, Autumn forecast 2018 otherwise) 

14 

2004-072008-122013-1520162017201820192020Real GDP (y-o-y)6.80.73.64.87.04.03.83.6Potential growth (y-o-y)5.72.92.73.64.54.64.14.1Private consumption (y-o-y)13.20.03.67.910.0...Public consumption (y-o-y)-2.41.20.12.22.6...Gross fixed capital formation (y-o-y)23.2-3.71.6-0.23.5...Exports of goods and services (y-o-y)9.97.010.716.010.0...Imports of goods and services (y-o-y) 22.31.48.516.511.3...Contribution to GDP growth:Domestic demand (y-o-y)14.4-1.12.55.17.5...Inventories (y-o-y)-1.40.00.30.00.2...Net exports (y-o-y)-6.41.30.6-0.3-0.7...Contribution to potential GDP growth:Total Labour (hours) (y-o-y)-0.4-1.0-1.0-0.20.20.4-0.1-0.1Capital accumulation (y-o-y)2.12.21.10.91.31.31.41.5Total factor productivity (y-o-y)3.91.72.53.03.12.92.82.7Output gap6.2-1.4-2.8-1.11.50.50.2-0.3Unemployment rate7.26.66.95.94.94.34.24.1GDP deflator (y-o-y)13.26.22.62.54.76.53.83.5Harmonised index of consumer prices (HICP, y-o-y)8.15.71.4-1.11.14.13.33.1Nominal compensation per employee (y-o-y)15.87.94.315.012.313.06.76.7Labour productivity (real, person employed, y-o-y)7.42.34.16.04.0...Unit labour costs (ULC, whole economy, y-o-y)7.85.50.28.58.09.32.53.0Real unit labour costs (y-o-y)-4.8-0.6-2.35.93.12.7-1.2-0.5Real effective exchange rate (ULC, y-o-y)9.5-2.7-0.56.76.36.8-1.10.7Real effective exchange rate (HICP, y-o-y)8.5-2.90.9-1.2-1.72.4-0.40.8Savings rate of households (net saving as percentage of net disposable income)-22.3-5.4-9.6-8.1-7.6...Private credit flow, consolidated (% of GDP)13.93.0-1.20.61.7...Private sector debt, consolidated (% of GDP)43.370.662.755.651.0...of which household debt, consolidated (% of GDP)11.921.418.216.716.2...of which non-financial corporate debt, consolidated (% of GDP)31.549.344.438.934.8...Gross non-performing debt (% of total debt instruments and total loans and advances) (2)1.4.14.87.75.1...Corporations, net lending (+) or net borrowing (-) (% of GDP)-2.80.47.67.87.78.36.56.6Corporations, gross operating surplus (% of GDP)25.928.231.831.131.731.432.032.5Households, net lending (+) or net borrowing (-) (% of GDP)-4.70.2-4.3-4.0-6.4-6.9-5.3-4.6Deflated house price index (y-o-y)..-1.45.23.3...Residential investment (% of GDP)2.02.92.52.64.2...Current account balance (% of GDP), balance of payments-10.2-6.2-1.0-2.1-3.2-4.3-4.5-4.7Trade balance (% of GDP), balance of payments-11.3-7.4-0.6-0.9-2.1...Terms of trade of goods and services (y-o-y)4.31.01.8-0.3-1.50.6-0.20.0Capital account balance (% of GDP)0.50.62.42.51.2...Net international investment position (% of GDP)-37.2-61.7-58.2-49.0-47.8...NIIP excluding non-defaultable instruments (% of GDP) (1)-5.0-22.2-16.5-6.7-5.8...IIP liabilities excluding non-defaultable instruments (% of GDP) (1)35.857.750.740.037.4...Export performance vs. advanced countries (% change over 5 years)84.070.524.020.130.9...Export market share, goods and services (y-o-y)..7.08.63.1...Net FDI flows (% of GDP)-7.1-2.8-1.9-2.6-2.4...General government balance (% of GDP)-1.7-6.1-1.4-2.9-2.9-3.3-3.4-4.7Structural budget balance (% of GDP)..-0.6-2.2-3.4-3.3-3.4-4.6General government gross debt (% of GDP)14.627.038.237.335.135.135.938.2Tax-to-GDP ratio (%) (3)28.527.327.626.525.826.226.226.2Tax rate for a single person earning the average wage (%)27.228.525.6.....Tax rate for a single person earning 50% of the average wage (%)22.725.522.9.....forecast 
  
 
 
 
2.  PROGRESS WITH COUNTRY-SPECIFIC RECOMMENDATIONS 

of 

all 

59  % 

recommendations 

Since  the  start  of  the  European  Semester  in 
2011, 
country-specific 
recommendations  addressed  to  Romania  have 
recorded  at  least  ‘some  progress”.  41  %  of 
country-specific 
recorded 
'limited'  or  'no  progress'  (Graph  2.1).  Overall, 
Romania  has  advanced 
its 
country-specific recommendations since 2013, and 
some  reforms  have  been  pursued  even  during 
economically  challenging  times.  However,  the 
reform momentum appears to have waned over the 
past  few  years.  In  several  policy  areas  subject  to 
country-specific 
recommendations  action  has 
slowed down or even been reversed and significant 
efforts  are  still  needed  to  achieve  tangible  results 
on implementing reforms.  

implementing 

in 

Graph 2.1:  Overall multiannual implementation of 2013-

2018 CSRs to date 

Progress on labour market and social assistance 
reforms  has  stalled  since  2016.  The  minimum 
wage continues to be set by the government in an 
ad-hoc manner, without applying a set of objective 
criteria. Social dialogue remains ineffective, while 
the  role  of  certain  important  institutions  has  been 
recently  weakened.  The  implementation  of  the 
minimum  inclusion  income  law,  adopted  in  2016, 
stalled in 2017 and is now expected to be enforced 
only  as  of  April  2019.  Active  labour  market 
policies  are  not  comprehensively 
to 
individual  needs and are  insufficiently  focused on 
upskilling.  

looking 

Access  to  quality  and  inclusive  education  is 
highly  insufficient.  Early  school  leaving  remains 
problematic and the acquisition of basic and digital 
skills  faces  substantial  challenges.  Ensuring  equal 
opportunities  for  students  from  poor  households 
and  the  Roma  community  remains  a  challenge. 
The  limited  availability  of  nurseries  and  their 
uneven  distribution  does  not  support  children’s 
early  cognitive  and  social  development  and 
women’s  return  to  the  labour  market.  The  labour 
market 
limited. 
Forecasting  and  anticipation  of  skills  needs 
remains  unused,  hampering  the  adaptation  of  the 
education system to labour market needs. 

relevance  of  education 

is 

(1) The overall assessment of the country-specific 
recommendations related to fiscal policy exclude 
compliance with the Stability and Growth Pact.  
(2) The multiannual CSR assessment looks at the 
implementation since the CSRs were first adopted until the 
February 2019 Country report 
Source: European Commission 

On  fiscal  adjustment,  past  progress  has  been 
gradually  undone.  Since  2009,  Romania  has 
pursued a significant fiscal consolidation which led 
to  achieving  its  medium-term  objective  in  2014 
and  2015.  However,  since  2016  the  authorities 
have  been  pursuing  an  expansionary  fiscal  policy 
that  led  to  a  substantial  departure  from  that 
objective. 

taken  by 

The  healthcare  system  is  faced  with  multiple 
challenges. Progress of reforms in key areas such 
as  the  development  of  integrated  community  care 
centres  and  the  building  of  regional  hospitals  has 
been  delayed,  while  in  other  priority  areas  the 
measures 
the  authorities  appear 
insufficient.  The  administrative  capacity  of  the 
Ministry  of  Health  continues  to  be  very  limited, 
while  poor  investment  planning  and  lack  of 
political  commitment  further  hamper  the  progress 
of reforms. The shift to outpatient care remains at 
an  early  stage,  with  most  efforts  concentrated  on 
hospital care.  

The  conduct  of  public  policy  continues  to  be 
highly  unpredictable.  Important  and  sometimes 
complex  legislative  changes  are  still  adopted 
without proper consultation of stakeholders, while 
impact  assessments  are  often  lacking.  This  often 
results  in  additional  legislative  changes  being 
necessary  to  correct  the  unintended  effects  of 
emergency  ordinances  adopted  on  very  short 
notice.  Contradictory  public  statements  about  the 

15 

No Progress12%Limited Progress29%Some Progress46%Substantial Progress10%Full Implementation3% 
 
 
2. Progress with country-specific recommendations 

Table 2.1: 

Assessment of 2018 CSR implementation 

(1) This does not include an assessment of compliance with the Stability and Growth Pact. 
Source: European Commission 

future  of  important  reforms  also  contribute  to  the 
overall  climate  of  unpredictability  of  policy 
making, 
business 
environment. 

negatively 

affecting 

the 

Overall,  Romania  made  limited  progress (8)  in 
country-specific 
2018 
addressing 

the 

(8)  Information  on  the  level  of  progress  and  actions  taken  to 
address  the  policy  advice  in  each  respective  subpart  of  a 
country  specific  recommendation  is  presented  in  the 
overview table in Annex A.  

recommendations. There was limited progress on 
tax  compliance  and  collection,  upskilling  and 
education,  social  dialogue,  outpatient  care,  public 
investment  prioritisation  and  public  procurement. 
No  progress  was  made  on  the  fiscal  framework, 
minimum  wage 
inclusion 
income,  predictability  of  decision-making  and  the 
corporate governance of state-owned enterprises.  

setting,  minimum 

16 

     Romania Overall assessment of progress with 2018 CSRs:  Limited progress   CSR 1: Ensure compliance with the Council recommendation of … June 2018 with a view to correcting the significant deviation from the adjustment path toward the medium-term budgetary objective. Ensure the full application of the fiscal framework. Strengthen tax compliance and collection. Limited progress   No progress was made in ensuring that the  national fiscal framework is implemented  Limited progress was made in strengthening tax compliance and collection.     CSR 2: Complete the minimum inclusion income reform. Improve the functioning of social dialogue. Ensure minimum wage setting based on objective criteria. Improve upskilling and the provision of quality mainstream education, in particular for Roma and children in rural areas. Improve access to healthcare, including through the shift to outpatient care. Limited progress  No progress was made in completing the minimum inclusion income reform.   Limited progress was made on improving social dialogue.   No progress was made on minimum wage setting.   Limited progress was made on upskilling and improving access to quality mainstream education.  Limited progress was made on shifting to outpatient care    CSR 3: Increase the predictability of decision-making by enforcing the systematic and effective use of regulatory impact assessment and stakeholder consultation and involvement in the design and implementation of reforms. Improve the preparation and prioritization of large infrastructure projects and accelerate their implementation, particularly in the transport, waste and waste water sectors. Improve the transparency and efficiency of public procurement. Strengthen the corporate governance of State-owned enterprises. No progress  No progress was made on improving the predictability of decision making.   Limited progress was made on strengthening project prioritization and preparation in public investment.  Limited progress was made on implementing the national public procurement strategy.  No progress was made on improving the corporate governance of State owned enterprises.        
                                                           
 
 
 
2. Progress with country-specific recommendations 

Box 2.1: EU funds and programmes contribute to addressing structural changes and to 
fostering growth and competitiveness in Romania 

Romania  is  a  large  beneficiary  of  EU  solidarity.  EU  funds  allocated  to  Romania  amount  to  EUR  30.8 
billion for the 2014-2020 programming period, potentially representing around 2.4 % of GDP annually. As 
of the end of 2018, around EUR 20.8 billion was allocated to selected projects. EUR 7.9 billion of the total 
allocation was paid to Romania. In addition, EUR 1.2 billion was allocated to specific projects on strategic 
transport  networks  through  the  Connecting  Europe  Facility.  Furthermore,  Romanian  research  institutions, 
innovative firms and individual researchers benefited from other EU funding instruments, notably Horizon 
2020.   

EU funds can help address policy challenges identified in the 2018 country-specific recommendations. 
Actions  financed  include  investments  in  transport,  energy,  water  and  waste  management  infrastructure, 
education,  employment  and  social  policies,  strengthening  healthcare,  extending  broadband  access  and 
developing public administration and inter-operable e-government services. As a result, 315 km of TEN-T 
railway lines and 378 km of TEN-T roads are under construction; almost 140 000 additional households will 
have  access  to  broadband  of  at  least  30  Mbps;  around  750  000  additional  people  could  benefit  from 
improved  water  supply  and  more  than  2.5  million  people  are  set  to  be  served  by  improved  wastewater 
treatment.  In  addition,  1  793  micro-enterprises  and  688  SMEs  have  received  direct  support  to  strengthen 
their competitiveness. The SME Initiative has generated EUR 361 million of loans supporting 1 344 SMEs. 
Moreover,  the  European  Social  Fund  is  currently  supporting  ongoing  active  labour  market  measures  for 
about EUR 473 million, while other EU funds will also enable the hiring of 174 new researchers. Despite 
some progress, implementation is still delayed in several sectors including for smart, sustainable, social and 
connectivity investments. The reform of the public administration, a precondition for EU funding support, is 
progressing at a slow pace. In addition, the implementation of some key country specific recommendations 
and related reforms is severely delayed (see Section 2). 

In  addition,  the  Commission  can  provide  tailor-made  technical  support  upon  a  Member  State's 
request  via  the  Structural  Reform  Support  Programme  to  help  Member  States  implement  growth-
sustaining  reforms  to  address  challenges  identified  in  the  European  Semester  process  or  other 
national  reforms.  Romania,  for  example,  is  receiving  support  for  the  establishment  of  a  national 
promotional  bank.  The  Commission  is  also  assisting  the  authorities  in  their  efforts  to  develop  an 
economically and environmentally sustainable water and waste water sector, to modernise the health service 
delivery model and to reinforce the administrative capacity of the National Agency for Fiscal Administration 
to  improve  tax  compliance  and  revenue  collection.  In  addition,  in  2018,  work  has  started  on  assisting  the 
National Institute of Administration in introducing modern methods of training of public administration, on 
conducting the first evaluation of state aid schemes to assess market outcomes and optimise their design in 
the future, and on creating a mechanism of early detection/warming and intervention for identifying children 
at risk of repeated school drop-out. 

EU funding can contribute to the mobilisation of private investment. Out of the total European Regional 
Development Fund financing, EUR 350 million is to be delivered via financial instruments and is expected 
to  leverage  additional  private  investment  of  around  EUR  1  billion.  European  Social  Fund  financial 
instruments  should  support  in  particular  the  creation  of  new  jobs  and  investments  in  the  social  economy. 
However,  implementation  has  not  started.  Romania  is  advancing  in  the  take  up of  the  European  Fund  for 
Strategic Investments, with total financing amounting to EUR 652 million and expected to trigger EUR 2.7 
billion in additional private and public investments (1). A Romanian project backed by the European Fund 
for  Strategic  Investments  is  "Agricover  Loan  for  Small  and  Medium-sized  Enterprises",  for  which  the 
European  Investment  Bank  provides  a  EUR  15  million  loan  to  Agricover  Credit  IFN  to  finance  small 
projects in the agricultural sector. 

EU actions are intended to strengthen national, regional and local authorities and civil society. Around 
EUR 1 billion has been allocated to strengthen the capacity of the public administration at different levels 
and  encourage  cooperation  with  relevant  stakeholders.  The  Coal  Regions  in  Transition  Initiative  seeks  to 
improve socio-economic and technological transformation processes in the Jiu Valley mining region. 

https://cohesiondata.ec.europa.eu/countries/RO#  

(1)  https://ec.europa.eu/commission/sites/beta-political/files/romania-investment-plan-factsheet-17x17-dec18_en.pdf 

17 

 
 
3.  OVERALL FINDINGS REGARDING IMBALANCES, RISKS AND 

ADJUSTMENT ISSUES 

Introduction 

based  real  effective  exchange  rate  (see  Section 
4.4.1). 

to  examine 

for  Romania 

in-depth  review 

The  2019  Alert  Mechanism  Report  concluded 
should  be 
that  a  new 
undertaken 
the 
possible  existence  of  imbalances  (European 
Commission, 2018i). An in-depth review  was not 
prepared  for  Romania  in  2018  and  no  imbalances 
have been identified. This chapter summarises the 
findings  of  the  analyses  in  the  context  of  the 
Macroeconomic  Imbalances  Procedure  (MIP)  in-
depth  review  that  is  contained  in  various  sections 
in this report (9). 

3.1. 

IMBALANCES AND THEIR GRAVITY 

from 

The  current  account  deficit  has  been  widening 
markedly.  From  being  nearly  balanced  in  2014, 
the current account registered a deficit of 3.2 % of 
GDP in 2017 and is estimated to have deteriorated 
further  to  4.3 %  of  GDP  in  2018.  This  evolution 
the 
increasing  divergence 
implies  an 
economy's fundamentals, which point to a close to 
balanced current account. This is mainly the result 
of  an  increasing  deficit  of  the  trade  in  goods, 
spurred  on  by  the  private  consumption  boom 
against  the  backdrop  of  an  expansionary  fiscal 
policy  in  times  of  high  GDP  growth.  The  net 
international  investment  position,  in  turn,  has 
improved to -47.8 % of GDP in 2017. The 20 pps 
correction  since  2012  has  been  mainly  due  to  the 
strong  nominal  GDP  growth  more  than  offsetting 
the  widening  current  account  deficit.  The  capital 
account surplus added further relief. 

Unit  labour  costs  have  been  growing  strongly. 
Despite  significant  productivity  gains  in  recent 
years,  which  are  to  some  extent  a  catching-up 
effect  from  a  low  starting  point,  wage  increases 
have  been  significantly  outpacing  productivity 
growth 
to  a  marked 
acceleration  of  unit  labour  costs.  This  in  turn  has 
led  to  an  appreciation  of  the  unit  labour  costs-

since  2016, 

leading 

(9)  Analyses relevant for the in-depth review can be found in 
the  following  sections:  Public  finances  and  taxation 
(Section 4.1); Financial sector (Section 4.2), Labour market 
(Section  4.3),  Competitiveness  reforms  and  investment 
(Section  4.4).  Some  of  the  elements  relevant  for  the  in-
depth review came into existence only after the publication 
of the 2019 Alert Mechanism Report. 

Public  and  minimum  wages  have  been 
increasing  at  a  rapid  pace,  with  potential 
spillovers  to  the  private  sector  and  negative 
implications  for  competitiveness.  Public  wages 
are on a marked upward trend. The more subdued 
evolution of wages in the tradeable sector in recent 
years,  as  well  as  relatively  robust  productivity 
developments,  have  allowed  exports  to  remain 
competitive  so  far  and  helps  explain  the  more 
limited  loss  in  cost  competitiveness  in  tradeables. 
Nevertheless,  empirical  evidence  shows  that  the 
in  wage 
public  sector  has  a 
determination  in  Romania.  Therefore  recent  and 
future wage increases in the public sector may lead 
to  substantially  higher  private  sector  wages, 
including  in  the  tradeable  sector,  undermining 
competitiveness.  Also  the  unilateral  government-
set  increases  in  the  statutory  minimum  wage, 
starting  in  2015  and  due  to  continue  into  2019, 
have  added  to  wage  pressures  and  reinforce  the 
potential negative effect on competitiveness. 

leading 

role 

Recent legislative initiatives risk threatening the 
normal  functioning  of  the  financial  sector. 
These  include  a  parliamentary  law  retroactively 
capping  mortgage  interest rates and a  government 
emergency  ordinance  imposing  a  tax  on  banks' 
assets  linked  to  interbank  interest.  Furthermore, 
measures  aimed  at  the  second  pension  pillar,  also 
passed into law by the emergency ordinance, may 
the  development  of  capital 
strongly  hinder 
markets,  which  are  already  very  shallow 
in 
Romania. The new risks to the banking sector, the 
weakening  of 
the 
increasing  unpredictability  of  policy  making  may 
also dent private investment. 

investors  and 

institutional 

3.2. 

EVOLUTION, PROSPECTS AND POLICY 
RESPONSES  

The current account deficit is on a deteriorating 
trend,  with  its  composition  being  a  concern. 
Prospects imply a further deterioration in 2019 and 
2020,  to  close  to  5%  of  GDP  according  to  the 
Commission’s 2018 Autumn Forecast. Romania is 
one of the very few Member States whose current 

18 

 
 
                                                           
3. Overall findings regarding imbalances, risks and adjustment issues 

normalisation in the EU, as  well as  trade  tensions 
leading  to  weaker  external  demand.  If  these 
developments were to materialise, they would have 
a negative impact on investment and exports. 

3.3.  OVERALL ASSESSMENT 

in 

a  good 

since  2012,  growth 

Romania faces increasing risks in the form of a 
deteriorating  current  account  deficit  and 
accelerating  unit 
labour  costs.  The  current 
account  deficit  has  been  widening  since  2014 
mainly  due  to  a  growing  deficit  of  the  trade  in 
consumer  goods.  Despite 
export 
performance  and  significant  export  market  share 
gains 
imports  has 
persistently  outpaced  that  of  exports.  Repeated 
increases  of  the  minimum  wage  and  public  sector 
wages  have  put  unit  labour  costs  under  growing 
pressure. The impact of  the  wage  policies on cost 
competitiveness  has  so  far  been  mitigated  by  a 
number of factors: productivity gains, a slow pass-
through  to  the  tradeable  sector  of  the  rising 
economy-wide  unit  labour  costs,  and  currency 
depreciation.  However,  the  continuation  of  this 
trend  entails  potential  competitiveness 
losses, 
leaving the country vulnerable to external shocks.  

Policy measures adopted so far may exacerbate 
the risks of imbalances. Government decisions on 
public  and  minimum  wages  have  played  a  major 
role  in  increasing  risks  to  cost  competitiveness. 
Also, an expansionary fiscal stance limits the room 
to  cushion  potential  shocks.  The  persistence  of 
these  trends  can  further  harm  the  confidence  of 
economic  players,  reduce  the  economy's  capacity 
to adapt to shocks that  may arise at  home  or spill 
over  from  abroad,  and  affect  the  economy’s 
growing  external  financing  needs  as  measured  by 
the high and worsening external deficit. 

Recent  government  decisions  have  increased 
risks in the financial sector and may negatively 
affect  private  investment.  These  decisions  could 
lead  to  a  lower  availability  of  credit,  fewer  long-
term  investors,  and  an  unstable  and  unpredictable 
policy-making  environment. 
the 
economy’s  limited  debt  tolerance,  strong  reliance 
on  foreign  investment  and  past  record  of  capital 
flows  volatility,  addressing  the  ongoing  trends 
would prevent a reversal of investors’ sentiment in 
a  context  of  slowing  economic  activity  and 
increased uncertainty in the economic outlook. 

light  of 

In 

is  worsening.  Changes 

account  deficit 
in 
composition  are  also  a  concern,  as  growth  in 
imports has been substantially higher for consumer 
goods than for intermediate or capital goods. This 
means that the import spree is not adding much to 
the  potential  future  growth  of  the  economy  or 
improving living standards in a sustainable way.  

Recent  improvements  in  the  net  international 
investment  position  may  stall.  GDP  growth, 
while  still  robust,  has  slowed  in  2018  and  is 
expected  to  slow  further  in  2019  and  2020,  while 
the  current  account  is  forecast  to  continue  to 
deteriorate.  That  could  end 
the  substantial 
improvement  of  the  net  international  investment 
position  observed  over  the  past  5  years.  The 
composition  of  the  net  international  investment 
position,  with  a  small  debt  weight,  may  mitigate 
risks.  Overall,  however,  recent  and  prospective 
developments  on  the  external  side  expose  the 
economy to growing risks, especially in times of a 
more uncertain and weakening world economy.  

export  market 

While  the  export  performance  is  still  strong, 
labour  costs  can  hurt 
fast-growing  unit 
competitiveness  and  the  country’s  external 
position.  Romania’s 
shares 
continued  to  increase  in  2017  despite  increasing 
RON-denominated  export  prices.  The  gradual 
depreciation of the national currency over the past 
2 years has somewhat reduced the pressure on the 
price competitiveness of exports. However, private 
sector  wages  are  under  pressure  from  a  very  tight 
labour market, repeated minimum wage increases, 
and  possible  spillovers  from  strong  public  sector 
wage  hikes.  This  could  trigger  competitiveness 
losses,  including  in  the  sectors  more  exposed  to 
external competition. 

Threats  to  the  external  performance  also  arise 
from  the  current  policy  trajectory  and  the 
increase 
external  environment.  These  could 
macroeconomic  volatility,  undermine  the  capacity 
to  withstand  adverse  shocks,  and  eventually  slow 
down  convergence  toward  the  standards  of  living 
in other EU countries. Uncertainty over policy and 
legislative decisions, including those with potential 
impact  on  investment  and  production  decisions, 
contributes 
of 
unpredictability in public policy making. The main 
external  risks  to  the  economic  outlook  include  an 
abrupt  shift  in  global  risk  appetite  against  the 
policy 
backdrop 

continued  monetary 

perception 

overall 

the 

of 

to 

19 

 
3. Overall findings regarding imbalances, risks and adjustment issues 

Box 3.1: MIP assessment matrix (*) – Romania 2019 

Gravity of the challenge 

Evolution and prospects 

Policy response 

Imbalances (unsustainable trends, vulnerabilities and associated risks) 

for 

the 

Parliamentary  and  governmental 
legislation 
financial 
sector,  the  second  pension  pillar 
and  energy  and  communications 
companies  have  increased  risks 
financial  sector  and 
the 
to 
investment. 

A 

through 

The  widening  of  the  current 
account  deficit  is  in  large  part 
linked 
to  Romania's  private 
consumption,  which  expanded, 
in  real  terms,  by  7.9 %  in  2016, 
10.1 %  in  2017,  and  4.6 %  in 
2018. 
persistently 
expansionary  fiscal  policy  has 
been  fostering  this  consumption 
boom 
successive 
indirect  tax  cuts  and  substantial 
public and minimum wage hikes. 
Public 
however, 
contracted  sharply  in  both  2016 
and  2017,  although  is  estimated 
in 
to  have  slightly 
the 
2018, 
indicating 
government's 
stance 
encourages  growth  in  the  short-
run  to  the  detriment  of  its  long-
term prospects. 

increased 
that 

investment, 

fiscal 

Financial sector 
and investment 
(see Section 4.2) 

Recent  legislative  initiatives  may 
hurt the functioning of the financial 
sector,  international  capital  flows 
and  private  investment,  and  might 
constrain  the  conduct  of  monetary 
policy.  These  legislative  initiatives 
include:  (i)  a  parliamentary  law 
retroactively 
capping  mortgage 
interest  rates;  (ii)  a  government 
emergency  ordinance  imposing  a 
tax  on  banks'  assets  linked  to  the 
interest  rate;  and  (iii) 
interbank 
measures  weakening 
the  second 
pension  pillar  and  the  development 
of capital markets. 

The  banking  sector’s  capital  adequacy 
and  quality  continued  to  improve  in 
2018.  However,  the  financial  sector’s 
ability  to  finance  the  economy  may  be 
impaired  and  its  stability  threatened  by 
in 
legislative 
December  2018,  including  a  retroactive 
capping of mortgage interest rates, a new 
tax  on  banks’  assets  and  changes  to  the 
second pension pillar. 

introduced 

changes 

legislation  may  also 
The  December 
hinder  foreign  and  domestic  private 
investment  due  to  tighter  credit  and  a 
shallower  capital  market  with  weaker 
institutional 
Unclear 
implementation  details  blur  the  potential 
overall  effect  in  the  economy,  adding  to 
the 
business 
environment,  affected  by  political  and 
legislative 
and 
unpredictability. 

beleaguered 

uncertainty 

investors. 

already 

External balance  
(see Section 
4.4.1) 

The  current  account  deficit  has 
to  an 
persistently  deteriorated, 
estimated  4.3 %  of  GDP  in  2018. 
The  widening  deficit  has  been 
driven  mainly by a worsening trade 
deficit  in  goods,  which  went  from 
4.3 %  of  GDP  in  2014,  when  the 
to 
current  account  was  close 
balance, to 6.7 % in 2018.  

The trade  deficit will continue  to widen, 
pushing the current account deficit to an 
estimated  4.5 %  of  GDP  in  2019  and 
4.7 %  in  2020.  The  deterioration 
is 
taking  place  in  a  context  of  buoyant 
foreign  demand  and  strong  gains  in 
export  market  shares.  Less  favourable 
external conditions could lead to an even 
stronger  than  forecast  worsening  of  the 
current  account.  At  the  same  time,  the 
NIIP  is  expected  to  improve  at  a  slower 
pace  or  even  to  worsen  from  levels  that 
are  already  behind  what  is  suggested  by 
economic fundamentals. 

The  consumption-led  widening  of  the 
current  account  deficit  is  not  supportive 
of  potential  GDP  growth.  The  trade 
deficit  in  goods  worsened  in  spite  of  a 
strong  export  performance  (the  export 
market share has increased by more than 
a  third  since  2012).  The  change  in  the 
also 
composition 
of 
worrisome.  The 
in 
consumer  goods  shifted  from  a  small 
surplus  in  2014  to  a  deficit  of  2.3 %  of 
GDP  in  2017.  Imports  of  consumer 
goods  are  growing  significantly  faster 
than  other  imports.  Consumer  goods 
imports  increased  by  14 %  in  the  last  3 
years,  twice  as  much  as  imports  of 
intermediate and capital goods. 

imports 
trade  balance 

is 

20 

 
 
 
 
 
 
 
 
 
 
 
 
3. Overall findings regarding imbalances, risks and adjustment issues 

Gravity of the challenge 

Evolution and prospects 

Policy response 

Competitiveness  
(see Section 
4.4.1) 

After  a  modest  evolution  in  the 
aftermath  of  the  crisis,  unit  labour 
costs  (ULCs) 
in  Romania  have 
started to pick  up  in recent  years. In 
2017, economy-wide ULCs grew by 
8 %,  the  highest  increase  in  the  EU. 
The  ULC  acceleration  has  been 
driven entirely by wage growth, with 
productivity  continuing  to  improve 
rates,  while  nominal 
strong 
at 
compensation 
employee 
increased  by  an  average  of  15 % 
between 2016 and 2018. 

per 

As  a  result,  the  ULC-based  real 
effective  exchange  rate  (REER)  has 
appreciated  continuously  since  2016 
while  the  export-price-based  REER 
also started appreciating in 2018. For 
the  future,  the  impact  of  these  cost 
losses 
and  price  competitiveness 
an 
exacerbated 
may 
environment  of  trade  tensions  and 
slowing external demand. 

be 

in 

Net  wages  increased  by  13 %  in  the  first 
11 months of 2018. They remained higher 
in  the  public  sector  (19 %  year-on-year) 
followed  by  both  industry  and  market 
services  which  still  grew  at  a  robust  pace 
(around  10.5 %  year-on-year).  Public 
wage developments  may further spill over 
into  the  private  sector  and  trigger  lagged 
competitiveness losses.  

The  impact  of  increasing  ULCs  on  price 
competitiveness  has  been  limited  so  far. 
Export  prices,  however,  resumed  growth 
in  2017  and  the  corresponding  REER 
started  to  appreciate  in  2018,  signalling 
risks to price competitiveness. 

such 

Competitiveness  continues  to  be  tied  to 
as  deficient 
non-cost 
factors 
infrastructure,  particularly 
in  poorer 
regions,  and  a  cumbersome  business 
environment,  fuelled  by  political  and 
and 
legislative 
unpredictability,  which  hinder  long-term 
economic  decisions  and  hurt  business 
confidence and investment. 

uncertainty 

Repeated  ad  hoc  public  wage 
and  minimum wage  hikes  have 
driven 
the  acceleration  of 
wages  in  the  overall  economy. 
The  gross  minimum  wage 
almost  doubled 
from  RON 
1 050  in  July  2015  to  RON 
2019, 
2 080 
resulting 
highly 
compressed  wage  distribution. 
The  share  of  workers  earning 
the  minimum  wage, which was 
below  10 %  until  2012,  has 
grown to 37 % in 2017. 

January 

in 

in 

a 

the  public  sector 
in 
Wages 
than  75 % 
grew  by  more 
2018, 
and 
between 
2015 
the 
outpacing 
significantly 
private 
Further 
sector. 
substantial  increases  have  been 
approved for the coming years.  

Conclusions from the IDR analysis 

 

 

 

The current account balance is deteriorating as the growth of imports continues to persistently outpace that of exports. This is despite 
export market share gains. Cost competitiveness has been deteriorating  on the back of strong wage growth. Recent parliamentary and 
governmental  decisions  may  hurt  the  functioning  of  the  financial  sector  and  have  added  to  the  prevailing  perception  of  an 
unpredictable policy-making environment. 

The  deterioration  of  the  current  account  balance  is  expected  to  continue  in  the  medium  term,  reflecting  the  ongoing  private 
consumption boom.  Imports of consumer  goods  have been a  major driver of  the current account  deterioration, spurred by  fiscal-led 
private  consumption.  Spillovers  from  public  sector  wages  to  the  private  sector  and  a  deterioration  of  external  conditions  due  to 
increasing trade tensions could further trigger a significant worsening of the country's current account. Recent legislation affecting the 
financial sector may distort the functioning of the sector, erode international capital flows and impact private investment. 

Policy action has contributed to the accumulation of vulnerabilities for the Romanian economy on several accounts. The expans ionary 
fiscal policy, in a context of high GDP growth, has repeatedly stimulated an already fast growing economy and led to the widening of 
the current account deficit. The recent increase in unit labour costs, triggered by successive public and minimum wages increases, may 
compromise external competitiveness. Recent legislative initiatives have created new risks to the functioning of the financial sector, 
international capital flows and private investment. 

21 

 
 
 
4.  REFORM PRIORITIES 

4.1.  PUBLIC FINANCES AND TAXATION 

4.1.1.  FISCAL POLICY (*) (10) 

4.1.2.  TAXATION 

social 

contributions 

The  authorities  have  been  reducing  taxes  and 
increasing  current  spending,  while  cutting 
public investment. (Graph 1.1) Tax revenues have 
been  dropping  following  cuts  in  consumption  tax 
rates  in  2016-2017  and  a  cut  of  the  flat  personal 
income tax rate  as  from 2018. On  the other  hand, 
significantly 
collected 
increased in 2018 thanks to the social security shift 
on the  employees and to  the  cut to  the proportion 
transferred  to  the  second  pension  pillar  (Box 
4.2.1). On the expenditure side, public wages have 
been  significantly  increased  in  an  ad-hoc  manner 
since  2016.  The  unified  wage  law,  adopted  in 
summer 2017, increased gross wages in the public 
sector  in  2018  and  beyond.  At  the  same  time, 
public  investment  gradually  fell  to  a  post-EU 
accession  low  in  2017  and  is  projected  to  have 
increased  only  slightly  in  2018.  These  policies 
have  increased  the  public  deficit  and  boosted 
private  consumption  (see  Sections  1  and  4.4.1)  to 
the detriment of long-term growth. 

Graph 4.1.1:  Drivers of change of general government 

balance 

The tax structure is characterised by low levels 
of revenues, with high reliance on consumption 
taxes.  The  tax-to-GDP  ratio  stood  at  24.9 %  in 
2017, the lowest value since 1996. This represents 
the second lowest level in the EU – well below the 
EU  average  of  39.2 %.  The  tax  structure  largely 
relies on consumption taxes, while the share of tax 
labour 
revenues 
social 
contributions) 
the  EU-average 
is  well  below 
(European Commission, 2019a).  

(including 

from 

low 

level  of 

tax  revenues 

The  power  of  the  tax  system  to  reduce  poverty 
and  correct  social  disparities  is  limited.  Income 
inequality  remains  one  of  the  highest  in  the  EU 
and a third of Romanians are at risk of poverty, the 
highest  rates  in  the  EU  (Section  4.3.2).  The 
relatively 
limits 
Romania's  ability  to  tackle  these  problems,  either 
via  redistribution  or  through  financing  public 
goods and services (Section 4.3.2). In addition, the 
tax  structure  relies  substantially  on  consumption 
taxes,  which  have  no  or  very  little  redistributive 
impact. The design of labour taxation is among the 
least  progressive  in  the  EU,  as  measured  by  the 
difference between the relative tax burden for low- 
and high-income earners (Graph 4.1.2). This partly 
explains the limited redistributive impact of the tax 
and benefit system (Graph 4.1.3). The graph shows 
that both non-pension social benefits (the distance 
between  the  square  and  triangle)  and  taxes  (the 
distance between the triangle and the cross) have a 
low impact on income inequality. 

Source: Eurostat, European Commission 2018 Autumn 
Forecast (for 2018) 

(10)  An  asterisk  indicates  that  the  analysis  in  the  section 
contributes  to  the  in-depth  review  under  the  MIP  (see 
Section 3 for an overall summary of the main findings. 

22 

-5,0-4,0-3,0-2,0-1,00,01,02,03,04,0201020112012201320142015201620172018*tax revenuessocial contributionscompensation of employeesinvestmentother itemsgeneral government balance change 
 
 
                                                           
Graph 4.1.2:  Degree of progressivity of labour income 

taxation in EU Member States, 2017 

(1) The indicator takes into account personal income taxes, 
social security contributions and family allowances. (2) The 
indicator is based on tax wedge data for a variety of family 
compositions (single, one earner couple, two earner 
couples, all three without and with two children). Those are 
then weighted according to their prevalence in the 
respective Member State (2) The setup of two earner 
couples combines a person earning 67 % of the average 
wage with either a person earning 50 % or 167 % of the 
average wage  
Source: European Commission calculations, based on 
Eurostat and OECD data. 

Graph 4.1.3:  Redistributive power of the tax and benefit 

systems in EU Member States, 2016 

4.1. Public finances and taxation 

the 

postponed until 1 January 2017. This tax proved to 
be  short-lived  as  on  1  July  2017,  the  government 
decided  to  suspend  its  application  until  1  January 
2019. However, government emergency ordinance 
74/2018  introduced  a  contribution  for  the  circular 
economy,  imposed  at  relatively  low  levels,  to  be 
collected  by 
sanitation/waste  collection 
companies.  The  government  is  also  planning  to 
introduce  in  2019  a  pollutants-dependent  car 
registration  tax  (see  Section  4.4.2).  Moreover,  the 
mandatory  contribution/surcharge  for  failure  to 
achieve 
targets  by  economic 
operators  placing  on  the  market  electrical  and 
electronic  equipment  and  portable  batteries  and 
accumulators,  and  by  collective  organisations  has 
been postponed until 2020. 

the  collection 

fraud, 

Tax compliance remains low, as exemplified by 
the  high  value  added  tax  (VAT)  gap.  The  VAT 
gap is defined as the difference between the VAT 
theoretically  due  and  VAT  actually 
liability 
collected.  It  thus  represents  lost  revenue  due  to 
evasion, 
bankruptcies, 
administrative errors or legal tax optimisation. The 
VAT gap in Romania was the largest in the EU in 
2016  as  a  share  of  VAT  theoretically  due  (CASE 
et  al.  2018).  It  amounted  to  around  36 %  of  VAT 
theoretically  due,  compared  to  the  EU  average  of 
approximately  12 %.  The  gap  increased  by  about 
2 pps in 2016 compared to the previous year.  

insolvencies, 

The  large  shadow  economy  poses  additional 
challenges  in  terms  of  tax  compliance.  The 
Romanian informal economy is estimated at 22 % 
of  the  total  economy  (2014  estimation  based  on 
OECD  methodology),  with 
the  unregistered 
workforce  the  biggest  component.  The  National 
Institute  of  Statistics  estimates  the  unobserved 
economy  at  about  21 %  of  GDP  in  2017 (11). 
According to a recent study (PWC, 2018), 42 % of 
surveyed  organisations  reported  having  been 
subject  to  economic  crimes  (defined  as  fraud 
committed  by  consumers,  cybercrime,  business 
misconduct)  in  the  last  24  months,  a  significant 
increase compared to the 2016 study (17 %). 

Undeclared  work  in  Romania  is  high.  It  is 
estimated to account for around one fifth of labour 
input  and  a  quarter  of  gross  value  added  in  the 
private  sector  (European  Commission,  2018m). 
Although  coercive  measures  were  expanded,  i.e. 

(11)  http://www.consiliulfiscal.ro/ionut_site.pdf.  

(1) Income data are adjusted for household size 
(equalisation). (2) Income inequality is measured by the Gini 
coefficient. The value 0 corresponds to perfect equality 
(same income to everybody) while 100 corresponds to 
maximum inequality (all income distributed to only one 
person and all the others have nothing.) (3) EU-SILC 2016 
data are based on income generated in 2015 (with the 
exception of Ireland and the UK.) 
Source: European Commission calculations, based on 
Eurostat data 

The  implementation  of  several  environmental 
taxes  has  been  delayed.  The  implementation  of 
the  landfill  tax  introduced  in  2014  was  gradually 

23 

-100102030405060IEFRBEITUKLUPLNLSIFIPTELMTATSKDKSEESCZLTEEDEHRHULVROBGEU-28in %Tax wedge 50% AWTax wedge 167% AWDifference202530354045505560IEFIUKDKBENLATSESIPTHRDEFRESHUCYCZMTITLUROEELTLVELSKPLBGMarket income inequality (pensions = market income)Disposable income inequality before social transfersDisposable income inequalityMarket income inequality (pensions = social transfer) 
 
 
 
                                                           
4.1. Public finances and taxation 

analysis in order to identify, assess and manage the 
risk  of  tax  non-compliance.  As  of  July  2018,  the 
Large  Taxpayers  Office  began  sending  taxpayers 
indicators 
formal  questionnaires  about 
identified  in  their  specific  activity  which  may 
influence their risk rating. Even though the criteria 
for  risk  assessment  are  not  made  public,  the 
questionnaires  may  help  the  tax  administration 
identify  inconsistencies  in  the  VAT  reporting 
obligations of the notified taxpayers (14).  

risk 

4.1.3.  FISCAL FRAMEWORK 

to 

requires 

The  Fiscal  Responsibility  Law  sets  national 
numerical  fiscal  rules  which  should  guide  the 
budgetary process. It contains a  structural deficit 
rule,  which 
compliance  with  or 
convergence 
the  medium-term  budgetary 
objective of a structural deficit not exceeding 1 % 
of GDP (15). The national framework also contains 
several auxiliary rules concerning expenditure and 
revenue  items.  Furthermore,  the  government  is 
required to prepare an update of the fiscal strategy 
– which sets out the macroeconomic assumptions, 
medium-term  budget  planning  and  expenditure 
ceilings  that  should  guide  the  annual  budget 
process  –  and  send  it  to  Parliament  by  15  August 
of  the  preceding  year.  The  Fiscal  Responsibility 
Law also requires that the Prime  Minister and the 
Minister  of  Finance  sign  a 
joint  statement 
certifying  that  the  draft  budget  and  the  fiscal 
strategy respect the fiscal rules set in the Law, and 
the principles of fiscal responsibility. 

As 
in  previous  years,  the  national  fiscal 
framework has not been respected. According to 
the  national  Fiscal  Council,  the  2018  budget  is  in 
flagrant  contradiction  with  the  fiscal  rules  set  up 
by  the  Fiscal  Responsibility  Law  (Fiscal  Council 
2017).  In  particular,  the  2018  budget  targeted  a 
headline deficit of close  to 3 % of GDP,  which  is 
inconsistent  with  the  structural  deficit  rule.  The 

(14)  In particular, those in relation to their third parties (possible 
VAT  abuse/non-compliance),  the  registration  of  a  profit 
margin  below  the  average  of  the  market  (possible  transfer 
pricing  abuse/non-compliance),  as  well  as  abnormal 
variations  of  certain  financial  indicators  such  as  labour 
productivity,  indebtedness,  liquidity,  rotation  speed  of 
fixed  assets  (financial  management  implications,  possible 
abuses/non-compliance). 

(15)  The path of convergence is defined in agreement with the 
EU  institutions,  based  on  the  rules  of  the  Stability  and 
Growth Pact. 

by  enlarging  the  legal  definition  of  undeclared 
work  situations (12),  the  overall  number  of  cases 
detected  by  the  labour  inspectorates  is  still  low. 
Coordination between the labour inspectorates and 
the fiscal authorities is, however, improving. Still, 
“envelope  wages”  (i.e.  underreported  salaries) 
have  so  far  been  only  treated  as  a  tax  collection 
problem  and  not  as  a  labour  relations  issue.  The 
preventive  measures  are  not  showing  sufficient 
results and could benefit from stronger cooperation 
with social partners. 

Tax  evasion  is  facilitated  by  high  use  of  cash 
payments.  According  to  the  National  Bank  of 
Romania, cash payments are four times larger than 
electronic payments. Only 77 % of total bank cards 
are  active,  in  the  context  of  a  relatively  low  level 
financial  education (13).  Only  58 %  of 
of 
Romanian adults hold a bank account compared to 
94 %  in  high-income  economies  and  63 %  in 
developing  countries.  About  a  third  of  pensioners 
receive  their  rights  in  cash  (World  Bank,  2017b). 
All  this  facilitates  the  spread  of  the  shadow 
economy and tax evasion. Law 19/2018, amending 
government emergency ordinance 193/2002 on the 
introduction  of  modern  payment  systems  (the  so-
called  "cashback  law")  now  obliges  companies 
with  a  minimum  turnover  equivalent  to  EUR 
50 000  to  operate  card  readers  or  other  modern 
electronic  payment  systems.  Although  a  positive 
development, its ability to reach consumers in rural 
areas remains to be assessed. 

about 

24 000 
from 

The tax administration has taken some steps on 
internal  reorganisation  and  processes 
to 
enhance  tax  compliance.  The  tax  administration 
moved 
mid-sized 
the  control  of 
contributors/companies 
regional  tax  administrations  to  county-level  ones 
as  of  November  2018.  The  tax  administration  has 
recently  updated  its  guidelines  on  the  registration 
of certified cash registers and the issuing of single 
identification  number  for  cash  registers.  It  is  also 
in the process of operationalising the use of its risk 

(12)  False  part-time  contracts,  fake/fraudulent  suspension  of 
work  and  failure  to  declare/register  work  contracts  in  the 
electronic  labour  registry  at  least  24  hours  in  advance. 
Done  by  government  emergency  ordinance  53/2017,  OJ 
644 of 7 August 2018, approved through Law 88/2018, OJ 
315 of 10 April 2018. 

(13)  According to the Standard&Poor’s Ratings Services Global 
Financial Literacy Survey, only 22 % of adults in Romania 
understand  basic  financial  concepts,  against  a  European 
average of 52 %. For details, see Klapper et al. (2015). 

24 

 
                                                           
                                                           
4.1. Public finances and taxation 

(Graph  4.1.4).  The  structure  of  the  government 
debt in terms of maturity longer than 1 year helps 
to mitigate vulnerabilities. However, the high share 
of  government  debt  in  foreign  currency  and  the 
substantial holdings of debt by non-residents could 
be  aggravating  factors,  as  could  the  negative  net 
international investment position.  

Graph 4.1.4:  General government debt projections (% of 

GDP) 

2018  budget  amendment  from  September  broke, 
among others, rules prohibiting increases: (i) of the 
nominal  headline  and  primary  deficit  ceilings 
during  the  fiscal  year;  and  (ii)  in  personnel 
expenditure  and  total  government  expenditure 
excluding  EU  funds  during  the  fiscal  year.  The 
second  2018  budget  amendment,  published  in 
November, also broke several national fiscal rules. 
The  draft  2019  budget,  approved  by 
the 
government  on  8  February,  again  broke  multiple 
fiscal  rules,  including  the  structural  deficit  rule 
(Fiscal  Council,  2019).  Moreover,  as  in  previous 
years, the authorities did not send an update of the 
medium-term  fiscal  strategy  to  Parliament  by  the 
statutory August deadline, thereby undermining its 
guiding  role.  Also,  as  in  previous  years,  the 
authorities derogated from the requirement to sign 
a  statement  that  the  2019  budget  and  the  fiscal 
strategy  respect  the  fiscal  rules  and  principles  of 
fiscal responsibility. 

4.1.4.  DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

Source: European Commission calculations. 

Over  the  short  term,  no  significant  risks  of 
fiscal stress are foreseen. The value of the early-
detection  indicator  of  fiscal  stress  (ʻS0ʼ),  which 
assesses  risk  within  one  year,  is  below  its  critical 
threshold.  None  of 
the  fiscal  and  financial 
competitiveness  sub-indexes  point  to  short-term 
vulnerabilities.  Financial  markets’  perceptions  of 
sovereign  risk  remain  medium-grade,  with  a 
‘BBB- stable’ or equivalent rating of the sovereign 
debt  from 
three  major  rating  agencies. 
However,  the  financing  cost  of  public  debt  has 
been increasing since mid-2017 (see Section 1).  

the 

The  public  debt  ratio  is  expected  to  gradually 
increase,  leading  to  debt  sustainability  risks  in 
the  medium  term (16).  Due  to  a  high  structural 
primary  deficit,  and  assuming  no-policy  change, 
the debt-to-GDP ratio is set on an upward path and 
expected  to  go  beyond  the  60 %  of  GDP  Treaty 
reference  value by 2029. Adhering to the  existing 
the 
fiscal 
requirements of the preventive arm of the Stability 
and  Growth  Pact,  would  set  the  government  debt 
ratio on a significantly lower trajectory relative to 
the  baseline  scenario  at  unchanged  fiscal  policy 

full  compliance  with 

rules, 

i.e. 

(16)  For  an  overview  of  fiscal  sustainability  assessment  see 

European Commission (2019b). See also Annex B. 

The  high  fiscal  deficit  and  increasing  ageing 
costs  are  set  to  negatively  impact  government 
fiscal  sustainability  over  the  long  term.  The 
relevant indicator (ʻS2ʼ), points to a required fiscal 
adjustment  of  5.9 pps  of  GDP  to  ensure  that  the 
public debt ratio remains sustainable over the long 
term.  This  is  driven  by  the  initial  budgetary 
position  (a  contribution  of  3.7  pps  of  GDP)  and 
aging costs, in particular pensions and health care 
(a contribution of 2.1 pps of GDP).  

These  projections  do  not  take  into  account  the 
long-term  impact  of  the  new  pension  law.  The 
law  adopted  by  Parliament  in  December  2018 
changed  several  parameters  used  to  calculate 
pension benefits. It will lead to substantially higher 
long-term pension costs. In particular, the pension 
point  value  will  rise  as  the  indexation  factor  for 
existing  pensions  would  no  longer  converge  to 
prices  but  will, 
instead,  remain  permanently 
composed  of  wages  and  prices.  Moreover,  the 
contributory period used in the calculation of one’s 
pension  is  now  shorter,  leading  to  higher  pension 
expenditure  for  new  pensions.  However, 
the 
abolishment  of  the  correction  index  for  new 
pensions  (which  used  to  partly  link  the  first 
pension to wages) will mitigate the overall pension 

25 

152535455565751617181920212223242526272829BaselineSGP scenarioConvergence Programme scenario 
                                                           
 
4.1. Public finances and taxation 

expenditure 
parameters. 

increase 

implied  by 

the  other 

26 

 
4.2.  FINANCIAL SECTOR 

Banking and insurance (*) 

Following several years of efforts to strengthen 
its resilience, the banking sector faces increased 
stability  risks.  Banking  sector  capitalisation  has 
been  flat  since  2016  at  around  19 %,  well  above 
the  EU  average.  The  common  equity  tier  1  ratio 
declined  marginally  in  the  first  half  of  2018,  but 
reassuring  at  17.5 %.  The  non-
remained 
performing  loans  ratio  declined  to  below  6 %  by 
the  third  quarter  of  2018,  while  the  flow  of  new 
non-performing  loans  has  again  increased  in  the 
first  months  of  2018,  in  particular  for  household 
loans  in  local  currency.  With  sovereign  bond 
holdings of roughly 20 % of total assets (compared 
to 2.2 % in 2008) and a pronounced home bias, the 
banking  sector  is  heavily  exposed  to  domestic 
sovereign  debt,  leaving  banks  vulnerable  to  an 
increase  in  sovereign  spreads  and  interest  rate 
hikes.  Due  to  their  deposit-based  funding  model, 
instruments. 
banks  have 
Consequently, 
compliance  with  minimum 
requirement  for  own  funds  and  eligible  liabilities 
will entail higher costs, in particular in the context 
of Romania’s under-developed capital market. 

few  debt 

issued 

Tax  measures  have  slowed  down  sales  of  non-
performing  loans  by  banks.  In  mid-2017,  the 
government  limited  as  of  January  2018  the  tax 
to  non-
deductibility  of  expenditures  related 
performing  loans  sold  by  banks  to  third  parties  to 
30 %. Full tax deductibility was previously the rule 
(European  Commission,  2018a).  Law  72/2018 
introduced  an  additional  tightening  of  the  tax 
regime  for  the  non-performing  loans  sold  by 
banks, by taxing both the income from the sale and 
part  of  the  losses  recorded  at  sale.  The  law  treats 
70 % of the difference between the  book  value  of 
loans  sold  or  written-off 
the  non-performing 
(covered  partially  or  entirely  by 
loan-loss 
provisions)  and  the  sale  price  as  being  similar  to 
income  and,  therefore,  subject  to  taxation.  This 
treatment  goes  against  efforts  to  develop  the 
secondary market for impaired assets in the EU. It 
discourages  the  sale  of  non-performing  loans  and 
would  hinder  balance  sheets’  repair  if  these  loans 
were  to  increase  again.  The  Romanian  secondary 
market  for  impaired  assets,  the  most  dynamic  in 
Eastern  Europe  in  recent  years,  recorded  sales  of 
EUR 8.5 billion in 2015-2017 but has stalled since 
Q1-2018. 

A  recently  introduced  bank  tax  is  likely  to 
create strong headwinds for the banking sector. 
In  December  2018,  without  impact  assessment  or 
the  government 
consultation  of  stakeholders, 
adopted  an  emergency  ordinance  introducing  a 
new  tax  for  banks  (the  "tax  on  greed")  levied  on 
total assets and linked to the level of the interbank 
interest rate (ROBOR). The levy is calculated on a 
quarterly  basis.  It  increases  gradually  from  0.1 % 
to  0.5 %  of  total  assets  depending  on  how  much 
the  quarterly  average  ROBOR  surpasses  an 
arbitrarily  set  threshold  of  2 %.  The  tax  is  very 
pro-cyclical  and  raises  calibration  concerns,  as  it 
inhibits the price-setting mechanism in the banking 
sector. At the January 2019 level of the ROBOR, it 
will amount to 1.2 % of total assets per year. Based 
on a preliminary analysis, the tax is likely to put a 
strain  on 
financial  stability  by  significantly 
impacting  the  solvency  and  profitability  of  banks 
and  by  worsening  further  the  situation  of  weaker 
banks.  The  impact  of  the  levy  on  banking  sector 
profitability  appears  to  be  much  higher  than  in 
other EU countries which introduced such taxes in 
the  past,  including  regional  peers.  Moreover,  the 
bank  levy  is  likely  to  constrain  credit  activity,  as 
banks  may  deleverage  to  reduce  total  assets, 
further  lower  banking  sector  intermediation,  and 
reduce flexibility  for  monetary policy and hamper 
transmission  mechanism.  Banking  sector 
its 
intermediation  in  Romania  (measured  as  the  ratio 
of  private  sector  credit  to  GDP)  is  currently  the 
lowest in the EU.  

Three  laws  with  potential  negative  impact  on 
the  banking  sector  were  recently  adopted  by 
Parliament. These laws are still to be enacted. The 
in  mortgage  and 
law  capping 
significant 
raises 
loan 
consumer 
calibration (17) 
concerns.  The 
could 
potentially  harm  lending  activity  and  financial 
intermediation (18).  They  may  have  an  adverse 
impact  on  the  supply  of  banking  services  and 
financial products by credit institutions and hinder 

interest  rates 
contracts 
caps’ 

(17)  The  law  is  unclear  about  the  application  of  caps,  as  a 
reference  is  missing.  It  can  be  inferred,  however,  that  the 
legislator  intended  to  have  a  cap  of  3  pps  above  the 
monetary  policy  rate  for  mortgage  loans,  tighter  than 
previously discussed, and 18 % for consumer loans. 

(18)  Caps on interest rates exist in other EU Member States, but 
with  the  objective  to  protect  consumers  from  usury 
practices.  Caps  are  normally  linked  to  an  average  market 
interest  rate  and  target  mainly  consumer  loans  or  loans 
granted  by  non-financial  institutions.  Mortgage  loans  are 
less frequently impacted. 

27 

 
 
                                                           
4.2. Financial sector 

exposed  to  the  real  estate  sector.  Real  estate 
lending  to  households  accounts  for  over  one  third 
of total credit to the private sector, with the bulk of 
loans being granted at variable  interest rates.  This 
increased  exposure  has  been  markedly  supported 
by 
the  government-sponsored  Prima  Casă 
programme (20).  The  robust  economic  growth  and 
developments  in  the  residential  real  estate  market 
in  recent  years,  could  justify  a  phasing  out  of  the 
Prima Casă programme.  

Household indebtedness has increased in recent 
years,  although  from  low  levels.  Due  to  the 
sustained  increase  in  housing  loans  since  2015, 
household  indebtedness  has  increased  in  absolute 
terms.  Whereas  household  debt-to  GDP  stood  at 
just  below  17 %  in  2017,  well  below  the  EU 
average,  the  indebtedness  level  of  low-income 
borrowers  constitutes  a  matter  of  concern  as  they 
are  the  most  exposed  segment  to  an  increase  in 
interest  rates.  To  curb  the  risks  from  the  high 
indebtedness  of  individuals  with  low  income,  the 
National  Bank  of  Romania  introduced  as  of 
January 2019 maximum levels of indebtedness for 
both RON and foreign currency denominated loans 
(40 % and respectively 20 % of net income). These 
levels  can  be  increased  by  5  pps  for  borrowers 
taking out a mortgage loan for the first time to buy 
an own occupied dwelling. 

access  to  credit  for  clients  with  a  higher  risk 
profile.  The  law  capping  the  value  recoverable 
from  non-performing  loans  sold  by  banks  will 
further hinder banks' ability to further reduce non-
performing  loans  and  continue  balance  sheet 
repair.  It  will  negatively  impact  the  revenues  of 
investors  in  these  loans  and  of  debt  collection 
companies,  increasing  the  likelihood  of  market 
exits,  undermining 
the  secondary  market  for 
impaired  assets.  Furthermore,  the  right  granted  to 
defaulted  borrowers  to  buy  the  impaired  assets 
from  investors  at  capped  values  and  obtain  full 
debt discharge is likely to induce moral hazard and 
weaken  significantly  payment  discipline  in  the 
banking  sector.  It  may  reduce  access  to  credit  for 
some categories of borrowers as banks are likely to 
the 
become 
retroactive application of the laws capping interest 
rates 
credit 
agreements  concluded  in  the  past  will  increase 
legal  uncertainty (19).  Without  prejudice 
to 
legitimate consumer protection objectives, the law 
eliminating the writ of execution of loan contracts 
will  prevent 
the  out-of-court  repossession  of 
collateral  by  banks  and  increase  the  overall 
recovery  time  for  collateral.  This  will  further 
adversely  impact  non-performing  loans  resolution 
and disposal. 

increasingly  selective.  Moreover, 

and  banks’ 

receivables 

from 

other 

initiatives 

the  State  guarantee  on 

Several 
by 
legislative 
Parliament  are  also  of  concern.  The  Parliament 
intends  to  amend  the  2016  law  on  debt  discharge 
and  has  discussed  the  possibility  of  including  the 
Prima Casă loans under the scope of this law. This 
would  make 
loans 
inapplicable,  which  could  be  regarded  as  an 
attempt  by  the  State  to  backtrack  on  its  financial 
obligations  under  the  Prima  Casă  scheme.  As 
such, it could put under strain the country’s rating. 
Attempts  to  modify  the  Statute  of  the  National 
Bank of Romania and remove  the legal protection 
of staff involved in prudential supervision of credit 
institutions,  which  go  against  good  international 
practices,  would  significantly  weaken  prudential 
discipline and the supervision of credit institutions. 

The banking sector’s exposure to the real estate 
market  has  steadily  increased  in  recent  years. 
intermediaries  most 
Banks  are 

the  financial 

The insurance sector is still highly dependent on 
compulsory  car  insurance.  Insurance  activity 
expanded  further  in  2017,  when  gross  written 
premiums  increased  by  roughly  3 %  compared  to 
2016.  Meanwhile,  insurance  penetration (21)  has 
remained  subdued  (1.1 %  at  the  end  of  2017)  and 
at low levels compared to EU peers. The insurance 
sector  remains  highly  dependent  on  non-life 
insurance (in particular compulsory car insurance), 
which  generated  79 %  of 
the  gross  written 
premiums in 2017. Life insurance, the main driver 
of the insurance business in the EU, and household 
insurance  have  significantly  lagged  behind.  The 
compulsory  car  insurance  market  (motor  third 
party  liability  insurance)  has  been  dominated  by 
insurers  subject  in  recent  years  to  supervisory 
measures  aimed  at  restoring  compliance  with 
solvency requirements. This market segment could 
increase 
benefit 

further 

efforts 

from 

to 

(19)  It  is  also  in  breach  of  the  principle  of  non-retroactivity  of 
civil law, which is one of the reasons for which these laws 
are being challenged in the Constitutional Court. 

(20)  See e.g. European Commission (2017 and 2018a). 
(21)  Defined  as  the  share  of  gross  written  premiums  in  a 

country's GDP. 

28 

 
                                                           
                                                           
4.2. Financial sector 

for  non-bank 

enterprises 
financing  has  also 
remained subdued, mainly due to their low level of 
financial  education  and  burdensome  (and  often 
costly) administrative requirements.  

Loan  demand  from  non-financial  corporations 
has  picked-up  in  Q2-2018.  This  trend  continued 
in  Q3-2018  and  is  estimated  to  have  continued  in 
the  last  quarter,  albeit  at  a  slower  pace.  Credit 
standards  applicable  to  corporate  loans  tightened 
moderately in Q3-2018 following the introduction 
of  macro-prudential  measures  by  the  National 
Bank of Romania. In contrast, credit standards for 
corporates  in  the  euro  area  continued  to  ease  in 
Q3-2018 (NBR, 2018c).  

profitability,  through  cost-cutting  measures  and 
maintaining 
technical 
provisions,  thus  improving  the  insurers’  capacity 
to meet their obligations towards policyholders. 

adequate 

levels 

of 

Access to finance 

Retained  earnings  and  asset  sales  are  the  main 
sources  of  financing  for  Romanian  companies. 
Access to finance, mainly to bank financing, does 
not  represent  a  pressing  issue  for  most  Romanian 
companies. In  fact, appetite  for external financing 
of  their  operations  is  low.  According  to  a  recent 
survey  (NBR,  2018b),  Small  and  medium-sized 
enterprises resort to bank financing less than larger 
corporations  (22 %  vs  50 %).  They  also  report 
lower rates of success in obtaining the full amount 
requested  compared  to  large  companies  (19 %  vs 
44 %).  The  appetite  of  small  and  medium-sized 

29 

 
 
 
4.2. Financial sector 

Box 4.2.1: Second pension pillar in Romania 

Since 2008, Romania has had a three-pillar pension system, including a second pillar based 
on  defined  contributions.  The  first  pillar  is  a  mandatory  pay-as-you-go  scheme.  The  second 
pillar,  also  mandatory,  is  fully-funded  and  is  run  by  private  pension  funds’  management 
companies. The third pillar consists of voluntary individual pension savings. As of end-November 
2018,  the  seven  second  pillar  funds  were  managing  assets  worth  RON  48.2  billion  (EUR  10.3 
billion)  for  7.2  million  individual  participants.  Around  63 %  of  their  assets  were  invested  in 
government bonds, 19 % in equity and 8 % in deposits. While investment in government securities 
is  close  to  the  prudential  and  legal  threshold,  exposure  to  equity  remains  well  below  the  50 % 
maximum limit. 

Several  government  decisions  undermine  the  viability  of  the  second  pension  pillar.  The 
contributions to the second pension pillar, which were to be progressively raised to 6 % of gross 
wages  by  2016,  were  just  5.1 %  by  2017  and  have  been  reduced  to  3.75 %  in  2018.  Moreover, 
government  emergency  ordinance  114/2018,  adopted  in  December,  made  the  second  pillar 
optional, with employees now having the possibility to opt out after contributing for 5 years to the 
second  pillar  and  transfer  future  contributions  to  the  first  pillar.  The  government  emergency 
ordinance  also  significantly  increased  the  minimum  capital  requirements  for  pension  funds’ 
management  companies  and  reduced  the  administration  fee  levied  on  gross  contributions  from 
2.5 % to 1 %. As such, the  funds’  management companies can retain only 0.2%, since 0.5% are 
transferred to the National Pension House and 0.3% to the Financial Supervisory Authority. These 
changes  make  the  operating  environment  for  pension  funds’  management  companies  highly 
unpredictable, negatively affect their financial results, and increase the likelihood of their market 
exit. They also reinforce the overall perception of an unpredictable legislative environment. 

The  short-term  budgetary  gain  from  the  likely  reduction  of  the  transfers  to  the  second-
pension  pillar  will  dissipate  in  the  long-term  while  the  retirement  income  will  be  less 
diversified. The second pillar is classified outside of the general government sector. Therefore, the 
reduction of transfers to the second pillar, following the likely opt-out of some employees entirely 
to  the  first  pillar,  will  decrease  the  general  government  deficit  in  the  short  term.  However,  this 
budgetary  gain  would  dissipate  in  the  long  term  as  the  diverted  social  contributions  would  be 
accompanied  by  an  obligation  to  pay  the  corresponding  pensions  in  the  future.  Furthermore,  the 
changes  to  the  second  pillar  are  likely  to  result  in  even  less  diversified  retirement  income  and 
subject pensions to higher political and demographic risks. Past pension cuts and recent significant 
increases  to  the  pension  point  have  shown  a  tendency  to  depart  from  the  statutory  pension 
indexation formula.  

The  weakening  of  the  second  pillar  can  hamper  the  development  of  the  capital  market. 
Second pillar funds have invested approximately RON 8.3 billion (c. EUR 1.8 billion) in shares, 
mainly domestic. This accounts for some 5 % of the market capitalisation of the Bucharest Stock 
Exchange.  In  2016,  they  were  among  the  top  performers  in  the  region  (European  Commission, 
2018a). Direct comparison with the performance of the first pillar is not possible since payments 
under the first pillar are the result of a political rather than an investment decision. Pension funds 
can support developing capital markets and boost investment if the assets they manage are allowed 
to  grow  and  the  predictability  of  the  legislative  environment  is  conducive  to  long-term 
investments.  Empirical  literature  points  to  a  positive  impact  of  second  pillar  pension  funds  on 
market capitalisation (Enache et al., 2015). The  likely  market exit of some pension funds due to 
the  recently  adopted  measures  could  deprive  the  Romanian  economy  of  a  potential  source  of 
investment  funding,  thus  curtailing  further  development  of  what  is  currently  a  rather  small  and 
undeveloped capital market. 

30 

 
4.3.  LABOUR MARKET, EDUCATION AND SOCIAL POLICIES 

4.3.1.  LABOUR MARKET 

Employment  is  growing  but  labour  shortages 
continue  to  increase  on  the  back  of  economic 
expansion.  The  employment  rate  has  increased 
steadily  for  the  past  5  years  reaching  65.5 %  in 
2017,  above  the  pre-crisis  level  of  64.4 %.  The 
unemployment  rate  of  3.8 %  in  December  2018, 
was  the  lowest  in  a  decade,  pointing  to  a  tight 
labour  market.  Meanwhile,  the  country  continues 
to  face  serious  adverse  demographics  (22)  due  to 
fast ageing (23), low birth rates and emigration. The 
contribution  of  labour  to  potential  GDP  remains 
low  but  positive, 
low 
unemployment 
remaining  untapped 
potential in the labour market. 

supported  by 

rate  and 

the 

The  continued  emigration  of  the  labour  force 
challenges  sustainable  economic  growth.  In 
almost  three  decades  Romania  lost  23.3 %  of  its 
working-age  population  due  to  emigration  (World 
Bank, 2018). The decrease in annual GDP growth 
due  to  emigration  is  estimated  at  0.6  to  0.9  pps 
(IMF,  2016).  Over  3  million  people  are  estimated 
to have left the country, with the  highest numbers 
leaving  from  the  larger  cities  (Roman,  2018). 
Emigration from poor rural areas and of the young 
population  (15-34  years  old)  is  prominent  in  the 
Nord-Est  and  Sud-Muntenia  regions  (Roman, 
2018).  While  the  main  drivers  of  emigration  are 
higher wages, better working conditions and public 
services, 
in  particular  education  and  health 
(European Commission, 2018a), the emigration of 
people with higher education is also due to the low 

(22)  From  -4.7 %  in  2010  to  -6.2 %  in  2017  the  population 

change trend is negative (Eurostat). 

(23)  The projected old-age dependency ratio per 100 persons is 
forecast to reach 35 % in 2030 (25 % in 2015) (Eurostat) 

quality  of  public  governance  (IMF,  2016).  Some 
measures  aimed  at  reducing  outward  labour  force 
migration  were  adopted 
in  December  2018, 
notably  in  the  construction  sector,  by  exempting 
employees  from  income  tax  as  of  January  2019, 
for a period of 10 years and the adoption of a new 
specific  minimum  wage  for  the sector  (24)  (see 
Section 4.4). 

Internal  labour  market  mobility  schemes  are 
used  to  address  labour  shortages,  but  barriers 
persist.  Unemployment  rates  vary  significantly 
the 
across  regions.  The  capital  region  and 
metropolitan  areas  in  the  Vest  and  Nord-Vest  are 
service-driven  regions  which  offer  better  labour 
market  opportunities  and  attract  more  qualified 
in  the  regions  with  a 
workers.  In  contrast, 
manufacturing economic base, the urban industrial 
centres attract mainly unqualified workers from the 
neighbouring  rural  areas  (World  Bank,  2017a). 
Although  internal  mobility  schemes  are  in  place 
and  supported  by  a  national  mobility  plan,  their 
implementation 
lagging  behind.  Potential 
beneficiaries  complain  about  the  administrative 
burden  related  to  its  implementation  and  the  lack 
of an integrated solution for the unemployed (such 
as  limited  provision  of  social  and  education 
services for family members).  

is 

(24)  Government emergency ordinance 114/2018 

31 

 
 
                                                           
 
 
 
 
                                                           
4.3. Labour market, education and social policies 

Box 4.3.1: Monitoring performance in light of the European Pillar of Social Rights 

The European Pillar of Social Rights is designed as a compass for a renewed process of upward 
convergence towards better working and living conditions in the European Union (1). It sets out 
20  essential  principles  and  rights  in  the  areas  of  equal  opportunities  and  access  to  the  labour 
market; fair working conditions; and social protection and inclusion.  

labour 

improved, 

Romania  still  faces  a  significant  number  of  challenges  in  the  areas  covered  by  the  Social 
Scoreboard  supporting  the  European  Pillar  of  Social  Rights.  The  country  has  one  of  the 
highest early school leaving rates and a high number of people living at risk of poverty or social 
market 
exclusion.  While 
the  overall 
performance  has 
inactivity  and  especially 
inactivity  of 
women  remain  a  concern.  The  available 
skills  are  not  keeping  up  with  the  needs  of 
the labour market and future work patterns. 
The  lack  of  basic  competences  among  the 
Roma  and  people  in  vulnerable  situations 
do  not  allow  them  to  fully  benefit  from 
economic expansion and to gain a foothold 
in  the  labour  market.  The  design  of  social 
inclusion  policies,  the  availability  of  social 
services  and  social  transfers  are  still  not 
fully  effective  at  getting  people  out  of 
poverty  and  lack  an  integrated  approach 
and 
combining 
education measures. 

employment, 

health 

Significant  challenges  persist  on  equal 
social  protection. 
opportunities  and 
Inequality  of  opportunity  persists 
in 
education,  healthcare  and  access  to  social 
services, with rural areas disproportionately 
affected.  Territorial  coverage  of  existing 
social  services  is  very  uneven,  and  not 
correlated  with  communities’  needs.  The 
lack  of  consistent  evidence  basis  for 
policymaking 
and  unpredictability  of 
reform  timelines  are  preventing  effective 
implementation 
of 
results. 

sustainability 

and 

Conversely,  the  de-institutionalisation  of  children  shows  some  positive  results.  The 
coordinated  approach  linking  legislative  changes,  adequate  funding  mechanisms  and  support  to 
the  local  authorities  is  showing  its  first  results.  The  shift  towards  community-based  support  is 
accompanied by individualised assessment of children’s needs while capacity-building activities 
are  being  developed  to  support  municipalities.  Additional  efforts  are  still  needed  to  ensure  the 
availability  of  foster  families  across  the  country  and  to  improve  and  professionalise  their  care 
competences.  

(1)  The European Pillar of Social Rights was proclaimed on 17 November 2017 by the European Parliament, the Council 
and  the  European  Commission.  https://ec.europa.eu/commission/priorities/deeper-and-fairer-economic-and-monetary-
union/european-pillar-social-rights/european-pillar-social-rights-20-principles_en 

32 

Early leavers from education and training (% of population aged 18-24)Critical situationGender employment gapCritical situationIncome quintile ratio (S80/S20)Weak but improvingAt risk of poverty or social exclusion (in %)Weak but improvingYouth NEET (% of total population aged 15-24)Weak but improvingEmployment rate (% population aged 20-64)Weak but improvingUnemployment rate (% population aged 15-74)Better than averageLong-term unemploymentOn averageGDHI per capita growth Best performersNet earnings of a full-time single worker earning AWWeak but improvingImpact of social transfers (other than pensions) on poverty reductionCritical situationChildren aged less than 3 years in formal childcareTo watchSelf-reported unmet need for medical care To watchIndividuals' level of digital skillsCritical situationMembersStatesareclassifiedaccordingtoastatisticalmethodologyagreedwiththeEMCOandSPCCommittees.ThemethodologylooksjointlyatlevelsandchangesoftheindicatorsincomparisonwiththerespectiveEUaveragesandclassifiesMemberStatesinsevencategories(from"bestperformers"to"criticalsituation").Forinstance,acountrycanbeflaggedas"betterthanaverage"iftheleveloftheindicatorisclosetoEUaverage,butitisimprovingfast.Formethodologicaldetails,pleaseconsultthedraftJointEmploymentReport2019,COM(2018)761final.Dataupdate of 29 January 2019.NEET:neitherinemploymentnorineducationandtraining;GDHI:grossdisposablehousehold income.                      Dynamic labour markets and fair working conditionsSocial protection and inclusionEqual opportunities and access to the labour marketSOCIAL SCOREBOARD FOR ROMANIA 
 
 
4.3. Labour market, education and social policies 

that  of  men).  The  situation 

The  activity  rate  of  women  is  low  despite  the 
overall  positive  economic  conditions.  The 
activity rate of women aged 20 to 64 is 63.7 % (20 
is 
pps  below 
particularly  critical  for  young  and  middle-aged 
women whose inactivity rate is 5 pps above the EU 
average (25),  mainly  due  to  personal  and  family 
responsibilities (26) (Graph 4.3.1). This is primarily 
due  to  low  participation  of  children  aged  0-3  in 
formal  childcare  (15.7 %  in  2017).  The  lack  of 
efficient  measures  to  promote  an  early  return  of 
women to the labour market further aggravates the 
situation.  Regions  such  as  Centru,  Sud-Est  and 
rates  below 
female  employment 
Vest  have 
50 % (27).  Further 
in  childcare 
investments 
facilities  could 
labour  market 
participation of women. 

increase 

the 

Graph 4.3.1:  Inactive female population by reason for 

inactivity 

to 

the 

2016  to  40.2 %  in  2017.  However,  the  Youth 
Guarantee coverage of the young people neither in 
education,  employment  or  training  is  poor  (only 
14 % of this group aged 15-24 are registered). This 
points 
limited  outreach  measures 
implemented so far and to ineffective coordination 
between  the  education,  employment  and  social 
sectors. In the meantime, emigration remains very 
high  among  young  people,  with  Romania  being 
one of the EU countries with the highest numbers 
of 
(European 
emigrants 
Commission, 2018b).  

aged  15 

to  24 

in 

Access  to  the  labour  market  is  particularly 
challenging  for  certain  social  categories.  The 
share  of 
total 
long-term  unemployment 
unemployment  declined  from  50 %  in  2016  to 
41.4 %  in  2017.  However,  a  large  part  of  the 
people  in  this  group  either  remain  unemployed 
(73.2 %) or fall into inactivity (13.2 %), with only 
about  one  in  eight  (12.3 %)  being  registered  with 
the  public  employment  service,  one  of  the  lowest 
registration rates in the EU. At the same time, the 
employment  rate  for  people  with  disabilities 
the  EU  average 
(43.5 %) 
(48.1 %).  The 
labour  market  participation  of 
people  with  low  educational  attainment,  which 
also include persons from the Roma community, is 
low, as only 46 % of them are active (Graph 4.3.2). 
Measures  co-financed  by  the  European  Social 
Fund  such  as  targeted  employment  subsidies  and 
job coaching are planned but their implementation 
is delayed. 

is  slightly  below 

Source: European Commission 

Graph 4.3.2:  Activity and employment rates for selected 

groups 

in 
The  number  of  young  people  neither 
education,  employment  or  training  is  steadily 
decreasing.  The  share  of  young  people  neither  in 
education, employment or training stood at 15.2 % 
in 2017, down from 18.1 % in 2015 and 17.4 % in 
2016,  but  is  still  among  the  highest  in  the  EU. 
Implementation  of  the  Youth  Guarantee  shows 
some  signs  of  improvement.  The  proportion  of 
beneficiaries taking up an offer within the 4-month 
target  has  increased  significantly  from  25.9 %  in 

(25)  The  inactivity  rates  of  women  aged  25-49  are  24.7 %  for 

RO and 19.7 % for the EU (Q3-2018, Eurostat data) 
(26)  43 % of women aged 25-34 and 48.7 % of those aged 35-
44  are  inactive  for  personal  reasons  or  due  to  family 
responsibilities (Eurostat). 

(27)  National Institute of Statistics, 2017 data 

Source: European Commission 

33 

0%20%40%60%80%100%15-2425-3435-4445-5455-64OtherDiscouraged workersRetirementEducation or trainingPersonal or family responsabilitiesCare responsabilitiesDisability or illness0102030405060708090Activity rateof populationaged 15-64 -menActivity rateof populationaged 15-64 -womenActivity rateloweducationattainment(15-64)NEET rateforpopulationaged 15-24 -totalEmploymentrate forpersons withdisabilitiesThe rate of inactive population aged 25-49 –women %RomaniaEU 28 
 
                                                           
 
4.3. Labour market, education and social policies 

Active labour market policies provide a limited 
response  to  the  labour  market  needs.  The 
measures  in  place  still  focus  mainly  on  financial 
incentives  for  companies  rather  than  on  tailor-
made  approaches  addressing  the  comprehensive 
needs  of  the  unemployed,  notably  upskilling  and 
integrated  services  delivery.  Despite  the  increase 
in the amount of subsidies for employers who hire 
young people neither in education, employment or 
training  and  other  vulnerable  groups,  the  take-up 
of  the  measures  is  slow,  pointing  to  a  limited 
evidence-  base  behind  this  policy.  Nevertheless, 
the  measure  for  unemployed  people  aged  over  45 
and single parents (28) shows some positive results. 
The  excessive  administrative  burden  associated 
with  accessing  labour  market  measures  remains 
unaddressed. 

The  minimum  wage  was  increased  again  in 
January 2019 without  an objective  mechanism. 
A  government  decision  issued  in  December  2018 
increased  the  minimum  wage  from  RON  1  900 
(EUR 413) to RON 2 080 (EUR 450) from January 
2019. Moreover, a higher minimum wage of RON 
2 350 (about EUR 510) was introduced for people 
with  a  university  degree  and,  in  a  subsequent 
emergency  ordinance,  an  even  higher  level  of 
RON  3  000  (EUR  652)  for  workers  in  the 
construction  sector.  Previous  ad  hoc  increases  of 
the  minimum  wage  resulted  in  one  in  three 
employees  earning  the  minimum  wage  in  2017,  a 
rate  almost  four  times  higher  than  in  2011 
(Romanian Labour Inspectorate) (29). 

Graph 4.3.3:  Productivity and labour costs (GDP deflator) 

The  planned  reform  of  the  public  employment 
service  has  been  significantly  delayed.  The 
public employment service has a very limited case 
management  approach.  The  lack  of  integration  of 
employment, social and education services and the 
ineffective  cooperation  with  employers  remain 
important  barriers.  The  accumulated  delay  in  the 
implementation  of  the  European  Social  Fund  co-
financed  measures  is  undermining  the  service’s 
effectiveness  as  a  broker  in  the  labour  market 
the 
delivering 
unemployed. 

for  employers  and 

services 

Wage  increases  are  large,  particularly  in  the 
public  sector.  After  years  of  moderate  wage 
growth, Romania displays one of the  fastest  wage 
increases in the EU, strong even for a catching up 
economy  faced  with  high  poverty  rates.  Between 
2011  and  2015,  nominal  compensation  per 
employee grew at an annual average rate of 3.5 %, 
below  productivity.  This  relationship  reversed  in 
2016, when compensation per employee increased 
by  15 %  (Graph  4.3.3).  Subsequent  increases  of 
12.3 % in 2017 and an estimated 13 % in 2018 are 
much  faster  than  the  pace  consistent  with  an 
unchanged real effective exchange rate or expected 
based  on 
inflation,  productivity  growth  and 
unemployment.  Gross  wage  growth  was  mainly 
driven by the public sector (see Section 4.4.1). 

(28)  The  number  of  employment  subsidies  requests  for  this 
category  increased  from  334  in  January  2018  (before  the 
subsidies were increased) to 3 470 in September 2018. 

Source: European Commission 

Skills are not evolving in line with the needs of 
expanding  economic  sectors.  81 %  of  employers 
declare  having  difficulties  filling  job  vacancies 
The  hardest  profiles  to  fill  in  are  electricians, 
welders, mechanics and engineers in the chemical, 
electrical, civil and mechanics sectors (Manpower, 
2018).  The  ICT  sector  is  growing,  also  based  on 
the  development  of  specialised  business  clusters 
i.e.  in  the  Cluj  county  area,  and  it  represents  a 
valuable  future  economic  potential.  However,  the 
number  of  Romanians  aged  20-29  holding  a 
science,  technology,  engineering  and  mathematics 
degree fell from 16.6 per 1 000 individuals in 2014 
to 14.4 in 2016 (19.1 in the EU). The available IT 

(29)  In  2017,  the  minimum  wage  was  44.6  %  of  average 
monthly  earnings  in  industry,  construction  and  services.

34 

70901101301501701902101011121314151617181920index 2010=100Nominal compensation per employeeReal productivity per personNominal unit labour costforecast 
                                                           
 
                                                           
 
 
4.3. Labour market, education and social policies 

skills are not keeping up with the emergence of IT 
hubs,  as  only  29 %  of  individuals  have  basic  or 
above  basic  digital  skills  (European  Commission, 
2018k).  Skill  mismatch  represents  an  additional 
challenge for Romanian firms (EIB, 2018). 

Dialogue  Committees.  Despite  the  established 
framework  of  dialogue  and  consultations,  the 
stability  and  the  role  of  these  institutions  has 
weakened over the last year. 

The upskilling of the labour force would benefit 
from  a  comprehensive  approach.  At  present 
there  is  neither  a  global  assessment  available  of 
skills needs nor one at economic sector level. The 
labour  market  relevance  of  vocational  education 
and training is limited. Some steps have been taken 
to recognise learning outside formal education and 
training  and  to  steer  the  new  dual  vocational 
education  and  training  system  (see  Section  4.3.3), 
yet  important  challenges  remain.  Other  important 
barriers  are:  (i)  the  limited  offer  of  non-formal 
education and training; (ii) limited participation in 
vocational  qualifications'  programmes  for  people 
with  a 
(iii) 
insufficient  coordination  between  stakeholders; 
and  (iv)  insufficient  system  monitoring,  quality 
assurance and staff training.  

level  of  qualifications30; 

low 

4.3.2.  SOCIAL POLICIES 

The poverty rate decreased in 2017 but remains 
very high. One in three Romanians are still at risk 
of poverty and social exclusion. Despite a decline 
of  2  pps  compared  to  2016,  monetary  poverty  is 
one  of  the  highest  in  the  EU,  affecting  23.6 %  of 
the  total  population  in  2017.  The  main  drivers  of 
poverty  are  inactivity,  low  education  attainment, 
intergenerational transmission of poverty and lack 
of  inter-regional  mobility.  Poverty  and  social 
exclusion levels in rural areas are more than twice 
as high as those in cities (Graph 4.3.4). Vulnerable 
groups  in  rural  areas  (children,  people  with 
disabilities, members of the Roma community and 
the  elderly)  face  particularly  high  poverty  rates. 
Moreover,  the  country  has  the  highest  rate  of  in-
work poverty in the EU (17.4 %). 

Income  inequality  remains  high,  with  regional 
and gender gaps. Despite a considerable decrease 
since  peaking  in  2015,  income  inequality  remains 
well above the EU average. As shown in the Social 
Scoreboard  accompanying  the  European  Pillar  of 
Social  Rights,  the  income  of  the  top  20 %  of  the 
population exceeds by 6.5 times the incomes of the 
bottom  20 %  (EU:  5.1)  (Eurostat).  High  income 
inequality 
levels  are  experienced  particularly 
within  the  working-age  population,  and  can  be 
attributed  more  to  the  poorer  being  relatively 
poorer  rather  than  the  richer  getting  relatively 
richer.  The  rate  of  in-work  poverty  is  five  times 
higher 
for 
low-educated  workers 
university graduates. Men are more exposed to this 
risk  than  women.  However  women  are  twice  as 
likely as men to be inactive (see Section 4.3.1).  

than 

for 

is 

coverage 

agreements 

low, 
Collective 
particularly at sector level. According to national 
authorities,  around  15 %  of  employees  were 
covered  by  collective  agreements  in  2017.  The 
current  delineation  of  sectors  does  not  facilitate 
collective  bargaining  at  sector  level  and  only  one 
agreement at this level was in force in 2017. In 24 
out of the 30 industrial sectors there is no complete 
representation of social partners able to negotiate a 
collective agreement. The authorities have initiated 
plans to revise the definitions of economic sectors 
but  no  agreement  has  been  reached  yet.  Trade 
unions  consider  that  employee  representatives, 
who  signed  8  out  of  10  existing  collective 
agreements,  were  not 
a 
transparent procedure.  

selected 

through 

is 

insufficiently  used 

for 
Social  dialogue 
engaging  social  partners  on  policy  issues  and 
reforms  in  a  timely  and  meaningful  manner. 
Beyond 
the  collective  bargaining  framework, 
social  partners  do  not  enter  into  a  voluntary 
dialogue  to  improve  labour  market  conditions. 
Most  social  dialogue  takes  place  formally,  within 
the  Economic  and  Social  Council  and  the  Social 

(30)  The  legal  provisions  have  been  changed  recently  to  allow 
to 

low  educational  attainment 

people  with  a  very 
participate in vocational qualification courses. 

35 

 
                                                           
4.3. Labour market, education and social policies 

synergies  between  the  relevant  benefits  and  the 
community-based social and  employment services 
aggravates 
the  situation  further.  A  dedicated 
European  Social  Fund  co-financed  project  aiming 
to  increase  the  employability  of  people  with 
disabilities  is  under  preparation.  Preparing  the 
deinstitutionalisation  of  adults  with  disabilities  is 
just starting,  with the first visible results expected 
for 2021. 

The  situation  of  the  Roma  community  shows 
very little progress. The living conditions of part 
of  the  Roma  community  are  characterised  by 
informal,  unhygienic  and  irregular  settlements. 
Eight in ten Roma live in a house without running 
water and only one in two  has  medical  insurance. 
Lack  of  identification  documents  and/or  property 
deeds precludes some Roma from accessing public 
services  and  claiming  their  rights.  Implementing 
the  National  Roma  Inclusion  Strategy  is  being 
hampered  by  the  fact  that  coordination  between 
line  ministries  is  not  always  a  priority.  The 
implementation  of  the  National  Roma  Platform  is 
still  pending.  Several  Roma  inclusion  projects 
through  integrated  measures,  co-financed  by  the 
European  Social  Fund,  are  under  implementation. 
Sustainability  of 
is,  however, 
challenging as the existing projects are fragmented 
and rely heavily on external funding.  

the  measures 

income 

According  to  the  European  Pillar  of  Social 
Rights,  social  transfers  have  a  low  impact  on 
inequality. 
reducing  poverty  and 
Government  spending  on  social  transfers  is  low 
(Graph  4.3.5).  This  contributes  to  the  overall  low 
impact  of  the  tax  and  benefit  system  on  income 
inequality  (Graph  4.1.3).  The  social  reference 
index  used  as  a  basis  for  most  social  benefits  has 
not been updated since its introduction in 2008. It 
also  depreciated  considerably  in  relation  to  the 
minimum  wage  from  being  almost  equal  to  it  in 
2008  to  roughly  five  times  lower  in  2018.  As  a 
result, poverty rates  for people  with low and very 
low  work  intensity  increased  by  half  since  2010. 
The impact of social transfers on reducing income 
inequality is also low.  

Graph 4.3.4:  People at risk of poverty or social exclusion by 

degree of urbanisation 

Source: European Commission 

in 

life  due 

their  adult 

Children  living  in  poverty  are  more  likely  to 
remain  poor 
to 
inequalities  of  opportunity.  Romania  has  the 
highest  share  of  children  living  in  poverty  in  the 
EU.  The  poverty  risk  for  children  is  indirectly 
correlated  with  parents'  education  level,  and  this 
correlation  grew  stronger  in  2017.  Moreover,  due 
to  shortcomings  in  the  education  and  health 
systems,  children  born  today  are  set  to  enter  the 
labour  market  with  only  60 %  of  their  real 
the  EU  (31). 
potential, 
Compared  to  the  EU  average,  families  with  low 
incomes  report  higher  difficulties  in  affording 
education  for  their  children.  The  existing  offer  of 
public  services  and  the  education  system  do  not 
this  challenge.  Growing 
manage 
inequalities  of  opportunities  also  affect  other 
vulnerable  groups  such  as  young  adults  and  the 
Roma community. 

to  address 

lowest 

level 

the 

in 

and 

living 

independent 

People with disabilities  have limited support to 
achieve 
access 
employment.  Care  for  people  with  disabilities  is 
mainly  focused  on  providing  medical  assistance 
rather  than  enabling  independent  active  living. 
Children  in  this  group  have  limited  access  to  pre-
school  facilities  and  drop  out  of  school  twice  as 
often as other children. The education system does 
not  prepare  them  sufficiently  for  an  independent 
life.  Employment  quotas  have  been  set  to  boost 
employment  of  people  with  disabilities,  but  this 
reform  has  not  been  matched  with  sufficient  and 
targeted active labour market policies. The lack of 

(31)  Human Capital Index 2018, World Bank 

36 

101520253035404550556020072008200920102011201220132014201520162017%AROPE totalCitiesTowns and suburbsRural areas 
 
                                                           
4.3. Labour market, education and social policies 

occupational 
2018n). 

injuries 

(European  Commission, 

The  high  level  of  housing  deprivation  hampers 
social inclusion. One in seven households faces a 
serious  housing  problem  (e.g.  humidity,  lack  of 
sanitary facilities) (33). Overall housing deprivation 
is the  highest in the EU. Romania's housing stock 
is low quality, energy inefficient and deteriorating 
because  of  lack  of  maintenance  (Housing  Europe, 
2017).  Post-institutionalised  children,  the  victims 
of  domestic  violence  and  the  mentally  ill  are 
particularly  in  need  of  housing.  Social  housing 
policies are being decentralised without a strategic 
framework,  which  makes  poverty  worse  in  areas 
that  are  already  poor.  Through  measures  co-
the  European  Social  Fund 
financed  under 
approximately  260  vulnerable  communities  are 
currently  supported,  but  not  all  vulnerable  groups 
are covered. 

Graph 4.3.5:  Redistributive power of social transfers 

(1) Social transfers exclude pensions 
(2) Income inequality is measured by the Gini coefficient. 
The value 0 corresponds to perfect equality (same income 
to everybody) while 100 corresponds to maximum inequality 
(all income distributed to only one person and all the others 
have nothing.) 
Source: European Commission 

The  minimum  inclusion  income  reform  is  not 
yet  completed.  The  minimum  income  benefit  in 
Romania  is  among  the  least  sufficient  in  the 
EU (32).  A  law  adopted  in  2016  is  designed  to 
increase coverage and adequacy of benefits and to 
pair  them  with  activation  measures.  Its  entry  into 
force has been postponed to April 2019 and is still 
uncertain. In the meantime, the national authorities 
have attached stronger activation measures and the 
tapering  of  benefits  to  the  current  minimum 
income  guaranteed 
the 
adjustment,  social  assistance  beneficiaries  that 
refuse  one  job  lose  their  social  benefit  for  a  year. 
On 
the 
minimum  guaranteed  income  with  income  from 
seasonal activities included in their  municipality’s 
plan. 

scheme.  Following 

they  can  cumulate 

the  other  hand, 

security 

for  atypical  workers 

Social 
is 
inadequate.  One  in  three  atypical  workers  is  at 
risk of severe material deprivation. Moreover, self-
employed  and  part-time  workers,  people  in  low-
qualified  jobs  and  those  living  in  rural  areas  are 
most at risk of in-work poverty compared to other 
employees.  Daily  and  seasonal  workers  do  not 
have  formal  access 
to  social  security  rights 
covering  unemployment,  maternity,  accidents  and 

(32)  According  to  the  Benchmarking  Framework  on  Minimum 
Incomes 
the  Social  Protection 
Committee.  For  details,  see  the  draft  Joint  Employment 
Report 2019, COM(2018) 761 final 

conducted  within 

rural  areas  and 

the  homeless,  young  people 

Social  services  are  characterised  by  uneven 
territorial distribution and insufficient coverage 
and quality. According to the Ministry of Labour 
Justice  only  around  20 %  of 
and  Social 
administrative territorial units have licensed social 
services. Services are usually concentrated around 
richer  or  urban  areas,  while  needs  exist  mostly  in 
regions (34).  Some 
poorer, 
vulnerable  groups  face  a  severe  lack  of  services, 
e.g. 
leaving 
institutions, and the elderly. The shortage of social 
assistants,  particularly  in  rural  areas,  compounds 
this  issue.  Access  to  the  profession  is  costly  and 
laborious (35).  Coordination  between  the  local, 
county  and  national  levels  is  ineffective,  also  due 
to  the  fragmented  distribution  of  powers  and 
responsibilities.  There  is  no  direct  link  between 
financing and needs at county and local levels. The 
underfinancing  of  private  service  providers  is 
affecting  the  continuity  of  services  at  local  level, 
as more than two thirds of the current providers are 
non-public.  Use  of  alternative  financing  methods, 
including volunteering and sponsorships, is low as 

(33)  National Institute of Statistics, 2017 
(34)  According  to  the  Ministry  of  Labour  and  Social  Justice, 
more than half of the social service providers are located in 
towns with more than 100 000 inhabitants. 

(35)  After  graduation  all  social  assistants  need  to  register  with 
and obtain a certificate from the National College of Social 
Assistants,  a  non-governmental  entity  in  charge  of  a 
national register of social assistants. 

37 

IEFIUKDKBENLATSESIPTHRDEFRESHUCYCZMTITLUROEELTLVELSKPLBG024681012140246810Reduction of income inequality via social transfers (excluding pensions)Social tranfers (excluding pensions) as % of GDP 
 
                                                           
                                                           
4.3. Labour market, education and social policies 

the  existing  legal  incentives  are  perceived  as 
insufficient (see Section 4.4). 

for the country to keep up  with the ageing rate  of 
its population. 

of 

limiting 

integrated, 

activation  measures 

Integration  of  services  is  progressing  at  a  slow 
pace.  Social,  employment,  health  and  education 
the 
services  are  poorly 
effectiveness 
and 
worsening  social  conditions.  A  dedicated  EU  co-
funded project to introduce integrated teams (36) in 
139 
started 
implementation  in  the  second  half  of  2018.  The 
project  will  design  integrated  case  management 
methodologies  that  can  be  scaled  up  at  national 
level  and  envisages  closer  collaboration  with 
employment services.  

communities 

marginalised 

the 

beyond 

standard 

than  other  groups.  Due 

The  old-age  pensions  have  been  increasing 
although  some  structural  challenges  remain 
unaddressed.  The  elderly  have  lower  poverty 
to  significant 
rates 
indexation 
increases 
mechanism,  the  average  old-age  pension  from  the 
state social insurance increased by 10.0 % in 2017 
and 9.4% in 2018 (37). The pension law adopted in 
increase  pension 
December  2018 
adequacy  but  also  budgetary  costs  (see  Section 
4.1.3).  Some  structural  challenges  with  an  impact 
on  pension  adequacy  remain  unaddressed.  The 
effective average retirement age is close to the EU-
average. However, the retirement age is  not equal 
between  women  and  men.  Coupled  with  shorter 
contributory  periods  for  women,  this  results  in  a 
considerable pension gender gap.  

is  set 

to 

The  long-term  care  sector  is  not  ready  to  deal 
with a rapidly ageing population. Romania faces 
one  of  the  fastest  ageing  rates  in  the  EU,  a  trend 
that is not fully taken into account in the design of 
current policies or projections of long-term needs. 
In 2016, homes for the elderly covered only 1 % of 
the  population  over  75  years  old.  There  are  very 
few at-home and day-care services. When they do 
exist  they  are  normally  close  to  areas  with  higher 
income.  Additional  investments  appear  necessary 

(36)  The  municipal  teams  are  expected  to  include  social 
the  county  school 

workers,  community  nurses  and 
counsellors. 

(37)  Source: National House of Public Pensions. These growth 
rates  exclude  some  special  pensions schemes  such  as  old-
age  pensions  of  farmers,  military,  lawyers  and  clergy. 
Including  these  categories,  the  growth  rates  are  12.3%  in 
2017 and 9.6% in 2018 (the latter being an estimate). 

4.3.3.  EDUCATION 

to  modernise 

The  educational  system  is  underfinanced  and 
it 
administrative  capacities 
require 
strengthening.  The  acquisition  of 
basic (38)  and  digital  skills (39)  faces  significant 
challenges. Investment in education remains one of 
the lowest in the EU (3.7 % of GDP compared to 
4.7 %).  This  gap  is  particularly  relevant  at  pre-
primary and primary levels of education (40) which 
leaving, 
to  preventing  early  school 
are  key 
tackling 
opportunities 
ensuring 
and 
equal 
life.  Recent 
legislative 
in 
inequalities 
measures  postpone 
legal 
the 
until 
requirement for allocating the equivalent of 6 % of 
GDP  annually  on  education.  This  threshold  has 
never  been  reached.  Strategic  planning,  aligning 
system-monitoring  to  educational  priorities  and 
improving the use of results at central, county and 
school  level  is  faced  with  challenges  (OECD, 
2017). 

2022 

later 

Modernisation  of  the  school  network  and 
optimisation  to  address  demographic  trends  is 
lagging  behind. The  number  of  children  in  pre-
university  education  decreased  by  14 %  between 
2007 and 2017 (excluding children in nurseries). A 
recent  mapping  shows  that  10 %  of  schools  are 
overcrowded,  while  58 %  have  excess  capacities 
(41).  38 %  of  schools  in  rural  areas  have  outside 
lavatories,  without  running  water  or  sewage, 
compared 
in  urban  areas.  School 
laboratories  and  libraries  are  often  lacking  and 
school buses are insufficient. Regular maintenance 
and  rehabilitation  are  lagging  behind  due  to  the 
lack  of  funding  by  local  authorities.  58.5 %  of 
kindergartens have excess capacities. 

to  7 % 

The  acquisition  of  cognitive  skills  is  hampered 
by  low  participation  in  quality  early  education 

(38)  Despite  efforts  to  introduce  a  competence-based  school 
curriculum,  almost  40 %  of  teenagers  lack  the  basic 
competences in reading, mathematics or science. 

(39)  Measures  were  taken  to  improve  digital  skills  in  schools 
(European  Commission,  2018e),  but  only  52 %  of  young 
people aged 16-19 have basic or above basic digital skills. 
(40)  In 2016 Romania invested the equivalent of 0.7 % of GDP 
on pre-primary and primary education compared to the EU-
average of 1.5 %. 

(41)  46 % in urban areas and 63 % in rural areas 

38 

 
                                                           
                                                           
4.3. Labour market, education and social policies 

income 
status  greatly  affects 

The  education  system  fails  to  compensate  for 
socio-economic 
perpetuating 
disadvantage, 
inequalities.  Parents’ 
already  high 
school 
socioeconomic 
outcomes  (PISA,  2016).  The  transition  to  upper 
secondary education is particularly challenging for 
students  from  vulnerable  groups  and  those  living 
in rural areas. This is mainly due to financial costs 
of studying in urban areas where most high schools 
and  professional  schools  are 
located.  Roma 
inclusion  in  education  is  a  significant  challenge, 
including  due  to  poor  quality  of  education  in 
Roma-majority schools. 

i.e. 

and 

education 

education 

incorporating 

employers.  Measures 

Dual-vocational 
training 
education 
education is being rolled out in a bid to address 
skills shortages. In September 2017, more than 2 
400  students  (equivalent  to  8 %  of  students  in 
in  dual 
professional  schools)  were  enrolled 
education, 
a 
are 
partnership  with 
envisaged  to  revise  the  school  curriculum  for 
vocational  education  and  training,  professional 
qualifications  and  training  standards.  However, 
still 
vocational 
considered a second-choice option by students and 
parents.  Moreover,  the  employment  rate  of  recent 
vocational  education  and 
training  graduates 
remains  relatively  low  (67 %  in  2017,  vs.  an  EU 
average  of  77 %),  indicating  that  labour  market 
relevance  is  a  challenge.  Employers  complain  of 
training  graduates’ 
vocational  education  and 
to  outdated 
skills, 
outdated 
equipment  and  teaching  methods.  They  report  a 
heavy  administrative  burden  for  taking  part  in 
dual- 
training 
programmes.  

including  due 

vocational 

education 

training 

and 

and 

is 

Higher education is not sufficiently aligned with 
the labour  market.  Although tertiary educational 
attainment has doubled over the decade, it remains 
low  (26 %  in  2017  vs.  an  EU  average  of  40 %). 
The  number  of  graduates  in  science,  technology, 
engineering and mathematics is low, including due 
to low participation in higher education. Only 4 % 
of  new  university  entrants  have  parents  with  low 
educational  attainment.  Employers  report 
that 
graduates  entering  the  labour  market  have  overly 
theoretical  skills  and  often  lack  key  soft  skills, 
and 
including  problem 
communication.  Several  Romanian  universities 

teamwork 

solving, 

and  care.  The  participation  of  children  aged  4  to 
the  starting  age  of  compulsory  primary  education 
is  below  the  EU  average  (88%  vs  95%  in  2016). 
Pre-school participation is particularly low in rural 
areas (42)  and  among  Roma (43).  Only  15.7 %  of 
children  aged  0-3  are  enrolled  in  nurseries  (EU: 
34 %),  including  due  to  lack  of  facilities.  The 
Ministry of Education is in the process of drawing 
up  cost  and  quality  standards  and  the  necessary 
curricula,  together  with  training  for  specialised 
staff.  EU  funded  activities  are  being  implemented 
but face delays.  

Early  school 
leaving  remains  very  high, 
hampering  the  development  of  high  skills.  The 
rate  of  early  leavers  from  education  and  training 
stood  at  18.1 %  in  2017,  almost  8  pps  above  the 
EU  average.  The  indicator  is  particularly  high  in 
rural  areas  (27.1 %)  and  among  Roma  (77 %, 
FRA,  2016).  The  proportion  of  out-of-school 
children remains high (44). An integrated approach 
to  prevent  early  school  leaving  is  still  missing. 
There have been only scattered efforts to improve 
the  quality  of  education  in  schools  with  high 
dropout  rates.  A  project  setting  up  an  early 
warning  system  to  identify  pupils  at  risk  of  drop 
out  started  in  2018.  Access  to  second  chance 
programmes  is  insufficient  and  their  design  is  not 
tailored  to  the  needs  of  adult  learners.  The 
provision of career guidance services is limited.  

insufficiently 

Teachers’  ability  to  apply  a  learner-centred 
approach  are  not  sufficiently  developed.  Initial 
teacher  education 
focuses  on 
challenges  in  the  classroom,  including  supporting 
children  with  learning  difficulties  or  children  at 
risk of dropping out. The European Social Fund is 
co-financing  the  retraining  of  teachers  to  support 
the  new  competence-based  curriculum.  However, 
implementing  a 
in 
education is not applied across-the-board. Teachers 
in  rural  areas  are  much  more  likely  to  lack  the 
necessary  qualifications.  In  addition,  the  school 
funding  model and teachers’  merit allowances are 
not  sufficiently  geared  towards  improving  the 
outcomes of disadvantaged schools and students. 

learner-centred  approach 

(42)  97.4 %  in  urban  areas  compared  to  85%  in  rural  areas  in 

2016-2017 (National Institute of Statistics) 

(43)  Only  38 %  of  Roma  children  attend  kindergarten  (FRA, 

2016). 

(44)  In the 2016/2017 school year, the gross enrolment rate was 
89 % in primary and 91 % in lower secondary education. 

39 

 
                                                           
4.3. Labour market, education and social policies 

have  started  offering  a  limited  number  of  online 
courses (45).  

Graph 4.3.6:  Spending on healthcare by Member State, 

2016 

4.3.4.  HEALTH POLICIES 

to  81  years  for 

The health of the population remains below the 
EU  average,  despite  recent  improvements.  Life 
expectancy  at  birth  was  75.3  years  in  2016, 
the  EU. (46)  The 
compared 
amenable mortality rate, i.e. deaths that could have 
been  avoided  through  optimal  quality  healthcare, 
was  two  and  a  half  times  higher  than  the  overall 
rate  in  the  EU  in  2015  and  is  not  converging 
towards  the  EU  level (47).  Ongoing  initiatives 
include  screening  campaigns  for  oncological  and 
cardiovascular  diseases  and  a  legislative  initiative 
on  vaccination.  In  addition,  the  current  national 
multiannual  plan  promotes  various  healthy  living 
initiatives. 

Spending  on  healthcare  is  comparatively  low 
and  staff  shortages  are  an  ongoing  concern. 
Spending  on  preventive  care  slowly  increased  in 
recent  years,  from  1.3 %  of  the  public  healthcare 
budget  in  2011  to  1.6 %  in  2016.  However, 
coordination  of  prevention  measures  and  funding 
is  not  progressing  fast  enough.  Provision  of  key 
diagnostic  and  therapeutic  medical  equipment  is 
very  low,  particularly  in  hospitals,  despite  a  high 
supply  of  hospital  beds.  In  addition,  the  coverage 
of high cost novel medicines, especially in the area 
of cancer treatment, remains limited, despite recent 
improvements.  A  shortage  of  healthcare  staff, 
coupled  with  high  workforce  emigration  poses 
challenges  to  the  proper  functioning  of  the  health 
system.  In  2016,  there  were  56 000  physicians  in 
Romania  which  in  per  capita  terms  was  the  third 
lowest  number  in  the  EU.  In  2013, more  than  a 
fifth of the total number of Romanian doctors were 
working  abroad  (World  Bank,  2018).  Recent 
increases  in  public  salaries  in  the  health  sector 
could  increase  workforce  retention,  especially 
when  coupled  with  complementary  measures  to 
improve working conditions. 

(45)  https://www.mooc-list.com/countries/romania  
(46)  Eurostat general mortality data 
(47)  Eurostat causes of death data 

(1) The data for Denmark, Cyprus, Luxembourg, Netherlands, 
Slovenia, Slovakia and Finland refer to 2015; there are no 
data for Malta. 
Source: Eurostat System of Health Accounts. 

Unmet  needs  for  medical  care  remain  high, 
especially 
for  vulnerable  groups.  Despite 
improvements  in  recent  years,  high  disparities  in 
the accessibility of healthcare are reported between 
different groups as well as between urban and rural 
areas.  The  rate  of  unmet  healthcare  needs  due  to 
long  travelling  distances  was  the  third  highest  in 
the  EU  in  2017 (48).  The  widespread  practice  of 
informal  payments  is  a  significant  impediment  to 
the accessibility of healthcare. The government has 
taken  measures 
transparency  and 
governance,  including  by  setting  up  a  patient 
feedback 
comprehensive 
assessment of the results is not yet available.  

mechanism. 

foster 

to 

A 

The  healthcare  system  is  characterised  by 
inefficiency and limited accessibility. The uptake 
of  ambulatory  care  (such  as  one-day  surgery)  in 
hospitals  has 
increased.  Legal  and  financial 
measures were recently taken to incentivise the use 
of  ambulatory  care  in  hospitals  and  specialised 
ambulatory services outside of hospitals. However, 
progress on shifting to outpatient care remains low. 
The  current  design  of  competencies  between 
medical  services  might  lead  to  gaps  in  healthcare 
services  coverage,  especially  in  rural  areas  and 
marginalised  communities.  Preparations  are  under 
way for the building of the first three of a total of 
eight  planned  new  regional  emergency  care 
hospitals. However, implementation and budgetary 
challenges for the building of the hospitals remain. 

(48)  Eurostat Survey on Income and Living Conditions data 

40 

0%2%4%6%8%10%12%14%05001.0001.5002.0002.5003.0003.5004.0004.500FRDESENLATDKBEUKFIPTESITSIELBGIEHUHRCZSKCYEELTPLLVLUROTotal Healthcare Expenditure (EUR in PPS per inhabitant)Of which spending by government schemes and compulsory contributory health carefinancing schemesTotal Healthcare Expenditure (% of GDP) (lhs) 
                                                           
 
                                                           
4.3. Labour market, education and social policies 

labour  market  needs,  while  better 
regional 
anticipating 
the  new  skills  requirements  and 
introducing more flexible upskilling and reskilling 
opportunities.  Ensuring  sustainable  growth  also 
requires  matching  investment  in  social  inclusion, 
specifically  by  supporting  a  wide  range  of  active 
inclusion  measures,  and  the  deinstitutionalisation 
of  children  and  of  adults  with  disabilities,  as  well 
as increasing access to integrated social, education 
and healthcare services, in particular for children at 
risk  of  poverty  and  vulnerable  groups.  It  is  also 
important  to  pay  due  attention  to  geographical 
disparities  in  the  availability  and  quality  of  these 
services. 

Due  attention  is  needed  in  preparatory  planning 
efforts to embed these hospitals in regional referral 
schemes.  This  would  allow 
for  optimised 
the  spectrum  of  primary, 
allocation  across 
secondary and tertiary care.  

for 

care 

Improvements  in  community  care  are  much 
needed  but  delayed.  The  roll-out  of  community 
care centres delivering integrated care has suffered 
further  delays.  Improved  community  care  could 
reduce the current high level of avoidable hospital 
admissions 
sensitive 
ʻambulatory 
conditionsʼ  such  as  diabetes  and  hypertension 
(OECD,  2018a).  The  continued  decline  of  the 
share  of  patients’  lists  registered  with  family 
physicians (49)  hints  at 
the  health  system’s 
decreasing capacity to monitor patients in primary 
care  settings.  Various  planned  policy  measures  to 
boost  the  uptake  of  e-health  solutions  across  the 
health system continue to be delayed, including the 
move  to  a  fully  functional  operation  of  electronic 
health records. 

Access  to  long-term  care,  rehabilitation  and 
palliative  care  is  poor.  Longstanding  concerns 
have  not  been  remedied  over  patient  access  to 
rehabilitation services (WHO, 2016), that typically 
enable  patients  to  experience  a  smooth  transition 
out  of  hospital  following  surgery.  Rehabilitation 
care  is  provided  in  ambulatory  and  inpatient 
settings,  but  access  to  such  care  is  not  adequate 
and  waiting  lists  are  long.  Coverage  and  public 
spending  on  long-term  care  in  Romania  is  among 
the  lowest  in  EU;  only  7.9 %  of  palliative  care 
needs were covered in 2014.  

4.3.5.  INVESTMENT 

Increased  investment  in  skills,  education  and 
training,  healthcare  and  social  inclusion  is 
important for improving productivity and long-
term  inclusive  growth.  The  main  obstacles  to 
business  investment  include  high  labour  force 
emigration  and  skills  shortages,  unfavourable 
demographics and regional disparities. This points 
to  the  need  to  invest  in  early  childhood  education 
and  prevention  of  early  school  leaving,  improve 
quality and inclusiveness, and matching education 
(notably  vocational  education  and 
curricula 
training  and  tertiary  education)  to  local  and 

(49)  National Health Insurance Fund, 2017 Activity Report 

41 

 
                                                           
4.4. COMPETITIVENESS REFORMS AND INVESTMENT 

4.4.1.  COMPETITIVENESS AND EXTERNAL 

Graph 4.4.2:  Evolution of unit labour costs by sector 

POSITION (*) 

increasingly  outpaced 
Labour  costs  have 
productivity  developments.  Unit  labour  costs 
(ULCs)  have  accelerated  strongly.  Nominal  unit 
labour  costs  started  to  accelerate  in  2016  (Graph 
4.4.1), growing by 8.5 % in 2016, by 8 % in 2017 
in  2018.  This 
and  by  an  estimated  9.3 % 
acceleration  has  been  driven 
entirely  by 
compensation  per  employee,  which  has  been 
increasing by double digits in nominal terms since 
2016.  Productivity  developments  have  only 
partially  mitigated 
impact.  Labour 
productivity per person grew 6 % in 2016, 4.3 % in 
2017  and  an  estimated  3.3 %  in  2018,  well  above 
labour  productivity 
levels, 
regional  peers.  In 
amounts to around two thirds of the EU average. 

such 

Graph 4.4.1:  Nominal unit labour costs, growth breakdown 

Source: European Commission 

The  increase  in  nominal  compensation  per 
employee comes mainly from public wage but is 
also  meaningful  in  the  private  sector.  Public 
sector  compensation  per  employee  is  estimated  to 
have grown annually at an average of above 20 % 
over  the  last  3  years,  whereas  private  sector 
compensation  increased  by  an  average  of  around 
10 %.  A  similar  decoupling  of  public  wages  from 
private wages took place in the run-up to the 2009 
crisis,  leading  to  a  strong  correction  in  the 
following  years (Graph  4.4.3). Wage levels in  the 
public and private sectors differ substantially, with 
public  wages  34 %  higher  than  private  wages. 
These  cannot  solely  be  explained  by  the  different 
skill composition in these sectors. 

Source: European Commission 

labour  costs 

So  far  the  rise  in  nominal  unit  labour  costs 
stems  mainly  from  the  public  sector.  Overall, 
unit 
increased  by  almost  70 % 
between 2014 and 2017. Growth has been stronger 
and  accelerating  faster  in  the  public  sector,  where 
unit  labour  costs  increased  by  27.5 %  and  20.7 % 
in  2016  and  2017,  respectively  (see  Section  1). 
Unit labour costs in other sectors have experienced 
milder  increases,  but  those  in  construction  were 
in  2017 
already  showing  significant  growth 
(14.6 %)  while  those  in  industry,  Romania's  main 
exporting  sector,  expanded  substantially  less,  by 
7.5 % in 2016 and 3.6 % in 2017. 

42 

-15-10-505101520091011121314151617181920Rate of change y-o-y (%)Inflation (GDP deflator growth)Real Compensation per EmployeeProductivity Contribution (negative sign)Nominal unit labour costforecast-10-505101520253020132014201520162017IndustryPublic sectorTrade and accomodationConstructionOther private servicesTOTAL 
 
 
 
4.4. Competitiveness reforms and investment 

Graph 4.4.3:  Evolution of public and private wages 

subdued  up  to  2016.  However,  since  then  labour 
costs  have  been  growing 
faster.  Repeated 
minimum  wage  increases  with  additional  indirect 
effects  on  the  wage  scale,  together  with  potential 
spill-overs from public sector wages put additional 
upward  pressure  on  private  wages  (see  Section 
4.3),  creating  significant  pressure  on 
firms' 
profitability and/or prices. 

limits 

labour 

A  number  of  non-cost  factors  also  affect 
Romania's competitiveness negatively. The poor 
state  of  road  and  railway  infrastructure  affects 
businesses'  effectiveness  in  moving  goods  and 
services  across  borders, 
force 
mobility  and  aggravates  regional  disparities  (see 
Section  4.4.2).  The  economy's  low  innovative 
limiting 
another  key 
capability 
competitiveness 
4.4.2).  A 
cumbersome  business  environment,  marked  by 
frequent  and  unpredictable  legislative  changes, 
together  with  excessive  red  tape  and  persistent 
administration 
inefficiencies 
undermines 
risks 
reducing  the  country's  attractiveness  to  foreign 
investors (see Section 4.4.5). 

investment  decisions  and 

the  public 

Section 

factor 

(see 

in 

is 

Romania  has  gained  export  market  share  in 
recent  years.  Romania's  export  market  share 
increased by 8.5 % in 2016 and by a further 3.1 % 
in  2017  (Graph  4.4.4).  Over  2012-2017, 
it 
increased  by  37 %,  second  in  the  EU  only  to 
Ireland, and significantly above gains in other peer 
countries. From 2016 to 2017 export market share 
gains  shifted  from  machinery  and  equipment,  to 
the vehicle industry and mineral products. Growth 
in the latter sector was particularly strong, even if 
from  a  relatively  low  base.  For  services,  exports 
and 
continued 
telecommunications.  On  quality,  for  the  last  10 
years,  Romania  has  increasingly  specialised  in 
medium  high-tech  products,  which  now  account 
for almost 50 % of total manufacturing exports. 

transport 

rely 

on 

to 

Source: National Statistics Institute 

the  pressure  on 

Spillovers of the wages' growth from the public 
to  the  private  sector  may  further  affect 
competitiveness.  Unit  labour  costs  developments 
in the tradable sector (mainly industry and ICT in 
the  case  of  Romania)  have  been  much  more 
moderate  than  in  the  overall  economy.  This  has 
softened 
the  country's  cost 
competitiveness  and  supported  the  very  strong 
export  performance  in  recent  years  (Graph  4.4.4). 
However,  wage developments in the  public sector 
can spill-over to other sectors, triggering additional 
competitiveness 
evidence 
suggests that the public sector in Romania plays a 
leading  role  in  wage  dynamics,  with  public-wage 
increases 
than 
proportional wage increases in the private tradable 
sector, which are in turn fully adapted by the non-
tradable sector. A 10 % increase in public wages is 
estimated  to  lead  to  a  6.6 %  increase  in  wages  in 
the  tradable  sector  (Biea  et  al,  2019).  Additional 
evidence  suggests  that  a  10 %  increase  in  public 
sector  wages  leads  to  a  3.5 %  increase  in  the 
average  wage growth in the industry sector over a 
year (NBR, 2016). 

losses.  Empirical 

eventually 

leading 

less 

to 

The  profitability  of  firms  has  remained  robust 
despite the recent increase in unit labour costs. 
Profitability  deteriorated  in  the  aftermath  of  the 
crisis across  sectors but has been improving  since 
2013. 2016  data,  the  latest  available  data,  suggest 
robust  profit  rates  in  construction,  manufacturing 
and  retail.  This  reflects  the  fact  that  labour  cost 
the  private  sector  was  relatively 
growth  for 

43 

05001.0001.5002.0002.5003.0003.500Apr-01Feb-02Dec-02Oct-03Aug-04Jun-05Apr-06Feb-07Dec-07Oct-08Aug-09Jun-10Apr-11Feb-12Dec-12Oct-13Aug-14Jun-15Apr-16Feb-17Dec-17Oct-18Net wage, 12 month mowing average (RON)Private servicesPublic sectorIndustry 
 
4.4. Competitiveness reforms and investment 

Graph 4.4.4:  Export market share growth 

Graph 4.4.5:  RON-denominated export price evolution 

Source: European Commission 

Source: European Commission 

Romania's strong export performance has been 
supported by subdued export prices but risks to 
price competitiveness are emerging. The price of 
exported  goods  in  the  domestic  currency  (as 
measured  by  the  export  of  goods  deflator),  fell 
each year between 2013 and 2016 (Graph 4.4.5). It 
resumed  growth  in  2017,  increasing  by  3.5 %.  In 
the  first  three  quarters  of  2018  the  price  of 
exported  goods  increased,  on  an  annual  average, 
by 3.7 %, 4.5% and 5 % year-on-year respectively, 
raising 
country's  price 
competitiveness  could  start  deteriorating.  The 
evolution  of  the  real  effective  exchange  rate 
deflated  by  export  prices  also  signals  risks.  It  has 
been  depreciating 
since  2015  but  began 
appreciating in the first quarter of 2018. 

concerns 

that 

the 

A  gradual  depreciation  of  the  currency  has 
mitigated  the  effect  of  rising  export  prices. 
Between  December  2016  and  December  2018  the 
RON 
the  euro.  This 
depreciation has partially compensated for the rise 
in  export  prices  and  has  supported  the  country's 
strong export performance in euro area markets. 

fell  by  3 %  against 

labour 

High  unit 
costs  might  hinder 
competitiveness.  The  acceleration  of  unit  labour 
costs  has  put  pressure  on  the  real  effective 
exchange rate and Romania's cost competitiveness. 
As  a  result,  the  real  effective  exchange  rate, 
subdued over the last few years, has started to pick 
up.  The  inflation-based  real  effective  exchange 
rate (50)  depreciated  every  year  between  2014  and 
2017 due to the nominal depreciation of the RON. 
In  2018,  however,  the  stabilisation  of  nominal 
exchange  rates  (see  Section  1)  allowed  an 
appreciation of the real effective exchange rate  by 
an average of 2.4 % year-on-year, putting pressure 
on price competitiveness (Graph 4.4.6). 

Despite  a  strong  export  performance,  the 
current  account  deficit  has  persistently 
deteriorated since 2014. From a balanced position 
in  2014,  the  current  account  reached  a  deficit  of 
3.2 %  of  GDP  in  2017  and  is  estimated  to  have 
widened  further  to  4.3 %  in  2018.  The  widening 
current account deficit has been driven mainly by a 
worsening  trade  balance  in  goods,  triggered  by 
strong growth in imports, which outpaced exports. 
The  deficit  in  the  trade  in  goods  gradually 
increased from 4.3 % of GDP in 2014 to 6.5 % in 
2017. 

(50)  Computed  using  the  Harmonized  Consumer  Price  Index 

and measured against a group of 42 trade partners 

44 

-30-20-100102030400102030405060708091011121314151617Rate of change y-o-y (%)Contribution: World export growth (euros, neg. Sign)Contribution: Export growth (euros)EMS growth rate-10-5051015202009Q12009Q32010Q12010Q32011Q12011Q32012Q12012Q32013Q12013Q32014Q12014Q32015Q12015Q32016Q12016Q32017Q12017Q32018Q12018Q3Y-o-y rate of change, 4 quarter moving average (%)GoodsGoods and servicesServices 
 
 
                                                           
4.4. Competitiveness reforms and investment 

Graph 4.4.6:  Real effective exchange rate growth 

Graph 4.4.7:  Breakdown of the trade balance 

Source: European Commission 

Consumer  goods  imports  have  substantially 
outpaced  other  imports.  The  change  in  the 
composition of imports raises concerns. Imports of 
consumer  goods  have  been  growing  significantly 
faster than those of capital and intermediate goods. 
The  boom  has  been  fostered  by  an  expansionary 
fiscal  policy  directed  at  increasing  disposable 
income,  which  has  driven  private  consumption. 
Since  2015,  consumer  goods 
imports  have 
increased  by  an  annual  average  of  13.5 %.  The 
corresponding  figures  for  imports  of  intermediate 
goods  and  those  of  capital  goods  were  6.7 %  and 
9.1 % respectively. As a result, the balance of trade 
for consumer goods moved from a small surplus in 
2014 to a deficit of around 2.1 % of GDP in 2017. 
In  contrast,  the  trade  deficits  in  capital  and 
intermediate  goods  deepened  slower  and 
the 
surplus  in  services  has  slightly  increased  since 
2015  (Graph  4.4.7).  A  current  account  deficit 
driven  by  consumption,  rather  than  investment, 
does  not  support  potential  GDP  growth  (see 
Section 1). 

Source: European Commission 

international 

investment  position 
The  net 
(NIIP)  is  improving  at  a  slower  pace.  The  net 
international  investment  position  reached  -47.8 % 
of GDP in 2017, almost 10 pps above 2014 (Graph 
4.4.8). This improvement has been due to the very 
strong  GDP  growth  and  to  a  positive  capital 
account. However, progress has slowed down. The 
net international investment position improved just 
over  1  pp.  in  2017,  reflecting  a  deceleration  of 
GDP  growth  and  a  widening  current  account.  By 
components,  net  direct  investment  has  remained 
broadly stable as a share of GDP, averaging -41 % 
in  the  last  8  years,  but  has  steadily  increased  its 
share  in  the  net  international  investment  position 
by  36 %  in  the  8  years  up  to  2017.  The  share  of 
other  foreign 
to  GDP  declined  as 
Romania repaid external debt. 

liabilities 

45 

-8-6-4-202468102013Q12013Q22013Q32013Q42014Q12014Q22014Q32014Q42015Q12015Q22015Q32015Q42016Q12016Q22016Q32016Q42017Q12017Q22017Q32017Q42018Q12018Q22018Q3Real effective exchange rate (deflator: HCPI)Real effective exchange rate (deflator: unit labour costs)Real effective exchange rate (deflator: exports of goods and services)-20-15-10-505janv-15avr-15juil-15oct-15janv-16avr-16juil-16oct-16janv-17avr-17juil-17oct-17janv-18avr-18juil-18oct-18Trade balance, EUR billion,12 months rolling sumPassenger motor cars and motor spiritIntermediate goodsCapital goodsConsumer goodsBalance of trade: Goods 
 
 
4.4. Competitiveness reforms and investment 

Graph 4.4.8:  Net international investment position 

4.4.2.  PRODUCTIVITY AND INVESTMENT  

Productivity developments 

(1) Merged BPM5/BPM6-ESA 2010 data 
Source: European Commission 

Foreign  direct  investment  (FDI)  flows  remain 
volatile. In 2017, foreign direct investment inflows 
declined  by  about  7 %  compared  to  2016.  In  the 
first 11 months of 2018, however, they were nearly 
20 %  higher  than  in  the  same  period  in  2017 
(Graph  4.4.9).  The  2018  increase  was  accounted 
for  by  debt  instruments  (intercompany  loans).  At 
the  end  of  2017,  43 %  of  the  foreign  direct 
investment  stock  was  concentrated  in  industry, 
about  15 %  in  construction  and  some  12 %  in 
financial  intermediation  (NBR,  2018a).  The  main 
countries of origin for foreign direct investment in 
Romania  are  Germany,  the  Netherlands,  Austria, 
France and Italy.  

Graph 4.4.9:  FDI flows by investment type 

Productivity  has  increased  substantially  over 
the  past  two  decades,  albeit  from  a  low  level. 
Despite  being  the  third  lowest  in  the  EU,  labour 
productivity increased from almost 22 % of the EU 
average  in  2000  to  nearly  60 %  in  2017.  Total 
factor productivity has also increased substantially. 
It averaged 0.8 % over 2007-2017 (vs. 3.7 % over 
1995-2007)  but  is  picking  up  again.  In  2017, 
factor 
Romania 
productivity growth in the EU despite some factors 
holding  back  further  gains:  low  infrastructure, 
dysfunctionalities  in  labour  and  product  markets 
(see  Sections  4.3  and  4.4.3),  weak  innovation 
capacity, and a cumbersome business environment 
(see Section 4.4.5). 

the  highest 

recorded 

total 

significantly 
Labour  productivity  diverges 
across  firms.  The  gap  between  the  10 %  least 
productive  and  the  10 %  most  productive  firms 
remains  very  wide  (CompNet  database).  This  gap 
could be due to large differences between foreign-
owned and domestic firms but may also signal the 
slow  spread  of  technological  advances.  Exporting 
firms  (mostly  multinationals)  are  more  productive 
than  non-exporting  ones  (ECB,  2017).  Large 
divergences in terms of productivity are translating 
into high wage dispersions and high inequality. 

A  National  Productivity  Board  was  set  up  in 
2018. Following a 2016 Council Recommendation, 
in  August  2018  Romania  announced  that  the 
Council  of  Economic  Programming,  part  of  the 
National  Commission  for  Strategy  and  Prognosis, 
as  Romania’s  National 
would 
Productivity Board. The board should contribute to 
addressing the relatively low productivity levels in 
Romania  and  boost  ownership  of  structural 
reforms, as recommended by the Council. 

serve 

also 

Source: European Commission 

Investment activity 

Investments  in  infrastructure  and  innovation 
are  particularly  needed  to  set  growth  on  a 
sustainable path. Romania is poorly connected to 
the EU’s main transport corridors. The low quality 
of  transport  infrastructure  affects  shipping  times 
and  limits  labour  force  mobility,  resulting  in 
additional costs for businesses. It also undermines 
investment  decisions  and  magnifies 
business 

46 

-150-100-5005005060708091011121314151617% of GDPReserve assetsNet portfolio investment, equity and investment fund shares/unitsNet portfolio investment, debt securitiesOther investment (net)Net direct investmentNet financial derivatives and employee stock optionsNet Int'l investment position (NIIP)NENDI (NIIP excluding non-defaultable instruments)-2.000-1.500-1.000-50005001.0001.5002.0002.5003.00011Q212Q213Q214Q215Q216Q217Q218Q2EUR millionDebt instruments (FDI)Equity and investment fund shares/units - other than reinvestment of earningsEquity and investment fund shares/units - reinvestment of earningsTotal FDI inflows 
 
 
4.4. Competitiveness reforms and investment 

and 

fiscal 

identified 

surveyed  companies,  the  instability  of  the  tax 
legislation  was  a  major  obstacle  to  investment.  In 
another  recent  survey  (EY,  2018),  Romanian 
legislative 
companies 
instability, political instability and a lack of vision 
of public policy as the main barriers to increasing 
their business. 85 % declared that their investment 
plans  have  been  affected  by  fiscal  and  legislative 
unpredictability.  The  adoption  by  the  government 
in December 2018, without any impact assessment 
or  public  consultation,  of  a  set  of  fiscal  measures 
with 
several 
the  prevailing 
economic 
perception of policy unpredictability (51).  

far-reaching  consequences 

reinforced 

sectors 

for 

EU  funds  account  for  a  large  share  of  public 
investment  in  Romania.  Since  2014,  capital 
transfers  from  the  EU  accounted  for  a  quarter  of 
public  investment  spending  and  1%  of  GDP 
annually. Following a drop caused  by the  delayed 
start  of  new  EU-funded  projects,  absorption 
improved by the end of 2018 (52). 

the 

but 

absence  of 

infrastructure 

EU funds have been made available to upgrade 
their 
Romania’s 
implementation  is  lagging  behind.  Recurring 
bottlenecks  and  delays  have  slowed  down 
implementation of EU-funded investment projects. 
Access  to  EU  funds  was  conditioned  on  reforms 
addressing  structural  policy  challenges.  However, 
these reforms are still at an early stage, hampered 
by  high  political  volatility,  low  political  buy-in, 
long-term  planning. 
and 
Furthermore,  there  is  no  strategic  management 
framework  for  either  nationally-funded  or  EU-
funded  public  investment.  EU  funds  absorption  is 
also  held  back  by  limited  administrative  capacity 
to prepare and implement large investment projects 
coupled  with  an  inefficient  application  of  public 
investment  management  rules,  a  lack  of  real 
prioritisation, and lengthy tender procedures. In the 
2007-2013  programming  period  Romania  was  a 
major  beneficiary  of  EU  funds,  having  received 
EUR 17 billion. However, it was not able to absorb 
about  EUR  1.6  billion  of  its  initial  EU  funds 
allocation (European Commission, 2018l). 

(51)  See section 4.4.5 for a further discussion on the impact on 

the business environment of public policy-making. 

(52)  As of 29 January 2019, the absorption rate stood at 26 % of 
the total allocation, compared to the EU average of 28 %. 

regional  disparities.  Investment  in  the  energy 
infrastructure  is  necessary  to  ensure  a  better 
integration  in  regional  energy  markets  and  secure 
the  country’s  energy  supply.  Romania  recycles 
only a very small part of the waste it produces and 
a  significant  part  of  its  population  is  still  not 
connected  to  public  water  supply.  Substantial 
investments in waste and wastewater infrastructure 
are  needed  to  allow  Romania  to  improve  the  life 
quality of its citizens and move towards a greener 
economy  (see  Box  4.4.1).  Romania’s  long-term 
economic  prospects  depend  on  the  economy’s 
capacity to move from the production of relatively 
low-technology  goods 
to  higher  value-added 
products  and  services.  This  requires  a  significant 
increase 
research  and 
in 
innovation activities. 

financing  of 

the 

Total  investment  is  relatively  high.  In  2007-
2018, total investment represented 26.7 % of GDP 
on average, well above the EU average (20.3 % of 
GDP).  Private  investment  accounted  for  some 
80 %  of  the  total.  Public  investment  was  strong 
immediately  after  EU  accession,  in  2007  (around 
6 % of GDP), but has lost momentum since 2016, 
dropping  below  4 %  of  GDP  on  the  back  of  a 
slowdown  in  EU  funds  absorption.  While  private 
investment 
constantly 
Romania 
outperformed  regional  peers,  public  investment 
started  lagging  behind  as  of  2014,  except  for  a 
slight rebound in 2016. 

has 

in 

and 

significantly 

from  a 
investment  would  benefit 
Private 
qualitative  improvement.  Private  investment  is 
geared  towards  replacement  needs  and  capacity 
expansion, 
towards 
developing new products or services. According to 
a  recent  survey  (EIB,  2018),  firms  invest  most  in 
machinery and equipment and least in research and 
development.  Asset  quality,  as  measured  by  the 
share of state-of-the art machinery and equipment, 
is  significantly  below  the  EU  average  (28 %  vs 
44 %). 

less 

Policy  unpredictability  is  a  key  obstacle  to 
investment.  Uncertainty  about  policy  and  labour 
and  business  regulations  are  cited  by  firms  as  the 
main  obstacles  to  long-term  investment  (EIB, 
2018). A survey by the National Bank of Romania 
(NBR,  2018b),  identifies  fiscal  unpredictability  as 
the  most  pressing 
facing  Romanian 
issue 
companies  in  2017-2018.  This  is  corroborated  by 
(2018b).  For  almost  half  of 
Eurobarometer 

47 

 
                                                           
4.4. Competitiveness reforms and investment 

domestic  firms  remain  limited,  in  part  because 
foreign-owned  firms  primarily  source  from  other 
foreign companies.  Domestic firms  mainly supply 
low  value-added  components  (ACAROM;  AKH 
Romania,  2018).  No  targeted  policy  has  been 
developed  to  leverage  technology  spillovers  from 
foreign  direct  investment  and  promote  research 
future 
a 
and 
for 
driver 
competitiveness 
Investors  Council, 
(Foreign 
2017b; Horobeț & Popovici, 2017). 

innovation 

as 

The  economy's  overall 
innovative  capacity 
remains  low.  Romania  ranks  last  in  the  EU  in 
terms  of  innovation  and  its  performance  has 
deteriorated  since  2010  (European  Commission, 
2018c).  Furthermore,  the  start-ups'  survival  rate 
beyond  5  years  dropped  from  60 %  in  2009  to 
40 %  in  2014  (European  Commission,  2018d). 
With the exception of the ICT sector, Romania has 
few fast-growing firms (53).  

At  sub-national  level,  research  and  innovation 
is  more  diversified  and  dynamic.  Innovation  is 
modest in all Romanian regions, albeit with a large 
gap between best and worst performers. Under the 
'Catching  Up  Regions 
smart 
specialisation strategies and  governance  structures 
were  set  up  in  two  pilot  regions  (Nord-Est  and 
Nord-Vest), leading to the development of regional 
entrepreneurial  discovery  processes (54)  and  a 
pipeline of projects to be co-financed by EU funds. 
The  initiative  is  being  rolled-out  to  all  Romanian 
regions.  

Initiative’, 

Investment in research and development (R&D) 
remains  critically  low.  R&D  intensity  (i.e.  R&D 
expenditure as a percentage of GDP) has been flat 
since 2000, at 0.5 % in 2017 vs. 2.7 % in the EU as 
a whole (Graph 4.4.10). Public R&D intensity fell 
from 0.32 % in 2011 to 0.21 % in 2017. Despite an 
increase  in  recent  years,  business  R&D  intensity 
remains  well  below  the  EU  average  (0.29 %  vs. 
1.36 % 
in 
business  R&D  results  in  a  number  of  researchers 
per capita in the private sector over six times lower 

in  2017).  This  under-investment 

(53)  Enterprises  with  an  average  annualised  growth  in  the 
number of employees of more than 10 % per year over a 3-
year  period  and  at  least  10  employees  at  the  moment 
growth began. 

(54)  An  inclusive  and  interactive  bottom-up  method  under 
which  participants  from  government,  industry,  academia 
and  civil  society  build  connections  and  partnerships, 
identify  potential  investment  opportunities  and  develop 
project pipelines. 

the 

funds.  However, 

Public-private  partnerships  are 
increasingly 
seen by the government as an alternative to EU 
funding.  The  low  absorption  rate  of  EU  funds 
notwithstanding,  the  authorities  have  announced 
that  they  intend  to  develop  major  infrastructure 
works,  including  several  motorways  and  regional 
hospitals,  using  public-private  partnerships  rather 
successful 
than  EU 
implementation  of  such  projects  requires  strong 
public  institutions  and  expertise  in  negotiating 
public-private  partnership  contracts,  and  keeping 
overall  costs  under  control.  The  experience  of 
other EU Member States highlights the importance 
of  a  strong  institutional  setting.  While  in  some 
Member  States  a  good  level  of  service  and 
maintenance  was 
public-private 
partnerships have often resulted in an inappropriate 
risk sharing between the public and private sectors, 
cost  overruns  and  delays  (European  Court  of 
Auditors,  2018).  A  move  towards  public-private 
partnership contracts unaccompanied by reforms to 
improve  administrative  capacity  could  result  in  a 
high future fiscal burden for the State budget. 

observed, 

Research and innovation 

The  competitiveness  gap  between 
foreign-
owned  and  domestic  firms  has  not  narrowed. 
This suggests a gap in the take-up and financing of 
research  and  innovation  activities.  Foreign-owned 
firms account for two-thirds of Romania’s exports 
of  goods  (Foreign  Investors  Council,  2017a)  and 
increased  their  share  of  total  value  added  from 
39 %  in  2008  to  44 %  in  2015  (Eurostat).  They 
have  a  strong  presence  in  key  medium-tech  and 
high-tech  manufacturing  sectors,  with  their  share 
of  value  added  in  the  manufacturing  of  motor 
vehicles exceeding 90 %. Their labour productivity 
is  also  twice  that  of  domestic  firms.  Conversely, 
the agro-food sector, dominated by small, domestic 
holdings,  is  characterised  by  very  low  levels  of 
productivity,  which  means  that  Romania  is  not 
able  to  fully  exploit  its  significant  agricultural 
potential (NBR, 2018d). 

The  innovation  gap  separating  foreign-owned 
and  domestic  firms  signals  that  technology 
imports  have  not  been  substituted  with  home-
grown  innovation.  Several  multinationals  in  the 
automotive and IT sectors have set up research and 
development  activities  in  Romania.  Most  seek 
experimental  development  rather  than  industrial 
to 
research.  However, 

technology  spillovers 

48 

 
                                                           
4.4. Competitiveness reforms and investment 

in 

allocated  for  this.  The  continued  decline  in  the 
tertiary  graduates 
number  of 
science, 
technology, 
and  mathematics 
engineering 
(European  Commission,  2018e),  further  hampers 
knowledge  transfer.  Romania  is  also  confronted 
with  a  significant  migration  of  skilled  people, 
having  one  of  the  largest  scientific  diasporas 
among  EU  countries  (European  Commission, 
2018h).  Further  investments  supporting  science-
business cooperation and skills are needed. 

Romania  has  not  yet  developed  a  coherent 
vision  for  moving  towards  higher  value  added 
activities.  Existing  policies  (the  Competitiveness 
Strategy,  the  National  Strategy  for  research  and 
development  and  the  2014  Small  and  Medium-
sized Enterprises Strategy) are loosely coordinated 
and do not provide adequate measures for firms to 
move  up  the  value  chain.  Non-financial  measures 
targeting  start-ups  and 
innovative  small  and 
medium-sized  enterprises  (e.g.  business  support 
services, 
remain 
underdeveloped,  whilst  existing  schemes  (mostly 
funding  measures)  are  not  customer-oriented 
(European  Commission  2018d).  The  use  of 
an 
financial 
innovation 
component 
if  some  equity 
instruments  were  set  up.  The  combination  of  EU 
funds  grants  and  financial  instruments  is  largely 
unexplored. 

instruments  with 
limited,  even 
is 

competences) 

support 

to 

Digitalisation 

Digitalisation  is  a  key  challenge  for  boosting 
innovation  and  competitiveness.  In  this  respect, 
Romania presents a very mixed picture. On the one 
hand,  there  are  elements  of  excellent  connectivity 
to  develop  services 
and  a  proven  potential 
especially  in  the  ICT  sector,  which  contributes  6-
7 %  to  Romania’s  GDP.  The  digital  sector  is 
growing,  with  two  major  hubs  in  Bucharest  and 
ICT 
Cluj-Napoca, 
investments  in  other  cities.  On  the  other  hand, 
Romania scores poorly on all other components of 
the  Digital  Economy  and  Social  Index,  including 
digital  public  services,  digital  skills  of  the  overall 
population 
and  digitalisation  of  businesses 
(European Commission, 2018k). 

significant 

as  well 

as 

than the EU average and in a very low number of 
patent  applications.  In  early  2017,  government 
emergency ordinance 3/2017 introduced a 10-year 
tax  exemption  for  R&D  firms,  but  procedural 
norms are still in preparation. 

is 

funding 

Public  R&D 
insufficient  and 
declining.  This  has  translated  into  an  overall 
stagnant scientific performance (55) and a low level 
cooperation (56). 
of 
scientific 
Although  substantial  investments  are  needed,  the 
government  has  no  clear  plans  to  address  this 
issue. 

international 

Graph 4.4.10: R&D intensity 2000, 2007, 2017 and 2020 target 

(1) Estonia: 2016 data; (2) EU: provisional data; (3) CESEE: 
SI,CZ, HU, EE, PL, LT, SK, HR, BG,LV,RO; (4) CZ: R&D Intensity 
target for 2020 is not available; (5) HR, SI, RO: Breaks in series 
occur between 2007 and 2017 
Source: European Commission 

economy's 

improved  by 

research  and 

innovative 
The 
capacity  could  be 
increased 
science-business  cooperation.  Higher  education 
institutions do not systematically integrate industry 
research 
needs 
programmes.  Knowledge  transfer  offices  are  not 
yet fully operational despite EU funds having been 

teaching 

their 

into 

and 

(55)  Measured as the share of top 10 % most cited publications 

in total publications. 

(56)  Measured  as  the  share  of  international  co-publications  in 

total publications 

49 

0,00,51,01,52,02,53,03,5R&D Intensity (gross domestic expenditure on R&D as % of GDP)2017 (1)20072020 target2000 
 
                                                           
4.4. Competitiveness reforms and investment 

Box 4.4.1: Investment challenges and reforms in Romania 

Macroeconomic perspective  

While Romania continues to have one of the highest investment ratios in the EU, its investment performance 
since the crisis has been volatile. An acceleration of investment in 2015 was  followed by a contraction in 
2016 as public investment fell due to a slow uptake of projects financed by EU funds under the 2014-2020 
programming  period.  Investment  grew  again  in  2017  on  account  of  an  upturn  in  private  investment,  but 
remained  subdued  in  2018.  Public  investment  inched  slightly  up  in  2018,  after  having  declined  for  2 
consecutive years, but remains significantly below pre-crisis levels.  

Assessment of barriers to investment and ongoing reforms 

The  overall  business  environment  presents  challenges  that  are  hampering  investment.  These  include 
continued  unpredictability  of  policymaking,  shortages  of  skilled  workforce  and  the  limited  labour  market 
relevance  of  education  and  training.  Some  measures  have  been  taken  to  tackle  these  issues,  but  many 
barriers remain to be addressed to lift growth and accelerate convergence (see Sections 4.3 and 4.4).   

Selected barriers to investment and priority actions under way 

1.  The recurrent legislative uncertainty continues to hamper the business environment. Investment may be 
held  back  by  frequent  and  unpredictable  legislative  changes  enacted  without  proper  stakeholder 
consultation or impact assessment, by the authorities’ contradictory declarations about important reforms 
and by persistent uncertainty over the direction of the fight against corruption (see Section 4.4.5).  

2.  Despite relatively high public investment spending over the past decade, infrastructure remains deficient 
in both qualitative and quantitative terms, hampering competitiveness and investment. The development 
of  quality  infrastructure  is  being  held  back  by:  (i)  comparatively  low  absorption of  EU  funds;  (ii)  low 
administrative  capacity;  and  (iii)  remaining  inefficiencies  in  project  preparation,  prioritisation  and 
implementation (see Section 4.4.2).   

Investment activity could be supported by the forthcoming National Promotional Bank. The institution 
will be responsible for coordinating the implementation of financial instruments in Romania. It will be well 
placed  to  address  market  failures  which  have  been  identified  during  an  ex-ante  assessment  delivered  mid-
2018.  The  feasibility  study  for  the  new  National  Promotional  Bank  and  its  associated  implementation 
roadmap  are  expected  to  be  delivered  by  end  of  February  2019,  enabling  the  start  of  the  implementation 
phase.   

50 

Regulatory/ administrative burdenCSRGROWFinancial TaxationCSRPublic administrationCSREMPLSector / TaxationAccess to financePublic procurement /PPPsCSREMPLCooperation btw academia, research and businessJudicial systemJUSTFinancing of R&D&IInsolvency frameworkJUSTBusiness services / Regulated professionsCompetition and regulatory frameworkGROWRetailEPL & framework for labour contracts EMPL?ConstructionWages & wage settingCSREMPLDigital Economy / TelecomEducation CSREAC/EMPLEnergyTransportNo barrier to investment identifiedSome progressCSRInvestment barriers that are also subject to a CSRSubstantial progressNo progressFully addressedLimited progressPublic administration/ Business environmentLabour market/ EducationSector specific regulationR&D&I 
 
4.4. Competitiveness reforms and investment 

transport.  Upgraded  railway  lines  designed  for 
speeds  of  160  km/h  are  not  used  to  their  full 
potential.  The  European  rail  traffic  management 
system is not operational anywhere on the core rail 
network,  affecting 
traffic 
safety, 
capacity, and accessibility.  

reliability, 

Graph 4.4.11: Quality of public infrastructure index, Romania 

and regional peers 

Scale: 1-7 (best) 
Source: World Economic Forum, The Global Competitiveness 
Report 2018 

Urban  mobility  is  weakly  developed  across 
Romania.  Urban  mobility  suffers  from  chronic 
underfinancing,  poor  sector  organisation  and  the 
weak administrative capacity of local providers. A 
number  of  growing  agglomerations  (Bucharest, 
Cluj,  Iasi,  and  Timisoara)  are  facing  increased 
challenges  due  to  the  recent  expansion  of  their 
functional areas and suburbanisation, as well as the 
poor  quality  of  urban  mobility  plans  and  delayed 
implementation  of  existing  projects.  Bucharest  is 
one of the most congested cities in the world (59). 

Telecoms networks 

Romania  is  lagging  behind  in  rural  broadband 
coverage.  Despite  outstanding  fast  broadband 
take-up,  with  53 %  of  homes  subscribing  to 
broadband  connections  of  ≥30Mbps  (EU  average: 
33 %),  overall  broadband  coverage  is  still  below 
the  EU  average  (74 %  vs.  80 %).  These  figures 
also  hide  a  large  urban-rural  digital  divide,  with 

(59)  https://www.tomtom.com/en_gb/trafficindex/  

Romania  lacks  a  clear  strategy  to  digitise 
businesses.  In  2016,  the  government  launched  a 
Manifesto  for  Digital  Romania (57)  setting  out 
principles aligned with a vision for a digital future. 
However,  a  clear  national  strategy  for  digitising 
industry is still  missing. The  integration of digital 
technologies by businesses remains very low, with 
electronic 
the  percentage  of 
information sharing decreasing from 22 % in 2015 
to 17 % in 2017 (European Commission, 2018k). 

firms  using 

The  digitalisation  of  the  Romanian  economy 
could  be  affected  by  recent  fiscal  measures.  In 
December  2018  the  government  set  a  minimum 
price threshold for spectrum licences of 4 % of the 
2018  turnover  of  the  telecom  sector  per  year  of 
licencing.  The  national  regulatory  authority  will 
launch  the  5G  spectrum  auction  by  the  end  of 
2019. These measures could  endanger the  success 
of  the  auction  and  adversely  affect  the  roll-out  of 
5G networks. The excessive pricing of 5G licences 
could  negatively  impact  the  very  competitive 
pricing of telecommunications services. 

Transport 

The general condition of the road infrastructure 
remains poor. The infrastructure is not keeping up 
with the traffic demand generated by an expanding 
economy (58), despite the availability of significant 
EU funding. The road network is among the  least 
developed in the EU (Graph 4.4.11). With only 38 
km  per  1  million  inhabitants,  Romania  has  by  far 
the  lowest  motorway  density  in  the  EU.  The 
country  ranks  also  relatively  low  in  the  quality  of 
its  road  infrastructure  (WEF,  2018)  and  has  the 
highest  road  fatality  rate  in  the  EU.  The  under-
developed  infrastructure  is  detrimental  to  delivery 
times  and  road  safety  and  hinders  the  country's 
competitiveness. Significant investments would be 
warranted  to  increase  the  quantity  and  quality  of 
the infrastructure. 

The  reform  of  the  railway  sector  is  lagging 
behind.  Although  the  Railway  Reform  Authority 
was established and studies have been initiated, the 
reform continues to be delayed. In addition, heavy 
underinvestment in  maintenance has reduced train 
speed  and  affected  delivery  times  of  rail  freight 

(57)  https://see40.org/2017forum/  
(58)  Romania  built  only  352  km  of  new  Trans-European 
Transport Networks (TEN-T) roads by the end of 2017.  

51 

0123456Quality ofroadsEfficiency oftrain servicesEfficiency of airtransportservicesEfficiency ofseaportservicesCZHUPLHRBGRO 
                                                           
 
                                                           
4.4. Competitiveness reforms and investment 

less  than  40 %  of  rural  areas  covered  (European 
Commission, 2018k). 

and growth. In the absence of additional measures 
Romania will not reach the 2030 climate targets, as 
established through the Effort Sharing Regulation.  

EU  funds  were  allocated  to  bridge  the  urban-
rural  digital  divide.  During 
the  2014-2020 
programming period some EUR 125  million  were 
allocated  from  EU  funds.  The  RO-NET  project 
supporting  the  deployment  of  national  broadband 
infrastructure in 'white areas' (60) is expected to be 
finalised by July 2019. For a significant part of the 
remaining 
the  Next  Generation 
Network investment projects will be developed by 
last-mile  access 
private  operators  deploying 
infrastructure.  Additional  public  investment  may 
be  needed  for  broadband  infrastructure  to  further 
increase the coverage of rural areas. 

'white  areas', 

More  efforts  are  needed  to  improve  fixed  and 
4G  broadband  coverage.  Despite  a  leap  from 
45 %  in  2016  to  72 %  in  2017,  mobile  4G 
broadband  coverage  is  still  well  below  the  EU 
average  of  91 %.  Fixed  broadband  coverage  is 
static  at  around  88 %  (EU  average:  97 %). 
Broadband  network  deployment  is  particularly 
affected  by  the  cumbersome  authorisation  process 
at  local  level.  A  better  coordination  between 
ministries,  the  national  communications  regulator 
and 
to  ensure 
streamlined  assistance  to  operators  interested  in 
investing  in  broadband.  In  November  2018,  the 
national  communications  regulator  adopted  a 
decision  on  maximum 
to 
network  operators  for  access  to  public  property, 
which  could  lower  costs  in  the  deployment  of 
communications networks. 

tariffs  chargeable 

local  authorities 

is  needed 

Energy and climate 

Energy intensity remains above the EU average. 
While  primary  energy  consumption  is  broadly 
stable, final energy consumption increased in 2016 
by  1.8%.  The  legal  and  operational  framework 
hinders  investments,  as  procedures  are  considered 
overly  complicated  by  many  project  developers. 
Buildings 
in  district 
heating  systems  to  improve  heating  services  and 
develop  district  cooling  systems  can  significantly 
contribute  to  enhancing  energy  efficiency  and 
support  the  transition  to  a  low-carbon  economy. 
The development of renewable energy sources and 
energy  efficiency  products  supports  job  creation 

investments 

renovation, 

(60)  Areas not covered by telecom networks. 

in 

line  with 

the  Regulation  on 

A  total  investment  need  of  around  EUR 22 
billion on energy and climate for 2021-2030 was 
indicated by Romania. The draft National Energy 
and  Climate  Plan  was  submitted  on  31  December 
2018 
the 
Governance  of  the  Energy  Union  and  Climate 
Action (61).  In  the  final  National  Energy  and 
Climate Plan to be adopted by 31 December 2019, 
its 
Romania  will  provide  an  overview  of 
investment  needs  until  2030  for  the  different 
aspects of the Energy Union, including renewable 
energy,  energy  efficiency,  security  of  supply,  and 
climate mitigation and adaptation. This will further 
contribute  to  the  identification  and  assessment  of 
energy and climate-related investment needs.  

Recent legislative changes could hamper future 
investments  in  the  energy  sector.  Government 
emergency ordinance 114/2018 may distort the gas 
market,  put  at  risk  investments  and  delay  the 
development of Romanian offshore gas production 
in  the  Black  Sea.  It  may  also  hamper  the 
development of infrastructure relevant for security 
of  supply  and  solidarity  in  the  Energy  Union  (see 
Section 4.4.3). 

transmission 

infrastructure  pending, 

Integration 
in  regional  gas  and  electricity 
markets  requires  additional  investments.  In 
2017, Romania’s electricity interconnectivity level 
was 7 %, below the 2020 target of 10 %. With the 
finalisation of planned projects of common interest 
on 
the 
Romanian  electricity  system 
is  overall  well 
developed.  The  timely  achievement  of  pending 
projects will increase Romania’s integration in the 
regional market and relieve existing congestions in 
the 
region  while  accommodating 
renewable development in north-east Bulgaria and 
southeast Romania (the Black Sea Corridor project 
of common interest). Investments in the gas sector 
are  further  needed  to  enable  bi-directional  flows, 
enhance  interconnectivity  with  neighbours  and 
fully  exploit  the  advantage  of  the  Black  Sea 
resources,  which  would  benefit  security  of  supply 
and competition in the region.  

south-east 

(61)  Regulation  (EU)  2018/1999  of  the  European  Parliament 
and  of  the  Council  of  11  December  2018  on  the 
Governance of the Energy Union and Climate Action. 

52 

 
                                                           
                                                           
4.4. Competitiveness reforms and investment 

EUR 2.5 billion. Considering the current low level 
of  compliance  with  collection  and 
treatment 
requirements, investments in the sector will remain 
a priority in the medium and long term.  

Air quality is very poor. Domestic solid fuel used 
by  households  and  the  energy  sector  remain  the 
main  sources  of  air  pollution.  Traffic  also  has  a 
significant  impact.  Over  25  000  premature  deaths 
per  year  are  due  to  air  pollution  (European 
Environment  Agency,  2018).  The  abolishment  in 
2017  of  a  vehicle  registration  tax  resulted  in  a 
surge  of  second-hand  car  sales,  aggravating  air 
quality. The government is considering introducing 
a pollutants-dependent car registration tax in 2019.  

lags  behind  on 

several  other 
Romania 
components affecting standards of living. This is 
the  case  for  green  infrastructure,  climate  change 
adaptation,  risk  prevention  and  disaster  resilience, 
the rehabilitation of old contaminated sites and the 
prevention  of  floods  and  other  natural  hazards. 
Romania  also  does  not  comply  with  EU  limits  on 
the emission of several major pollutants, while the 
the  EU  Nature  Directives 
implementation  of 
represents a considerable challenge. 

4.4.3.  SINGLE MARKET INTEGRATION 

Internal market for goods and services 

Obstacles  to  the  free  movements  of  goods 
persist  in  the  retail  trade  of  agricultural  and 
food products, gas and timber. National rules in 
these areas favour the domestic market, creating a 
barrier to trade and restricting market access from 
other countries. For instance, rules issued in 2016 
give  priority  to  marketing  local  food  products.  In 
the case of gas, emergency ordinance No 64/2016 
envisages  an  increase  of  domestically  produced 
gas to be traded on the centralised  market.  As for 
timber,  priority  access  is  given  to  local  furniture 
manufacturers  to  use  timber  from  state-owned 
forests.  

Access  to  certain  professions  and  services 
remains restricted by a cumbersome regulatory 
framework.  This  is  the  case  for  civil  engineers, 
architects,  accountants  and  tourist  guides  (63).  For 

(63)  The  European  Commission  has  developed  a  composite 
indicator on the restrictiveness of most existing barriers to 

Environment 

to 

the 

system 

continues 

performance 

waste  management 

the  waste  hierarchy  and 

lack  of  separate  collection, 
to 

The 
is 
underdeveloped.  Key  gaps  are 
insufficient 
lack  of  economic 
the 
separate  collection, 
incentives to move away from disposal, inefficient 
producer  responsibility  schemes  for  packaging, 
lack  of  infrastructure  and  investments  in  projects 
lack  of 
higher  up 
administrative  capacity  and  public  engagement. 
the 
Due 
country’s 
be 
characterised  by  very  low  recycling  of  municipal 
waste (14 %, including 7 % material recycling and 
7 %  composting)  and  very  high  landfilling  rates 
(70 %)  (Eurostat, 2017 data). However, the  figure 
does  not  include  the  temporary  storage  prior  to 
disposal, which, if added, would increase this rate 
further. This puts into question the achievement of 
the  EU  waste  targets  (European  Commission, 
2018j).  The  national  waste  management  plan  was 
adopted in 2017, with the aim of reaching the 50 % 
recycling  target  of  municipal  waste  by  2020  and 
reducing  biodegradable  municipal  waste  going  to 
landfills  to  35 %  (62).  County  waste  management 
the  national  waste 
plans,  which  will  put 
management  plan  into  practice,  are  still  under 
preparation.  Government  emergency  ordinance 
74/2018  introduced  some  measures  which  could 
incentivise  the  separate  collection  of  municipal 
waste.  These  include  the  pay  as  you  throw 
for 
principle,  minimum  service 
requirements 
sanitation  companies,  a  contribution  for 
the 
circular economy to replace the suspended landfill 
tax  (see  Section  4.1.2)  and  extended  producer 
responsibility.  However,  its  implementation  will 
represent  a  significant  challenge.  A  pipeline  of 
projects  to  be  financed  by  EU  funds  under  the 
current  programming  period  has  not  yet  been 
developed.  An 
committee 
established  in  October  2018  aims  to  ensure  better 
governance  and  coordination  of  technical  aspects 
in the sector. 

inter-ministerial 

The  water  and  waste  water  infrastructure  is 
also  deficient.  Connection  to  the  public  water 
supply  is  incomplete,  with  only  approximately 
57 %  of  the  population  connected,  the  lowest  rate 
in  the  EU.  Water  infrastructure  is  being  upgraded 
through EU co-financed regional projects totalling 

(62)  Art 5.2(c) of the Council Directive 1999/31/EC of 26 April 

1999 on the landfill of waste 

53 

 
                                                           
                                                           
4.4. Competitiveness reforms and investment 

frequently 

potential.  According  to  a  recent  survey  23 %  of 
respondents  have  used  a  service  offered  via 
collaborative  platforms,  most 
in 
transport  (49 %)  and  accommodation  (41 %) 
(Eurobarometer,  2018a).  Restrictive  requirements 
have  recently  been  introduced  on  certain  types  of 
platforms  intermediating  transport  services  by 
treating  them  as  taxi  dispatchers.  Draft  legislation 
on  ride-sharing  services  that  would  introduce 
further 
in 
Parliament.  Following  the  strong  development  of 
this  sector,  the  Competition  Council  is  currently 
the 
assessing 
economic operators and regulation's impact on the 
sector. A study will be published in 2019. 

is  being  discussed 

the  behaviour  of 

the  market, 

restrictions 

4.4.4.  REGIONAL DISPARITIES 

Significant  needs  remain  in  infrastructure  and 
human  capital  in  all  regions.  Despite  sustained 
convergence  towards  the  EU  average  in  the  last 
to  face  socio-
decade,  all  regions  continue 
economic  challenges.  Large  portions  of 
the 
country lack the basic conditions for a transition to 
a  dynamic,  high-value  added,  knowledge-oriented 
economy.  Three  of  the  eight  Romanian  regions 
remain  among  the  20  poorest  regions  in  the  EU 
economic 
(Eurostat,  2016).  Most  of 
development  takes  place  in  the  capital  region, 
followed  by  the  Vest,  Centru  and  Nord-Vest 
regions, whereas Sud- Vest Oltenia (GDP at 42 % 
of the EU average) and Nord-Est (GDP at 36 % of 
the  EU  average)  are  lagging  behind.  At  national 
level, GDP stands at about 60 % of the EU average 
(Eurostat,  2017).  The  Bucharest-Ilfov  region 
displayed  one  of  the  highest  rates  of  growth  in 
GDP  per  capita  in  the  EU  over  2007-2015 
(Eurostat regional yearbook 2017).  

the 

challenges 

development 

Different  development  patterns  call  for  tailor-
investment  priorities.  Fast-growing 
made 
metropolitan  areas  are  increasingly  confronted 
with 
to 
suburbanisation,  traffic  congestion  and  pollution. 
Smaller  cities  and  surrounding  areas,  however, 
face  challenges  related  to  access  to  the  labour 
market, as  well as education, healthcare and other 
social services. The same applies to areas  marked 
by  specific  territorial  challenges  (e.g.  remoteness 
and  difficult  access,  environmental  protection)  or 

related 

levels 

lawyers,  the  level  of  restrictiveness  is  similar  to 
EU 
(Paun  et  at,  2013).  Reducing 
administrative  complexity  for  businesses  and 
reforming  the  licensing  system  are  now  on  the 
government  agenda.  A  comprehensive  reform  of 
the  licensing  system  for  services,  intended  to 
redesign and simplify the procedures, is scheduled 
the 
to  be 
involvement of the Competition Council. 

in  2019-2020  with 

implemented 

Energy market 

Regulatory  changes  in  late  2018  constitute  a 
roll-back from the deregulation of energy prices 
for  households.  The  process  had  been  completed 
in 2017 for electricity and was expected to end in 
2021 for gas. In addition, regulated gas tariffs, set 
below  the  reference  price,  will  also  apply  to  the 
non-household  sector.  Retail  markets  remain 
highly  concentrated,  with  switching  rates  below 
1 %  in  2016  (CEER,  2017)  while  competition  on 
retail  energy  markets  is  not  yet  fully  functional. 
This  is  unlikely  to  change  considering  the  latest 
backtracking  from  a  competitive  and  open  energy 
market. 

line  with 

towards  competitive  and 
in 

liquid 
Progress 
markets 
the  EU  regulatory 
framework  appears  to  have  been  undone.  This 
is  the  case  particularly  for  gas.  Recent  legislative 
amendments  (the  Energy  Law  and  government 
emergency  ordinance  114/2018)  risk  undermining 
the functioning of the gas market, against its stated 
objectives, 
limiting  competition,  discouraging 
internal  producers  and  hurting  investments.  This 
could have negative repercussions on domestic gas 
production and on the long-term energy security of 
Romania  and  the  region.  In  addition  to  the 
provisions  of  the  Offshore  Law  these  could  also 
put  at  risk  the  bi-directional  Bulgaria-Romania-
Hungary-Austria  gas  corridor  (phase  2),  thus 
precluding  collateral  economic  and  budgetary 
benefits 
and 
infrastructure development in the country. 

royalties, 

creation 

from 

job 

Collaborative economy  

New  restrictions  to  the  collaborative  economy 
are  being  introduced  despite  strong  growth 

the  access  to  and  exercise  of  regulated  professions.  It  is 
based  on  data 
from  Member  States, 
complemented by desk research. 

collected 

54 

 
                                                                                   
4.4. Competitiveness reforms and investment 

effects on  the  net  wages of part-time  workers and 
employees  in  the  IT  and  the  R&D  sectors  led  to 
additional  amendments  to  the  Fiscal  Code  in 
February  2018.  This  practice  was  repeated  in 
December  2018,  when  the  government  passed 
emergency  ordinance  114/2018, 
immediately 
applicable  as  from  1  January  2019,  containing  a 
series of measures on taxation, pensions and public 
investment.  On  taxation,  the  ordinance  introduced 
a progressive tax on bank assets (see Section 4.2), 
tax  incentives  for  the  next  10  years  in  the 
construction  sector (65)  and  rules  affecting  the 
functioning of the energy and telecommunications 
sectors. The ordinance also undermines the role of 
second pension pillar funds (see Box 4.2.1) 

legislative 
initiatives 

this  persistent 
legislative 

The business environment is negatively affected 
instability. 
by 
Important 
often 
are 
announced by the government just before adoption 
(such  as  government  emergency  ordinance 
114/2018)  with  very 
limited  consultation  of 
relevant  stakeholders  and  limited  or  no  impact 
assessment.  Moreover, 
initiatives 
previously invalidated by the  Constitutional  Court 
in  forms  which  raise  more 
often  re-emerge 
concerns 
recent  years, 
investors.  Over 
contradictory  public  statements  by  the  authorities 
on  the  direction  of  certain  reforms  have  added  to 
the  overall  climate  of  unpredictability,  with 
potential 
firms' 
investment decisions.  

implications 

legislative 

negative 

for 

for 

respectively) 

Corruption remains a major issue and hampers 
the  business  environment.  Corruption  as  well  as 
patronage and nepotism are identified as obstacles 
to doing business in Romania by 85 % and 82 % of 
businesses  respectively  (EU  averages:  37 %  and 
38 % 
(European  Commission, 
2018a). Romania’s  position  on  the  incidence  of 
corruption 
the  2018  Global 
Competitiveness  Index  is  stagnating  (WEF,  2018) 
ranking among the last in the EU, but some regions 
have  made  significant  positive  advances  in  recent 
years (Charron and Lapuente, 2018). 

indicator  of 

(65)  An  exemption  from  personal  income  tax  and  a  3.75  pps 

reduction in social contributions for employees. 

is 

industrial  decline (64).  As  a  result,  the  rural-urban 
divided 
is  mainly 
increasing.  Poverty 
concentrated  in  rural  areas,  where  skills  and 
employability  are  low  and  the  connectivity  to  the 
centres  of  economic  opportunities 
is  poor. 
Improving the connectivity of less developed rural 
communities 
additional 
investments. 

substantial 

requires 

Municipalities' 
low  administrative  capacity 
limits  development  opportunities.  The  capacity 
of  urban  authorities  to  plan  strategically  and  to 
coordinate  and  cooperate  efficiently  is  limited, 
exploiting 
preventing 
from 
them 
development  and 
In 
smaller  municipalities,  scale 
is  an  additional 
challenge, both in terms of administrative capacity 
and  the  potential  for  efficient  provision  of  public 
services. 

fully 
financing  opportunities. 

network 

deficient 

transport 

affects 
A 
Romania's  connectivity  and  competitiveness. 
Romanian regions are poorly inter-connected, with 
the  Nord-Est region  faring particularly badly. The 
Romanian  sections  of  the  core  TEN-T  Rhine-
Danube  and  Orient-East  Mediterranean  corridors 
are  still  not  completed.  The  missing  links  (the 
Sibiu-Piteşti motorway and the Braşov-Predeal and 
Timişoara-Craiova-Calafat  rail  connections)  pose 
significant obstacles to regional, inter-regional and 
cross-border  mobility. 
river 
navigation  and  multi-modal  transport  have  been 
modest,  not  exploiting  the  full  potential  of  the 
country’s geographic and economic connections. 

Investments 

in 

4.4.5.  GOVERNANCE AND INSTITUTIONAL 

QUALITY 

Business environment (*) 

The  conduct  of  fiscal  and  economic  policy 
remains  highly  unpredictable.  A  notable 
example  is  the  government  emergency  ordinance 
adopted  in  November  2017  which  shifted  the 
burden of social contributions almost entirely onto 
employees, which was accompanied by a cut of the 
flat  personal  income  tax  rate  from  16 %  to  10 %. 
Both  changes  entered  into  force  in  January  2018 
without  a  proper  impact  assessment  and  with 
limited  public  consultation.  Some  unintended 

(64)  Such as the Danube Delta or the Jiu Valley mining area. 

55 

 
                                                           
 
                                                           
4.4. Competitiveness reforms and investment 

Council  of  Magistracy  are  also  advancing  on 
putting in place an IT registry of court decisions in 
which the State is a debtor or a creditor. 

A  pattern  of  pressure  on  the  key  anti-
corruption  institutions  has  created  growing 
concerns about their continued ability to deliver 
and  on  the  irreversibility  of  the  fight  against 
corruption.  The  National  Anti-Corruption 
Directorate has been a particular target of pressure, 
including  heavy  public  and  media  criticism  from 
senior  politicians  (European  Commission,  2018f). 
Both  the  dismissal  of  the  sitting  Chief  Prosecutor 
of  the  National  Anti-Corruption  Directorate  and 
the  proposed  replacement  ignored  the  negative 
opinion  of  the  Superior  Council  of  Magistracy, 
the  process.  The 
raising  major  doubts  over 
pressure  has  extended  to  the  High  Court  of 
Cassation  and  Justice.  The  steps  taken  by  the 
government  may  also  be  reflected  in  an  apparent 
reduction  in  the  cooperation  with  the  National 
Anti-Corruption  Directorate,  with  many  public 
institutions  such  as  ministries, 
the  Court  of 
Accounts and other control bodies reportedly more 
reluctant  to  flag  up  potential  fraud  and  corruption 
cases.  

the 

fight  against 

The ongoing amendments to the Criminal Code 
and the Code of Criminal Procedure could also 
undermine 
corruption. 
Amendments  adopted  by  Parliament  before  the 
summer  of  2018  under  an  emergency  legislative 
procedure  constitute  a  profound  overhaul  of  the 
2014  reform,  upsetting  the  balance  between  the 
public interest in sanctioning crime, victims’ rights 
and  the  rights  of  suspects.  The  amendments  also 
reduce the scope of corruption as an offence. This 
was  also  highlighted  by  the  Venice  Commission 
(2018b)  and  may  raise  questions  on  whether  the 
amendments  are  compatible  with  international 
conventions  ratified  by  Romania.  Many  of  the 
changes  were  ruled  unconstitutional  in  October 
2018 (European Commission, 2018f).  

The 
implementation  of  the  national  anti-
corruption  strategy  is  progressing  at  technical 
level, but political developments undermine the 
credibility  of 
the  process.  The  Technical 
Secretariat within the Ministry of Justice published 
its  first  monitoring  report  in  March  2018  and  has 
continued  to  organise  thematic  evaluations  of 
public 
prevention 
the  government 
measures. 

In  August  2018, 

institutions’ 

corruption 

Judicial reform and the fight against corruption 

for 

the 

legal  guarantees 

The amended justice laws have undermined the 
independence  of  judges  and  prosecutors  and 
public confidence in the judiciary. The amended 
laws  entered  into  force  in  July  and  October 
2018 (66).  They  contain  a  number  of  measures 
weakening 
judicial 
independence,  in  particular  new  provisions  on  the 
material liability of magistrates for their decisions, 
the  establishment  of  a  special  prosecution  section 
investigating offences committed by magistrates, a 
new  early  retirement  scheme (67),  restrictions  on 
freedom  of  expression 
for  magistrates  and 
extended  grounds  for  revoking  members  of  the 
Superior Council of Magistracy (68), and measures 
specifically  weakening  the  checks  and  balances 
underlying 
independence  of 
prosecutors.  There  is  a  risk  that  these  elements  – 
both on their own and cumulatively – could result 
judges  and  prosecutors,  and 
in  pressure  on 
ultimately undermine the independence, efficiency 
and quality of the judiciary. This concern has also 
been  raised  by  a  number  of  outside  observers, 
notably the Council of Europe Venice Commission 
the  Group  of  States  Against 
(2018a)  and 
Corruption (GRECO, 2018). The amendments also 
raise questions as to the capacity of prosecutors to 
continue  the  fight  against  high-level  corruption 
with  the  same  degree  of  independence  (European 
Commission, 2018f).  

the  operational 

The  implementation  of  an  action  plan  for  the 
enforcement  of  court  decisions  is  progressing. 
The action plan is advancing and a list of measures 
was  submitted  to  the  government  in  September 
2018  (European  Commission,  2018f).  Proposals 
include  amendments  to  the  legal  framework  in 
order  to  guarantee  timely  execution  of  judgments 
and  a  mechanism  to  supervise  and  prevent  late 
execution  of  judgements  for  which  the  State  is  a 
debtor.  The  Ministry  of  Justice  and  the  Superior 

(66)  Law 207/2018 amending and completing Law 304/2004 on 
the judicial organisation entered into force on 20 July. Law 
234/2018  for  amending  and  completing  Law  317/2004  on 
the  Superior  Council  of  Magistracy  entered  into  force  on 
11 October. Law 242/2018 amending and completing Law 
303/2004  on  the  statute  of  judges  and  prosecutors  entered 
into force on 15 October. 

(67)  Emergency  ordinance  92/2018  of  15  October  2018  delays 
for  1  year  the  entry  into  force  of  the  early  retirement 
scheme  but  does  not  abandon  it  as  recommended  by  the 
Venice Commission (2018a). 

(68)  Emergency  ordinance  92/2018  introduces  further  changes 

in the revocation procedure. 

56 

 
                                                           
4.4. Competitiveness reforms and investment 

of 

incidents. 

risks  and  carrying  out 

for  use  by 
adopted  standard  methodologies 
level  when  evaluating 
institutions  at  central 
ex-post 
corruption 
The 
integrity 
evaluation 
implementation  of  the  strategy  appears  to  have 
progressed  in  some  important  vulnerable  sectors, 
especially in education, internal affairs and at local 
level,  but  less  obviously  in  the  case  of  health.  At 
the  same 
legislative 
time,  several  ongoing 
initiatives  give  a  contradictory  signal  in  terms  of 
political support for the continuation of corruption 
prevention  and  sanctioning,  and  raise  concerns 
regarding  their  potential  impact  on  the  strategy’s 
implementation.  The  ongoing  reform  of 
the 
Administrative  Code  should  also  support  the 
implementation  of  the  strategy  by  strengthening 
the  professionalisation  of  the  national  and  local 
public administration and by ensuring the effective 
implementation of corruption preventive measures, 
such  as  the  responsibility  of  managers  of  public 
institutions  in  the  prevention  and  occurrence  of 
integrity incidents. (European Commission, 2018f) 

Corporate 
enterprises 

governance 

of 

state-owned 

The performance of state-owned enterprises has 
improved  in  a  context  of  strong  economic 
growth.  Overall,  the  economic  and  financial 
performance  of  state-owned  enterprises  improved 
in  2017  on  the  previous  year  (Fiscal  Council, 
2018).  Total  revenue,  operational  results  and 
profits  increased,  while  arrears  and  indebtedness 
decreased.  This  evolution  is  largely  in  line  with 
that of private companies in the same period. 

The  corporate  governance  of  state-owned 
enterprises  is  insufficiently  implemented  and 
may  be  weakened.  The  relevant  legislation(69)  is 
robust  but  a  number  of  amendments  were 
approved  in  December  2017  to  exempt  some  100 
state-owned  enterprises  from  Law  111/2016, 
including  most  large  ones.  The  amendments  were 
referred  back  to  Parliament  by  the  Constitutional 
Court  in  early  2018,  on  procedural  grounds. 
re-
legislators are  preparing 
However, 
introduction (70).  Also, 
the 

their 
implementation  of 

(69)  Namely Law 111/2016 on SOEs corporate governance and 
the accompanying implementing legislation, which updated 
the  previous  relevant  legislation,  government  emergency 
ordinance 109/2011 (European Commission, 2017a). 
(70)  The  exemption  was  again  approved by  the  Senate  in  June 

2018 and is awaiting the vote in the Chamber of Deputies. 

remains 
in 

an 
sparse.  Despite 
legislation 
improvement 
the  number  of  state-owned 
enterprises which have started appointments under 
Law  111/2016,  only  a  small  number  had 
completed  the  procedures  as  of  mid-2018.  The 
repeated appointment of interim boards is still the 
norm,  and  appointments  made  in  accordance  with 
the  legislation  frequently  diverge  from  its  spirit. 
Furthermore,  in  2018  the  Ministry  of  Finance  did 
not  meet  a  legal  obligation  to  publish  the  annual 
report  on  state-owned  enterprises’  activities  and 
governance (71).  Nor  is  the  Ministry  of  Finance 
request 
to 
fully 
implementation 
governance 
legislation  by  non-compliant  companies  beyond 
some effort to remind non-compliant firms of their 
obligations to make public accounts and reports. 

powers 
corporate 

exercising 

its 

of 

for 

the 

creation 

allowing 

Several  of  the  larger  state-owned  enterprises 
may be transferred to a new Sovereign Fund. In 
the  government  adopted  a 
November  2018, 
framework 
of 
government-owned  investment  funds.  This  paves 
the  way  for  the  setting-up  of  a  long  announced 
Sovereign Development and Investment Fund (72), 
to  which  the  government  intends  to  transfer  the 
ownership  of  some  30  state-owned  enterprises. 
The  Fund’s  goal,  governance  and  potential 
economic  and  fiscal  impact  have  yet  to  be 
clarified. The framework sets the funds' objectives 
in very broad terms: job creation, the development 
of 
innovation  and 
increasing  competitiveness.  The  government's 
intention is that the Fund will be classified outside 
the  budget  perimeter.  This  will  have  a  fiscal 
impact which cannot be estimated until the Fund is 
fully  set  up  but  which  could  be  substantially 
negative, in particular in the early years. 

infrastructure,  stimulating 

Public administration 

The reform of the public administration system 
is  advancing  at  a  slow  pace.  This  is  particularly 
the  case  for  the  decentralisation  process  and 
capacity  building  of 
local  authorities,  public 
consultation  and  evidence-based  decision-making, 
as  well  as  implementation  of  the  e-governance 

(71)  Ministry  of  Finance 

(2017: pp.6-7)  summarises 

the 

Ministry's obligations under Law 111/2016. 

(72)  The  Parliament  approved  in June  2018  the  creation  of  the 
Fund. In July, however, the Constitutional Court ruled that 
only the government can set up such a fund. 

57 

 
                                                           
                                                           
4.4. Competitiveness reforms and investment 

and  businesses.  Recent 

evaluation  and  the  delivery  of  better  services  to 
citizens 
legislative 
measures  appear  to  limit  the  number  of  civil 
the 
servants  over  2019-2021,  depending  on 
available  approved  budget  for  each  institution. 
This  measure  could  result  in  uneven  quality  of 
public  services.  The  attractiveness  of  the  public 
administration  as  an  employer  remains  low  for 
young  qualified  people  (only  3 %  of  total  civil 
servants  are  aged  below  30,  and  over  41 %  are 
above  50).  The  employee  turnover  rate  is  among 
the highest in the EU (74). Romania ranks 40th out 
of  41  among  OECD/EU  countries  in  2018  on 
executive  capacity,  down  four  places  on  2017 
(Bertelsmann Stiftung, 2018). 

the 

Moreover, 

The  national  administration’s  fragmented  IT 
system  increases  the  administrative  burden  for 
citizens  and  businesses.  The  GovITHub  project, 
launched  in  2016,  which  entailed  a  public-private 
partnership  based  on  fellowships  and  voluntary 
work in order to develop public services, has been 
discontinued. 
national 
administration  continues  to  face  difficulties  in 
attracting  and  retaining  ICT  specialists  which  can 
develop  digital  public  services.  The 
lack  of 
coordination  between  the  public  institutions  in 
setting  up  digital  public  services  represents  an 
additional  challenge.  This  limits  the  benefits  of  a 
functioning 
e-government 
system for citizens and businesses. Investments are 
necessary  to  create  interoperable  digital  public 
services  among  public  institutions  and  to  attract 
and build IT skills. 

interoperable 

and 

Public service delivery 

fragmentation  of  competencies  and 
High 
resources affects the coherence and availability 
of  services  provided.  National  and  regional 
strategies for different public services are not well 
translated into integrated measures at regional and 
local  level.  Funding  of  public  services  is  uneven 
across  regions  and  territorial  administrative  units 
and  does  not  correspond  to  local  needs.  Factors 
like  a  unitary  strategic  approach  per  type  of 
service,  existing  gaps  and  needs  to  develop  new 
services are overlooked. National programmes, for 
example  in  the  health  sector,  do  not  benefit  from 

(74)  The employee turnover rate = the rate of employees leaving 
the civil service, due to other reason than retirement, to the 
average number of employees (EU pack 2017) 

measures (73).  Regulatory 
impact  assessments 
continue  to  be  formalistic,  although  their  quality 
and  actual  use  vary  across 
sectors.  The 
development  of  impact  assessment  competencies 
and  tools  is  ongoing.  A  robust  policy  monitoring 
mechanism  with  a  transparent  reporting  system  is 
lacking, and ex-post evaluations are carried out on 
an  ad-  hoc  basis.  The  legal  and  institutional 
framework for a quality control function of impact 
assessments  at  governmental  level  has  not  been 
formally established. 

limited. 
for 

reshuffling 
consultation 

in  policymaking 
Stakeholders’  engagement 
of 
The 
remains 
responsibilities 
at 
public 
government level has stalled progress in this area. 
The  quality of public consultation continues  to be 
hindered  by  operational  factors,  such  as  short 
periods  of  consultation  (i.e.  10  calendar  days  or 
less),  late  announcement  of  important  legislative 
initiatives,  limited  follow-up  and  feedback  to 
stakeholders  during  and  after  the  consultation 
to 
process.  The  authorities  have  committed 
increasing 
involving 
the  Open  Government 
citizens 
Partnership.  However,  a  centralised  website  for 
public  consultation  (consultare.gov.ro),  one  of  the 
key deliverables of this process, is not consistently 
used.  

transparency  and  better 

through 

The  implementation  of  the  strategy  for  civil 
servants  continues,  yet  the  relevant 
legal 
framework has not been adopted. The entry into 
force  of  the  law  transposing  the  strategy  is  still 
pending, delaying the actual implementation of the 
human  management  reform  at  central 
level. 
Reform of local public administration will be more 
limited in scope compared to initial ambitions. The 
authorities  are  developing  new 
tools  and 
instruments,  including  a  framework  for  a  national 
competition 
results 
in  2019.  The  National  Institute  of 
expected 
Administration became operational in 2018 and is 
taking  steps  to  develop  its  organisational  strategy 
and  a  training  programme  portfolio  for  civil 
servants. 

for  civil  servants,  with 

Measures to increase the performance of public 
administration  are  not  widespread.  Wage 
increases  are  not  correlated  with  performance 

(73)  As shown by the recent report on the implementation of the 
2014-2020 strategy for public administration strengthening  

58 

 
                                                           
                                                           
4.4. Competitiveness reforms and investment 

budgetary 

multi-annual 
are 
sometimes  delayed  or  interrupted  because  of  a 
temporary lack of funding.  

planning, 

and 

Revenues of local administrations lack stability 
and  predictability.  Important  strategic  measures 
are  delayed,  such  as  setting  appropriate  cost  and 
quality  standards  for  all  services  and  increasing 
local  budgets'  resources.  Elements  like  inflation, 
updated standard costs and the need to develop or 
improve  services  are  not  factored 
the 
budgetary allocation, resulting in a  lack of or low 
quality service delivery. Fiscal decentralisation has 
stalled  and  the  capacity  of  local  authorities  to 
increase  the  share  of  their  own  resources  remains 
limited.  The  government  plans  to  beef  up  the 
revenues  of  local  authorities  by  increasing  their 
quota from the revenue taxes from 73 % (in 2018) 
to  100 %.  These  changes  are  planned  to  be 
incorporated  in  the  revised  Code  for  Local  Public 
Finances.  

into 

The  system  and  mechanisms  for  delivering  a 
minimum package of integrated public services 
are  not  developed.  The  government  programme 
makes reference to the minimum package of public 
services  to  be  made  available  to  citizens  in  rural 
areas.  However,  the  legal,  institutional  and  other 
necessary  instruments  to  deliver  these  services 
have  not  yet  been  developed.  There 
is  no 
integrated  framework 
to  ensure  a  minimum 
package  of  services  to  the  citizens,  including 
health,  social  protection  and  education.  The 
national  programme 
local  development 
for 
envisages  substantial  investments  but  these  are 
limited  to  infrastructure  related  investments.  A 
new development and investment  fund  will be  set 
up  in  2019  to  finance  priority  investment  areas  at 
local  level,  but  its  operational  and  financing 
mechanisms still need to be developed.  

and 

in  assessing 

some  progress 

The  long-envisaged  decentralisation  of  public 
services continues to progress very slowly. There 
has  been 
the 
opportunities 
impact  of  decentralising 
competencies  in  four  out  of  the  eight  sectors 
envisaged  by  the  strategy  (tourism,  youth  and 
sport,  education,  water and  forests). However, the 
overall  progress  for  all  sectors  is  limited.  Limited 
action  has  been  taken  to  improve  the  balance 
between competencies to be  decentralised and the 
financial  resources  and  ability  of  local  authorities 
to  deliver  good  quality  services.  Short-term 

budgetary solutions were provided for in the 2018 
state  budget  law  to  ensure  the  same  level  of 
financing of local authorities as for 2016 and 2017 
and  to  compensate  for  the  loss  of  revenue  due  to 
income  tax  reductions.  Additional  actions  are 
needed to increase administrative capacity at local 
level 
be 
decentralised.  

competencies 

especially 

for 

to 

Public procurement 

level  of  contracting  authorities, 

Further  efforts  are  needed  to  increase  the 
capacity of contracting authorities. Despite some 
initiatives  to  professionalise  procurement  and  to 
increase  technical  and  procedural  capabilities  at 
the 
further 
extensive efforts are required. One such example is 
the plan to train 4 100 civil servants in 2 years. The 
share  of  negotiated  procedures  without  prior 
publication has remained among the highest in the 
EU  (21 %  in  2018).  Moreover,  about  34 %  of 
contracts  awarded  by  public  institutions  in  2018 
were single bids.  

laid 
in 

for  more 

transparency 

system,  have 

transparency,  monitoring 

system  requires 
The  public  procurement 
enhanced 
and 
supervision.  The  recent  developments  on  e-
procurement,  such  as  the  ongoing  transition  to  a 
the 
new  e-procurement 
foundation 
the 
procurement  process.  The  supervision  function 
needs  to  be  fundamentally  strengthened  so  the 
authorities  can  take  adequate  measures  to  further 
increase 
public 
procurement  system  and  boost  competition  in  the 
public  procurement  market.  To  that  end,  the 
introduction  of  appropriate  key  performance 
indicators will be crucial to achieving a functional 
and efficient supervision system.  

transparency 

the 

the 

of 

Centralised  public  procurement 
is  not  yet 
operational.  The  legislation  setting-up  a  central 
purchasing  body  operating  at  national  level  was 
recently  adopted.  Before  expanding  centralised 
procurement  to  more  complex  products,  it  is  very 
important  to  build  on  the  experience  acquired  in 
the procurement of simple products that are subject 
to demand aggregation. Moreover, there are plans 
to  develop  aggregated  contracting  systems  for 
local contracting authorities  within a  geographical 
area. 

59 

 
4.4. Competitiveness reforms and investment 

The  ex  ante  external  control  sample  for  public 
procurement  has  been  significantly  reduced. 
The  initiative  for this control has been transferred 
the 
the  contracting  authorities.  Moreover, 
to 
responsibility for the ex-ante control of EU-funded 
contracts  or  agreements  was  taken  over  by  the 
managing  authorities,  which  may  not  be  fully 
prepared  in  terms  of  technical  expertise  and 
personnel  for  this  shift  of  responsibilities.  These 
important  changes  were  not  linked  to  or  based  on 
the  measured  performance  and  reliability  of 
contracting authorities against well-established key 
indicators, and were not supported by, for instance, 
an impact assessment. The streamlining of ex ante 
controls  is  essential  for  reaching  the  objectives  of 
the  national  strategy.  However,  to  achieve  an 
transparent  public  procurement 
efficient  and 
system, it is important to couple streamlining with 
increase 
measures 
the  accountability  and 
to 
capacity  of 
the  contracting  and  managing 
authorities.  

The  track  record  of  the  National  Integrity 
Agency  remained  steady  on  investigations  of 
incompatibilities and administrative conflicts of 
interests.  The  PREVENT  system  for  systematic 
ex-ante checks of conflicts of interests is now fully 
operational  and  the  National  Integrity  Agency 
reported positive results. However, the stability of 
the legal framework on integrity continues to face 
challenges (European Commission, 2018f). 

60 

 
ANNEX A: OVERVIEW TABLE 

Commitments  

Summary assessment (75) 

2018 country-specific recommendations (CSRs)  

the 

CSR  1:  Ensure  compliance  with 
the  Council 
recommendation  of  …  June  2018  with  a  view  to 
correcting 
the 
adjustment  path  toward  the  medium-term  budgetary 
objective.  Ensure  the  full  application  of  the  fiscal 
framework.  Strengthen 
and 
collection.  

significant  deviation 

compliance 

from 

tax 

Romania has made Limited progress on addressing 
CSR 1  

Ensure compliance with the Council recommendation 
of…June  2018  with  a  view 
to  correcting  the 
significant deviation from the adjustment path toward 
the medium-term budgetary objective.  

The  compliance  assessment  with  the  Stability  and 
Growth  Pact  will  be  included  in  spring,  when  final 
data for 2018 will be available.  

Ensure the full application of the fiscal framework.   No progress. There was no progress on ensuring the 
application of the fiscal framework. The 2018 budget 
did  not  comply  with  the  deficit  rule,  which  requires 
compliance  with  the  adjustment  path  towards  the 
medium-term  structural  objective.  The  2018  budget 
amendment  from  September  broke,  among  others, 
rules  prohibiting 
the  nominal 
headline and primary deficit ceilings during the fiscal 
year;  and  (ii)  personnel  expenditure  and 
total 
government  expenditure  excluding  EU  funds  during 
the fiscal year. The second 2018 budget amendment, 
published  in  November,  also  broke  several  national 
fiscal  rules.  Moreover,  as  in  previous  years,  the 
authorities  did  not  send  an  update  of  the  medium-
term  fiscal  strategy  to  Parliament  by  the  statutory 

increases 

in:  (i) 

(75)  The following categories are used to assess progress in implementing the country-specific recommendations (CSRs):  
No progress: The Member State has not credibly announced nor adopted any measures to address the CSR. This category covers a 
number  of  typical  situations  to  be  interpreted  on  a  case  by  case  basis  taking  into  account  country-specific  conditions.  They 
include the following:  

no legal, administrative, or budgetary measures have been announced  
in the national reform programme, 
in any other official communication to the national Parliament/relevant parliamentary committees or the European Commission, 
publicly (e.g. in a press statement or on the government's website); 
no non-legislative acts have been presented by the governing or legislative body; 
the  Member  State  has  taken  initial  steps  in  addressing  the  CSR,  such  as  commissioning  a  study  or  setting  up  a  study  group  to 
analyse possible measures to be taken (unless the CSR explicitly asks for orientations or exploratory actions). However, it has 
not proposed any clearly-specified measure(s) to address the CSR. 

Limited progress: The Member State has:  
announced certain measures but these address the CSR only to a limited extent; and/or 
presented  legislative  acts  in  the  governing  or  legislative  body  but  these  have  not  been  adopted  yet  and  substantial  further,  non-

legislative work is needed before the CSR is implemented; 

presented non-legislative acts, but has not followed these up with the implementation needed to address the CSR. 
Some progress: The Member State has adopted measures  
that partly address the CSR; and/or  
that address the CSR, but a fair amount of work is still needed to fully address the CSR fully as only a few of the measures have 
been implemented. For instance, a measure or measures have been adopted by the national Parliament or by ministerial decision 
but no implementing decisions are in place.  

Substantial progress: The Member State has adopted measures that go a long way towards addressing the CSR and most of them 

have been implemented.  

Full implementation: The Member State has implemented all measures needed to address the CSR appropriately. 

61 

 
 
                                                           
Strengthen tax compliance and collection.  

A. Overview Table 

August deadline.  

Limited  progress The Romanian tax administration 
(ANAF)  has  recently  updated  its  guidelines  on  the 
registration of certified cash registers and the issuing 
of  single  identification  numbers  for  cash  registers. 
They have been more active in using risk assessment 
for  the  management  and  auditing  of  taxpayers, 
mostly  for  value-added  tax  (VAT)  and  corporate 
income tax purposes. However, the relative weight of 
the  unobserved  economy  is  about  22.5  %  while  the 
VAT  gap  (i.e.  the  difference  between  the  VAT 
theoretically  due  and  VAT  actually 
liability 
collected) remained the highest in the EU in 2016 (at 
about  36 %).  The  introduction  of  the  cash  registers 
with  an  electronic  memory  connected  to  the  servers 
of  ANAF  is  slowly  being  implemented,  also  due  to 
suppliers' shortages.  

Romania has made Limited progress on addressing 
CSR 2  

CSR  2:  Complete  the  minimum  inclusion  income 
reform.  Improve  the  functioning  of  social  dialogue. 
Ensure  minimum  wage  setting  based  on  objective 
criteria.  Improve  upskilling  and  the  provision  of 
quality mainstream education, in particular for Roma 
and  children  in  rural  areas.  Improve  access  to 
healthcare,  including  through  the  shift  to  outpatient 
care.  

Complete the minimum inclusion income reform.   No  progress.  The  Law  on  minimum  inclusion 
income is expected to enter into force in April 2019. 
However,  no  visible  progress  has  so  far  been 
observed.  

Improve the functioning of social dialogue.  

Limited  progress.  The  social  dialogue  law  is 
currently in being debated in Parliament after a long 
period  of  consultation  with  relevant  stakeholders. 
Another competing proposal, drafted with the help of 
some social partners, has also been put forward. Both 
legislative  initiatives  are  being  debated  together. 
Currently, most social dialogue takes place formally, 
within  the  Economic  and  Social  Council  and  the 
Social Dialogue Committees. Despite the established 
framework  of  dialogue  and  consultations, 
the 
stability  and  the  role  of  these  institutions  weakened 
in the most recent period.  

Ensure  minimum  wage  setting  based  on  objective 
criteria.  

No  progress.  Minimum  wage  levels  continue  to  be 
set  in  an  ad-hoc  manner,  and  are  not  based  on  a 
comprehensive and predictable mechanism.  

Improve  upskilling  and  the  provision  of  quality 
mainstream  education,  in  particular  for  Roma  and 

Limited  progress.  There  has  been  limited  progress 
in  improving  the  provision  of  quality  inclusive 

62 

 
children in rural areas.  

A. Overview Table 

mainstream  education,  in  particular  for  children  in 
rural areas and Roma. The measures financed by the 
European  Social  Fund  are 
in  early  stages  of 
implementation.  Work  on  developing  the  early 
warning  mechanism 
to  prevent  school  dropout 
continues.  The  methodology  to  monitor  and  prevent 
school segregation has not been adopted yet. Overall, 
early school leaving remains  very  high.  Rural-urban 
disparities  and  Roma  inclusion  in  education  remain 
problematic. While the authorities are planning some 
measures,  active  labour  market  policies  continue  to 
provide 
limited  focus  on  upskilling.  A  global 
assessment  of  skills  needs  for  various  economic 
sectors still needs to be developed and implemented.  

Improve  access  to  healthcare,  including  through  the 
shift to outpatient care.  

Limited  progress.  Since  2018  there  have  been 
serious  delays  in  key  areas  such  as  integrated 
community  care  centres, 
regional 
hospitals with related care referral plans, etc. In other 
relevant areas (such as the uptake of one-day planned 
surgeries)  the  effectiveness  of  previously  taken 
measures remains to be demonstrated.  

funding  of 

Romania has made No progress on addressing CSR 
3  

CSR  3:  Increase  the  predictability  of  decision-
making by enforcing the systematic and effective use 
of  regulatory  impact  assessment  and  stakeholder 
consultation  and  involvement  in  the  design  and 
implementation  of  reforms.  Improve  the  preparation 
and prioritization of large infrastructure projects and 
accelerate  their  implementation,  particularly  in  the 
transport, waste and waste water sectors. Improve the 
transparency  and  efficiency  of  public  procurement. 
Strengthen the corporate  governance of State-owned 
enterprises.  

Increase  the  predictability  of  decision-making  by 
the  systematic  and  effective  use  of 
enforcing 
regulatory 
stakeholder 
impact  assessment  and 
consultation  and  involvement  in  the  design  and 
implementation of reforms.  

No  progress.  There  is  still  persistent  legislative 
instability and lack of decision-making predictability, 
which risk eroding investors’ confidence. Regulatory 
impact  assessments  continue 
to  be  formalistic, 
although  their  quality  and  actual  use  vary  across 
sectors. A robust policy monitoring mechanism with 
a transparent reporting system is lacking, and ex-post 
evaluations are carried out on an ad- hoc basis. The 
legal  and  institutional  framework  for  a  quality 
control 
at 
government level  has  not been formally established. 
Stakeholders’ involvement in policy-making remains 
limited. The quality of public consultation continues 
to  be  hindered  by  operational  factors,  such  as  short 
late  announcement  of 
periods  of  consultation, 
important  legislative  initiatives,  and  limited  follow-
up and feedback to stakeholders during and after the 

function  of 

assessments 

impact 

63 

 
A. Overview Table 

consultation process.  

Improve  the  preparation  and  prioritization  of  large 
their 
infrastructure 
implementation,  particularly  in  the  transport,  waste 
and waste water sectors.  

accelerate 

projects 

and 

Limited  progress.  Large  infrastructure  projects  are 
being prepared and sent to the European Commission 
for  approval,  due  in  particular  to  the  increased 
involvement  and  cooperation  with  the  European 
Investment  Bank  (through  the  Joint  Assistance  to 
Support  Projects  in  European  Regions  programme 
and 
instrument). 
Implementation, however, continues to lag behind.  

the  Project  Advisory  Support 

Improve  the  transparency  and  efficiency  of  public 
procurement.  

Limited  progress.  There  has  been  limited  progress 
in  implementing  the  national  public  procurement 
strategy.  The  transition  to  a  new  e-procurement 
system  and  the  putting  in  place  of  legislation  on  a 
Central Purchasing Body to operate at national level 
are  positive  examples.  However,  some  reforms 
started  under  the  Action  Plan  drafted  in  the  context 
of  the  ex-ante  conditionality  that  Romanian  had  to 
fulfil on public procurement and which were relevant 
for  the  implementation  of  EU  funds,  have  been 
stopped  and,  with  the  recent  adoption  of  the 
government emergency ordinance no 114/2018, even 
reversed.  Furthermore,  important  efforts  are  needed 
to increase the capacity of contracting authorities and 
to enhance transparency, monitoring and supervision 
of  the  public  procurement  system,  as  well  as 
predictability.  The 
legislative 
and 
public 
of 
control 
ex-ante 
streamlining 
procurement  should  be  based  on  the  measured 
performance and reliability of contracting authorities. 

stability 
of 

Strengthen the corporate  governance of State-owned 
enterprises.  

legislation 
No  progress.  Corporate  governance 
applicable  to  state-owned  enterprises  is  robust  but 
only  sparsely  applied.  The  exemption  of  some  100 
companies  from  the  legislation,  adopted  end-2017, 
has  been  barred  by  the  Constitutional  Court  on 
procedural  grounds,  but  was  again  approved  by  the 
Senate in June 2018 and awaits final approval in the 
lower house.  

Europe 2020 (national targets and progress)  

Employment rate target set in the NRP: 70 %.  

R&D target set in the NRP: 2 % of GDP  

The national target of 70 % by 2020 is  within reach 
as the employment rate in the age group 20-64 was at 
68.8 % in 2017. 

Romania’s  R&D  intensity  in  2017  was  0.5 %  of 
GDP,  the  lowest  in  the  EU  and  representing  only  a 
quarter  of  the  national  target.  Romanian  R&D 
intensity  fell  annually  by  1.1 %  between  2007  and 
2017.  To  reach  its  2020  target,  R&D  intensity  in 

64 

 
A. Overview Table 

Romania will need to grow by an average of 58.4 % 
per  year  until  2020.  In  2017,  public  R&D  intensity 
increased  by  4.8 %,  while  business  R&D  intensity 
increased by 7.4 % compared to 2016. Thus, business 
R&D intensity reached 0.29 % of GDP in 2017 while 
public R&D intensity amounted to 0.22 % of GDP.  

National  greenhouse  gas  (GHG)  emissions  target:  
-  19  %  in  2020  compared  with  2005  (in  sectors  not 
included in the EU emissions trading scheme)  

in  2017, 
to  preliminary  estimates 
According 
greenhouse  gas  emissions  not  covered  by  the  EU 
Emissions  Trading  Systems  (ETS)  decreased  by 
1.7 % between 2005 and 2017.  

2020 renewable energy target: 24 %  

According to the latest national projections based on 
existing  measures,  non-ETS  emissions  will  increase 
by  1.4 %  between  2005  and  2020.  The  target  is 
consequently  expected  to  be  met  with  a  margin  of 
17.6 pps. 

However,  the  2030  target  would  be  missed  by  a 
margin  of  12.5 %  based  on  existing  measures,  as 
emissions  are  projected  to  increase  above  the  base 
year in the long run.  

With  24.4 %  renewable  energy  share  in  gross  final 
consumption  in  2017  (Eurostat  provisional  data), 
Romania  is  on  track  and  slightly  above  in  attaining 
its  renewable  energy  target  for  2020.  In  light  of  the 
stable  or  slightly  decreasing  share,  continued  efforts 
are  needed  to  install  more  capacity  in  a  context  of 
economic growth.  

Energy efficiency, 2020 energy consumption targets:  

Romania's  2020  energy  efficiency  target  is  43  Mtoe 
expressed  in  primary  energy  consumption  (30.3 
Mtoe expressed in final energy consumption)  

Romania appears to be on track for reaching its 2020 
target.  However,  both  primary  and  final  energy 
therefore 
consumption 
continued  efforts  are  needed 
limit  energy 
consumption in a context of economic growth.  

in  2017,  and 

increased 

to 

Early leavers from education and training: 11.3 %.   With a rate of 18.1% in 2017, achieving the target by 

2020 is not within reach.  

Tertiary education target: 26.7 % of population aged 
30-34.  

With a rate of 26.3% of people aged 30-34 having a 
tertiary degree in 2017, Romania has almost reached 
the  national 
target.  However,  the  rate  remains 
significantly below the EU-average of 40%.  

Target  for  reducing  the  number  of  people  at  risk  of 
poverty or social exclusion, expressed as an absolute 
number  of  people:  580  000  (base  year  2010:  8  425 
000).  

The  national  target  of  580  000  people  is  already 
considered  reached.  The  population  taken  out  of 
poverty or social exclusion in 2017 was of 2 074 000 
persons,  considerably  higher  than  in  the  previous 
years ( e.g. 1 420 000 in 2016, 1 680 000 in 2015).   

65 

 
ANNEX B: COMMISSION DEBT SUSTAINABILITY ANALYSIS AND 

FISCAL RISKS 

66 

General Government debt projections under baseline, alternative scenarios and sensitivity tests2017201820192020202120222023202420252026202720282029Gross debt ratio35.135.135.938.240.442.745.147.750.353.055.858.661.6Changes in the ratio (-1+2+3)-2.20.00.92.22.22.32.52.62.62.72.72.83.0of which(1) Primary balance (1.1+1.2+1.3)-1.5-1.9-1.9-3.2-3.2-3.1-3.0-3.0-3.0-3.0-3.0-3.0-3.0(1.1) Structural primary balance (1.1.1-1.1.2+1.1.3)-2.0-1.9-2.0-3.1-3.1-3.0-3.0-3.0-3.0-3.0-3.0-3.0-3.0(1.1.1) Structural primary balance (bef. CoA)-2.0-1.9-2.0-3.1-3.1-3.1-3.1-3.1-3.1-3.1-3.1-3.1-3.1(1.1.2) Cost of ageing0.0-0.1-0.1-0.2-0.2-0.2-0.2-0.2-0.2(1.1.3) Others (taxes and property incomes)0.00.00.00.0-0.1-0.1-0.1-0.1-0.1(1.2) Cyclical component0.50.20.1-0.1-0.10.00.00.00.00.00.00.00.0(1.3) One-off and other temporary measures0.0-0.10.00.00.00.00.00.00.00.00.00.00.0(2) Snowball effect (2.1+2.2+2.3)-2.7-1.9-1.0-0.9-1.0-0.7-0.5-0.4-0.3-0.3-0.2-0.20.1(2.1) Interest expenditure1.31.41.41.51.61.71.81.92.02.22.32.52.7(2.2) Growth effect-2.4-1.1-1.2-1.2-1.4-1.4-1.5-1.4-1.4-1.5-1.5-1.6-1.5(2.3) Inflation effect-1.6-2.1-1.3-1.2-1.1-1.0-0.8-0.9-0.9-1.0-1.0-1.1-1.1(3) Stock-flow adjustments-1.10.00.00.00.00.00.00.00.00.00.00.00.0Note: For further information, see the European Commission Fiscal Sustainability Report (FSR) 2018. b. For the medium-term, the risk category (low/medium/high) is based on the joint use of the S1 indicator and of the DSA results. The S1 indicator measures the fiscal adjustment required (cumulated over the 5 years following the forecast horizon and sustained thereafter) to bring the debt-to-GDP ratio to 60 % by 2033. The critical values used are 0 and 2.5 pps. of GDP. The DSA classification is based on the results of 5 deterministic scenarios (baseline, historical SPB, higher interest rate, lower GDP growth and negative shock on the SPB scenarios) and the stochastic projections. Different criteria are used such as the projected debt level, the debt path, the realism of fiscal assumptions, the probability of debt stabilisation, and the size of uncertainties. c. For the long-term, the risk category (low/medium/high) is based on the joint use of the S2 indicator and the DSA results. The S2 indicator measures the upfront and permanent fiscal adjustment required to stabilise the debt-to-GDP ratio over the infinite horizon, including the costs of ageing. The critical values used are 2 and 6 pps. of GDP. The DSA results are used to further qualify the long-term risk classification, in particular in cases when debt vulnerabilities are identified (a medium / high DSA risk category). [2]Thechartspresentaseriesofsensitivitytestsaroundthebaselinescenario,aswellasalternativepolicyscenarios,inparticular:thehistoricalstructuralprimarybalance(SPB)scenario(wheretheSPBissetatitshistoricalaverage),theStabilityandGrowthPact(SGP)scenario(wherefiscalpolicyisassumedtoevolveinlinewiththemainprovisionsoftheSGP),ahigherinterestratescenario(+1pp.comparedtothebaseline),alowerGDPgrowthscenario(-0.5pp.comparedtothebaseline)andanegativeshockontheSPB(calibratedonthebasisoftheforecastedchange).Anadversecombinedscenarioandenhancedsensitivitytests(ontheinterestrateandgrowth)arealsoincluded,aswellasstochasticprojections. Detailed information on the design of these projections can be found in the FSR 2018.RO - Debt projections baseline scenario[1]Thefirsttablepresentsthebaselineno-fiscalpolicychangescenarioprojections.Itshowstheprojectedgovernmentdebtdynamicsanditsdecompositionbetweentheprimarybalance,snowballeffectsandstock-flowadjustments.Snowballeffectsmeasurethenetimpactofthecounteractingeffectsofinterestrates,inflation,realGDPgrowth(andexchangerates in some countries). Stock-flow adjustments include differences in cash and accrual accounting, net accumulation of assets, as well as valuation and other residual effects.[3] The second table presents the overall fiscal risk classification over the short, medium and long-term. a. For the short-term, the risk category (low/high) is based on the S0 indicator. S0 is an early-detection indicator of fiscal stress in the upcoming year, based on 25 fiscal and financial-competitiveness variables that have proven in the past to be leading indicators of fiscal stress. The critical threshold beyond which fiscal distress is signalled is 0.46. 202530354045505560657020162017201820192020202120222023202420252026202720282029Debt as % of GDP -ROBaselineEnhanced lower GDP growth scenarioAdverse combined scenarioEnhanced higher interest rate scenario20304050607020162017201820192020202120222023(% of GDP)Stochastic debt projections 2019-2023 -ROp10_p20p20_p40p40_p60p60_p80p80_p90p50Baseline202530354045505560657020162017201820192020202120222023202420252026202720282029Debt as % of GDP -ROBaselineHistorical SPB scenarioSGP scenario202530354045505560657020162017201820192020202120222023202420252026202720282029Debt as % of GDP -ROBaselineHigher interest rate scenarioNegative shock on the SPBLower GDP growth scenarioBaselineHistorical SPBLower GDP growthHigher interest rateNegative shock on SPBStochastic projectionsRisk categoryMEDIUMLOWMEDIUMMEDIUMMEDIUMMEDIUMDebt level (2029)61.655.364.065.267.8Debt peak year20292029202920292029Percentile rank89.0%84.0%Probability debt higher78.7%Dif. between percentiles35.7MEDIUMLong termDSAMEDIUMDebt sustainability analysis (detail)Medium termMEDIUMMEDIUMShort termLOW(S0 = 0.3)(S1 = 1.5)S2MEDIUM(S2 = 5.9)S1 
 
ANNEX C: STANDARD TABLES 

Table C.1: 

Financial market indicators 

(1) Latest data Q3 2018. Includes not only banks but all monetary financial institutions excluding central banks. 
(2) Latest data Q2 2018. 
(3) Quarterly values are not annualised 
* Measured in basis points. 
Source: European Commission (long-term interest rates); World Bank (gross external debt); Eurostat (private debt); ECB (all 
other indicators). 

67 

201320142015201620172018Total assets of the banking sector (% of GDP)1)63.660.157.655.552.550.6Share of assets of the five largest banks (% of total assets)54.454.257.459.159.4-Foreign ownership of banking system (% of total assets)2)90.090.090.591.477.374.5Financial soundness indicators:2)              - non-performing loans (% of total loans)-20.713.49.76.65.9              - capital adequacy ratio (%)18.817.718.919.219.418.6              - return on equity (%)3)0.0-15.211.310.611.715.9Bank loans to the private sector (year-on-year % change)1)-3.5-1.34.53.37.16.4Lending for house purchase (year-on-year % change)1)9.79.215.513.413.211.7Loan to deposit ratio2)-67.267.668.269.272.1Central Bank liquidity as % of liabilities1)0.3----0.0Private debt (% of GDP)66.862.159.155.650.8-Gross external debt (% of GDP)2) - public20.821.819.619.017.916.2    - private30.228.926.828.227.926.7Long-term interest rate spread versus Bund (basis points)*384.4333.1297.8322.9364.1427.9Credit default swap spreads for sovereign securities (5-year)*180.4137.4110.0105.992.583.5 
 
 
 
 
 
C. Standard Tables 

Table C.2: 

Headline Social Scoreboard indicators 

(1) People at risk of poverty or social exclusion (AROPE): individuals who are at risk of poverty (AROP) and/or suffering from 
severe material deprivation (SMD) and/or living in households with zero or very low work intensity (LWI). 
(2) Unemployed persons are all those who were not employed but had actively sought work and were ready to begin 
working immediately or within two weeks. 
(3) Long-term unemployed are people who have been unemployed for at least 12 months. 
(4) Gross disposable household income is defined in unadjusted terms, according to the draft Joint Employment Report 2019. 
(5) Reduction in percentage of the risk of poverty rate, due to social transfers (calculated comparing at-risk-of poverty rates 
before social transfers with those after transfers; pensions are not considered as social transfers in the calculation). 
(6) Average of first three quarters of 2018 for the employment rate, long-term unemployment rate and gender employment 
gap. Data for unemployment rate is seasonally adjusted (annual series, for EE, EL, HU, IT and UK data based on first three 
quarters of 2018). 
Source: Eurostat. 

68 

201320142015201620172018 6Equal opportunities and access to the labour marketEarly leavers from education and training (% of population aged 18-24)17.318.119.118.518.1:Gender employment gap (pps)16.316.717.517.617.118.3Income inequality, measured as quintile share ratio (S80/S20)6.87.28.37.26.5:At-risk-of-poverty or social exclusion rate1 (AROPE)41.940.337.438.835.7:Young people neither in employment nor in education and training (% of population aged 15-24)17.017.018.117.415.2:Dynamic labour markets and fair working conditions†Employment rate (20-64 years)64.765.766.066.368.870.0Unemployment rate2 (15-74 years)7.16.86.85.94.94.1Long-term unemployment rate3 (as % of active population)3.22.83.03.02.01.8Gross disposable income of households in real terms per capita4 (Index 2008=100) 98.099.4106.1116.7129.1:Annual net earnings of a full-time single worker without children earning an average wage (levels in PPS, three-year average)8581862189879609::Annual net earnings of a full-time single worker without children earning an average wage (percentage change, real terms, three-year average)-0.10.35.08.5::Public support / Social protection and inclusionImpact of social transfers (excluding pensions) on poverty reduction518.412.813.314.216.6:Children aged less than 3 years in formal childcare6.02.69.417.415.7:Self-reported unmet need for medical care10.99.89.46.54.7:Individuals who have basic or above basic overall digital skills (% of population aged 16-74)::26.028.029.0: 
 
 
 
 
C. Standard Tables 

Table C.3: 

Labour market and education indicators 

* Non-scoreboard indicator 
(1) Difference between the average gross hourly earnings of male paid employees and of female paid employees as a 
percentage of average gross hourly earnings of male paid employees. It is defined as "unadjusted", as it does not correct for 
the distribution of individual characteristics (and thus gives an overall picture of gender inequalities in terms of pay). All 
employees working in firms with ten or more employees, without restrictions for age and hours worked, are included. 
(2) PISA (OECD) results for low achievement in mathematics for 15 year-olds. 
(3) Impact of socio-economic and cultural status on PISA (OECD) scores. Values for 2012 and 2015 refer respectively to 
mathematics and science. 
(4) Average of first three quarters of 2018. Data for youth unemployment rate is seasonally adjusted (annual series, for EE, EL, 
HU, IT and UK data based on first three quarters of 2018). 
Source: Eurostat, OECD 

69 

Labour market indicators201320142015201620172018 4Activity rate (15-64)64.965.766.165.667.3:Employment in current job by durationFrom 0 to 11 months5.25.06.24.95.8:From 12 to 23 months5.86.07.46.46.7:From 24 to 59 months21.220.019.520.519.8:60 months or over67.869.066.868.267.7:Employment growth* (% change from previous year)-0.90.8-1.3-1.12.80.2Employment rate of women(% of female population aged 20-64)56.557.357.257.460.260.7Employment rate of men (% of male population aged 20-64)72.874.074.775.077.379.1Employment rate of older workers* (% of population aged 55-64)41.843.141.142.844.545.9Part-time employment* (% of total employment, aged 15-64)9.08.78.87.46.86.6Fixed-term employment* (% of employees with a fixed term contract, aged 15-64)1.41.51.41.41.21.1Participation in activation labour market policies(per 100 persons wanting to work)3.12.93.54.5::Transition rate from temporary to permanent employment(3-year average)57.757.856.556.156.9:Youth unemployment rate (% active population aged 15-24)23.724.021.720.618.316.2Gender gap in part-time employment1.01.30.70.40.20.6Gender pay gap1 (in undadjusted form)4.94.55.85.23.5:Education and training indicators201320142015201620172018Adult participation in learning(% of people aged 25-64 participating in education and  training)2.01.51.31.21.1:Underachievement in education2::39.9:::Tertiary educational attainment (% of population aged 30-34 having successfully completed tertiary education)22.925.025.625.626.3:Variation in performance explained by students' socio-economic status3::13.8::: 
 
 
 
 
C. Standard Tables 

Table C.4: 

Social inclusion and health indicators 

* Non-scoreboard indicator 
(1) At-risk-of-poverty rate (AROP): proportion of people with an equivalised disposable income below 60 % of the national 
equivalised median income. 
(2) Proportion of people who experience at least four of the following forms of deprivation: not being able to afford to i) pay 
their rent or utility bills, ii) keep their home adequately warm, iii) face unexpected expenses, iv) eat meat, fish or a protein 
equivalent every second day, v) enjoy a week of holiday away from home once a year, vi) have a car, vii) have a washing 
machine, viii) have a colour TV, or ix) have a telephone. 
(3) Percentage of total population living in overcrowded dwellings and exhibiting housing deprivation. 
(4) People living in households with very low work intensity: proportion of people aged 0-59 living in households where the 
adults (excluding dependent children) worked less than 20 % of their total work-time potential in the previous 12 months. 
(5) Ratio of the median individual gross pensions of people aged 65-74 relative to the median individual gross earnings of 
people aged 50-59.   
(6) Fixed broadband take up (33%), mobile broadband take up (22%), speed (33%) and affordability (11%), from the Digital 
Scoreboard. 
Source: Eurostat, OECD 

70 

201220132014201520162017Expenditure on social protection benefits* (% of GDP)Sickness/healthcare4.03.93.93.83.9:Disability1.21.11.11.11.0:Old age and survivors8.28.08.07.97.8:Family/children1.31.21.21.31.4:Unemployment0.20.20.10.10.1:Housing0.00.00.00.00.0:Social exclusion n.e.c.0.20.20.20.20.2:Total15.214.614.414.314.3:of which: means-tested benefits0.60.60.60.60.5:General government expenditure by function (% of GDP, COFOG)Social protection12.311.511.411.411.6:Health3.84.04.04.24.0:Education3.02.83.03.13.7:Out-of-pocket expenditure on healthcare (% of total health expenditure)22.420.220.321.320.8:Children at risk of poverty or social exclusion (% of people aged 0-17)*52.551.450.746.849.241.7At-risk-of-poverty  rate1 (% of total population)22.923.025.125.425.323.6In-work at-risk-of-poverty rate (% of persons employed)19.018.419.818.818.917.4Severe material deprivation rate2  (% of total population)31.129.825.922.723.819.7Severe housing deprivation rate3, by tenure statusOwner, with mortgage or loan19.916.14.91.61.41.2Tenant, rent at market price19.021.232.853.046.027.2Proportion of people living in low work intensity households4 (% of people aged 0-59)7.97.67.27.98.26.9Poverty thresholds, expressed in national currency at constant prices*388438883991425345185167Healthy life years (at the age of 65)Females5.15.25.75.75.6:Males5.95.85.96.36.2:Aggregate replacement ratio for pensions5 (at the age of 65)0.70.70.70.60.70.6Connectivity dimension of the Digital Economy and Society Inedex (DESI)6::43.946.249.854.1GINI coefficient before taxes and transfers*53.251.852.154.154.452.3GINI coefficient after taxes and transfers*33.234.034.737.434.733.1 
 
 
 
 
C. Standard Tables 

Table C.5: 

Product market performance and policy indicators 

(1) Value added in constant prices divided by the number of persons employed. 
(2) Compensation of employees in current prices divided by value added in constant prices. 
(3) The methodologies, including the assumptions, for this indicator are shown in detail here: 
http://www.doingbusiness.org/methodology.  
(4) Average of the answer to question Q7B_a. "[Bank loan]: If you applied and tried to negotiate for this type of financing 
over the past six months, what was the outcome?". Answers were codified as follows: zero if received everything, one if 
received 75% and above, two if received below 75%, three if refused or rejected and treated as missing values if the 
application is still pending or don't know. 
(5) Percentage population aged 15-64 having completed tertiary education. 
(6) Percentage population aged 20-24 having attained at least upper secondary education. 
(7) Index: 0 = not regulated; 6 = most regulated. The methodologies of the OECD product market regulation indicators are 
shown in detail here: http://www.oecd.org/competition/reform/indicatorsofproductmarketregulationhomepage.htm 
(8) Aggregate OECD indicators of regulation in energy, transport and communications (ETCR).   
Source: European Commission; World Bank — Doing Business (for enforcing contracts and time to start a business); OECD (for 
the product market regulation indicators); SAFE (for outcome of SMEs' applications for bank loans). 

71 

Performance indicators201220132014201520162017Labour productivity per person1 growth (t/t-1) in %Labour productivity growth in industry-6.383.980.198.522.174.34Labour productivity growth in construction9.014.722.706.845.37-3.25Labour productivity growth in market services35.863.850.643.103.595.03Unit Labour Cost (ULC) index2 growth (t/t-1) in %ULC growth in industry19.86-3.550.59-0.067.243.55ULC growth in construction-1.54-3.96-12.104.96-2.9013.85ULC growth in market services-18.713.015.72-0.1710.653.04Business environment201220132014201520162017Time needed to enforce contracts3 (days)512512512512512512Time needed to start a business3 (days)8.08.08.08.012.012.0Outcome of applications by SMEs for bank loans4:0.990.940.460.360.69Research and innovation201220132014201520162017R&D intensity0.480.390.380.490.480.50General government expenditure on education as % of GDP3.002.803.003.103.70:Employed people with tertiary education and/or people employed in science and technology as % of total employment242424262727Population having completed tertiary education5141414151515Young people with upper secondary education6808080808080Trade balance of high technology products as % of GDP-1.79-1.96-1.66-1.75-1.60-1.87Product and service markets and competition200320082013OECD product market regulation (PMR)7, overall::1.69OECD PMR7, retail::1.80OECD PMR7, professional services:::OECD PMR7, network industries8::1.97 
 
 
 
 
 
 
 
 
 
 
 
C. Standard Tables 

Table C.6:  Green growth 

All macro intensity indicators are expressed as a ratio of a physical quantity to GDP (in 2010 prices) 
          Energy intensity: gross inland energy consumption (Europe 2020-2030)(in kgoe) divided by GDP (in EUR)  
          Carbon intensity: greenhouse gas emissions (in kg CO2 equivalents) divided by GDP (in EUR) 
          Resource intensity: domestic material consumption (in kg) divided by GDP (in EUR) 
          Waste intensity: waste (in kg) divided by GDP (in EUR) 
Energy balance of trade: the balance of energy exports and imports, expressed as % of GDP   
Weighting of energy in HICP: the proportion of 'energy' items in the consumption basket used for the construction of the HICP 
Difference between energy price change and inflation: energy component of HICP, and total HICP inflation (annual % 
change) 
Real unit energy cost: real energy costs as % of total value added for the economy 
Industry energy intensity: final energy use in industry (in kgoe) divided by gross value added of industry, including construction 
(in 2010 EUR)  
Real unit energy costs for manufacturing industry excluding refining : real costs as % of value added for manufacturing sectors

Share of energy-intensive industries in the economy: share of gross value added of the energy-intensive industries in GDP 
Electricity and gas prices for medium-sized industrial users: consumption band 500–20 00MWh and 10 000–100 000 GJ; figures 
excl. VAT.   
Recycling rate of municipal waste: ratio of recycled and composted municipal waste to total municipal waste 
Public R&D for energy or for the environment: government spending on R&D for these categories as % of GDP 
Proportion of GHG emissions covered by EU emissions trading system (ETS) (excluding aviation): based on GHG emissions (excl 
land use, land use change and forestry) as reported by Member States to the European Environment Agency. 
Transport energy intensity: final energy use in transport sector including international aviation, (in kgoe) divided by transport 
industry gross value added (in 2010 EUR) 
Transport carbon intensity: GHG emissions in transport sector divided by gross value added of the transport activities 
Energy import dependency: net energy imports divided by gross inland energy consumption plus consumption of 
international maritime bunkers    
Aggregated supplier concentration index: Herfindahl-Hirschman index for net imports of crude oil and NGL, natural gas and 
hard coal. Smaller values indicate larger diversification and hence lower risk. 
Diversification of the energy mix: Herfindahl-Hirschman index of the main energy products in the gross inland consumption of 
energy 
* European Commission and European Environment Agency 
Source: European Commission and European Environment Agency (Share of GHG emissions covered by ETS); European 
Commission (Environmental taxes over labour taxes and GDP); Eurostat (all other indicators) 

72 

Green growth performance201220132014201520162017MacroeconomicEnergy intensity kgoe / €0.270.240.230.220.210.21Carbon intensity kg / €0.960.850.830.800.74-Resource intensity (reciprocal of resource productivity)kg / €3.353.263.233.713.433.02Waste intensity kg / €1.91-1.26-1.17-Energy balance of trade % GDP-3.05-1.90-1.41-0.91-0.94-1.31Weighting of energy in HICP%12.512.412.212.311.912.4Difference between energy price change and inflation %1.35.00.12.8-1.01.6Real unit of energy cost% of value added29.527.626.526.626.7-Ratio of environmental taxes to labour taxesratio0.180.190.220.240.23-Environmental taxes% GDP2.02.02.32.42.31.9Sectoral Industry energy intensity kgoe / € 0.160.150.140.140.130.12Real unit energy cost for manufacturing industry excl. refining% of value added21.521.220.620.420.3-Share of energy-intensive industries in the economy% GDP11.611.412.012.312.412.4Electricity prices for medium-sized industrial users€ / kWh0.080.090.080.080.080.08Gas prices for medium-sized industrial users€ / kWh0.030.030.030.030.030.03Public R&D for energy % GDP0.010.010.020.010.020.01Public R&D for environmental protection% GDP0.020.020.010.010.010.01Municipal waste recycling rate%14.813.213.113.213.313.9Share of GHG emissions covered by ETS*%44.638.038.237.735.2-Transport energy intensitykgoe / €0.600.540.530.480.430.42Transport carbon intensitykg / €1.681.531.521.351.21-Security of energy supplyEnergy import dependency%22.318.116.416.421.623.1Aggregated supplier concentration indexHHI12.412.814.217.819.9-Diversification of energy mixHHI0.230.230.230.230.230.23 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ANNEX D: INVESTMENT GUIDANCE ON COHESION POLICY 

FUNDING 2021-2027 FOR ROMANIA 

Building  on  the  Commission  proposal  for  the  next  Multi-Annual  Financial  Framework  for  the  period 
2021-2027  of  2  May  2018  (COM  (2018)  321),  this  Annex  D (76)  presents  the  preliminary  Commission 
services views on priority investment areas and framework conditions for effective delivery for the 2021-
2027 Cohesion Policy. These priority investment areas are derived from the broader context of investment 
bottlenecks,  investment  needs  and  regional  disparities  assessed  in  the  report.  This  Annex  provides  the 
basis for a dialogue between Romania and the Commission services in view of the programming of the 
cohesion policy funds (European Regional Development Fund, Cohesion Fund and European Social Fund 
Plus). 

Policy Objective 1: A Smarter Europe – Innovative and smart industrial transformation 

Romania’s  expenditure  on  research  and  innovation  is  significantly  below  the  EU  average  and  the 
country displays a stagnant research and innovation performance and low technological outputs. High 
priority investment needs (77) are identified to enhance research and innovation capacities and skills 
and  the  uptake  of  advanced  technologies,  in  all  Romanian  regions,  including  in  the  capital  region, 
taking into account the results of the Catching Up Regions Initiative and in particular to: 

  support  collaboration  between  public  research  institutions  and  innovative  industries,  increase  the 
attractiveness  and  performance  of  research  and  development  organisations  and  encourage  applied 
research through innovation hubs and joint national and transnational investments in early product 
validation, commercialisation, patenting, start-up formation and technology transfer; 

  support Entrepreneurial Discovery Processes and Project Development Labs at national and regional 
level and provide training on skills  for beneficiaries on  marketing research results and  developing 
project  and  business  plans  in  order  to  strengthen  the  preparation  and  implementation  of  smart 
specialisation projects;   

  strengthen research and innovation performance and foster productivity growth by identifying smart 

specialisation areas on the basis of national and regional needs and potential; 

 

reinforce  the  current  research  and  innovation  infrastructures,  capacities  and  skills  to  ensure 
participation in Horizon and  other EU programmes and initiatives, to integrate  international, cross 
border networks and transnational clusters and set-up joint research and education programmes and 
co-financing schemes;  

 

link  higher  education  and  vocational  centres  to  the  national  and  regional  innovation  and  smart 
specialisation reskilling system;  

  support the capacities and skills development of regional and national stakeholders, involved in the 
design and implementation of smart specialisation strategies and projects, in close cooperation with 
beneficiaries. 

(76)  This Annex is to be considered in conjunction with the Proposal for a Regulation of the European Parliament and of the Council 
on the European Regional Development Fund and on the Cohesion Fund COM(2018) 372 and the Proposal for a Regulation of 
the  European  Parliament  and  of  the Council  on the  European  Social  Fund  Plus  COM(2018)  382, in particular  as  regards  the 
requirements for thematic concentration and urban earmarking outlined in these proposals. 

(77)  The intensity of needs is classified in three categories in a descending order - high priority needs, priority needs, needs. 

73 

 
 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Romania 

Romania  performs  significantly  below  the  EU  average  in  terms  of  digital  public  services  and  the 
integration  of  digital  technologies  by  businesses.  Priority  investment  needs  are  identified  to  reap  the 
benefits of digitisation for citizens, companies and governments, and in particular to: 

  strengthen  the  Information  and  Communications  Technology  up-take  by  small  and  medium-sized 
enterprises,  including  investments  in  infrastructures,  foster  digital  skills  and  services  and  further 
support digital innovation hubs, living labs, etc.; 

 

increase  measures  for  e-government,  including  the  introduction  and  consolidation  of  Europe  wide 
interoperable services, e-inclusion, e-health, e-learning, e-skilling. 

Romania’s share of innovative companies is behind the EU average and the country is confronted with a 
persistent  low  level  of  business  investment  in  research  and  innovation.  Priority  investment  needs  are 
identified  to  enhance  growth  and  competitiveness  of  small  and  medium-sized  enterprises,  and  in 
particular to: 

  support the creation of new companies (start-ups, scale-ups), increase their survival rates and raise 

their degree of competitiveness and internationalisation; 

 

increase the innovation capacities of companies, by introducing product, organisational or marketing 
innovations,  by  providing  training  on  innovation  management  and  smart  specialisation  specific 
skills, marketing research results skills, by supporting key enabling technologies and acceleration of 
market  access  and  by  supporting  industrial  cluster  development  and  integration  into  industry-
research driven cooperation  networks, including cooperation  with the EU  Strategy for the Danube 
Region countries;  

 

facilitate access to finance  for small and  medium-sized enterprises, including by encouraging seed 
and early stage finance for high-potential innovative start-ups. 

Policy Objective 2: A low carbon and greener Europe  – Clean and fair energy transition,  green 
and blue investment, circular economy, climate adaptation and risk prevention (78) 

Energy intensity in Romania remains above the EU average and energy poverty affects one household 
out  of  four.  Priority  investment  needs  are  identified  to  promote  energy  efficiency  measures  and 
renewable energy, and in particular to:  

  support energy efficiency renovation of public and residential buildings;  

  support  energy  efficiency  measures  in  district  heating  systems,  together  with  the  promotion  of 

renewable energy into the district heating and cooling; 

  promote  small-scale  renewable  energy  in  combination  with  energy  efficiency  renovation  of 

buildings; 

  strengthen the capacity of managing authorities, project developers and public authorities. 

Romania is lagging behind regarding measures for tackling climate change adaptation, the rehabilitation 
of  old  contaminated  sites  and  the  prevention  of  floods  and  other  natural  hazards.  Priority  investment 
needs are identified to promote climate change adaptation, risk prevention and disaster resilience, 

(78)  While  outside  of  the  scope  of  the  ERDF  and  the  Cohesion  Fund  (art.  6,  paragraph  1(h),  COM  (2018)372),  energy 
interconnectors could be financed by the Connecting Europe Facility in line with its objectives (art. 3, paragraphs 1 and 2 (b), 
COM(2018) 438). 

74 

 
                                                           
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Romania 

and in particular to:  

  support  measures  for  emission  reduction,  elimination  (exchange)  of  energy  sources  for  district 

heating, complementary to the energy efficiency investments; 

 

implement  the  risk  prevention  strategies  and  address  climate  change  and  natural  risks  (floods, 
drought,  forest  fires,  landslides,  earthquakes),  as  prioritised  nationally  and  in  cross-border  and 
transnational coordination and cooperation. 

Water  and  wastewater  infrastructure  is  largely  insufficient  and  high  priority  investment  needs  are 
identified to promote sustainable water management, and in particular to: 

  promote regional water management schemes, including through capacity building; 

  support schemes for addressing  water pollution (dispersed sources) and  maintaining/improving the 

status of water bodies;  

  cooperate in international programmes for the Danube region and the Black Sea. 

The waste management system in Romania is one of the least developed in the EU, with high landfilling 
rates  and  the  poor  quality  of  waste  infrastructure.  High  priority  investment  needs  are  identified  to 
complete  the  waste  management  system,  to  promote  the  transition  to  a  circular  economy,  and  in 
particular to: 

 

invest  in  capacity-building  for  all  stakeholders  involved  in  the  transition  to  circular  economy,  and 
promote circular economy in small and medium sized enterprises; 

  expand the waste management schemes at county level in order to increase reuse and recycling, to 

prevent waste generation and divert waste from landfilling; 

  support  the  administrative  and  management  capacity  at  the  national  and  county  level  on  waste 

prevention, separate collection and recycling. 

Important  gaps  remain  in  reaching  the  EU’s  objectives  in  the  areas  of  maintaining  biodiversity, 
restoring  ecologically  damaged  areas  and  reducing  pollution,  in  particular  in  highly  sensitive  areas. 
Priority  investment  needs  are  identified  to  enhance  biodiversity,  green  infrastructure  in  the  urban 
environment, and reducing pollution, and in particular to: 

  support  management  and  conservation  measures  in  protected  areas,  in  line  with  the  EU 
environmental legislation for areas such as the Danube basin, the Black Sea and the Carpathians, in 
cooperation with the EU Strategy for the Danube Region countries; 

  support  ecological  restoration  and  develop  new  municipal  green  areas  connected  with  emission 

reduction objectives; 

  accelerate the closure and rehabilitation or the remaining incompliant landfills, storage and dumping 

sites and the decontamination and rehabilitation of contaminated industrial sites. 

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D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Romania 

Policy  Objective  3:  A  more  connected  Europe  –  Mobility  and  regional  Information  and 
Communications Technology connectivity 

The general condition and reliability of road and rail infrastructure in Romania are poor and its transport 
networks  remain  among  the  least  developed  in  the  EU,  without  tackling  geographical  obstacles  to 
traffic, such as the Carpathian Mountains and crossing the Danube to Bulgaria. High priority investment 
needs  are  identified  to  develop  a  sustainable,  climate  resilient,  intelligent,  intermodal  Trans-
European  Networks for  Transport, including improved  access to Trans-European  Networks for 
Transport, national, regional and cross border mobility, and in particular to:  

  develop  core  and  comprehensive  Trans-European  Networks  for  Transport  road  and  rail  networks, 
notably links with peripheral regions across the Carpathian Mountains e.g. the north-east and to the 
Danube Delta, and unlock industrial centres e.g. around Piteşti;  

  put  the  European  Railway  Traffic  Management  System  into  operation  on  the  core  rail  Trans-

European Networks for Transport;  

 

 

implement the adopted traffic safety strategy and carry out road safety measures to reduce the high 
road accident fatality rate and mitigate environmental damage;  

improve  the  navigability  of  the  Danube  River  in  cooperation  with  the  Danube  region  Member 
States;  

  support the administrative capacity building of the major transport beneficiaries i.e. the national rail 

and road companies, other transport authorities, and the Ministry of Transport; 

  develop core and comprehensive Trans-European Networks for Transport cross border connections 
e.g. realising additional transport connections across the Danube, either by constructing new bridges 
or improving ferry connections. 

Sustainable multimodal mobility in urban areas is poorly developed. High priority investment needs are 
identified to promote sustainable multimodal urban mobility, based on sustainable multimodal urban 
mobility plans, in particular to: 

  develop sub-urban rail and multi-modal connections in and around larger urban centres; 

  promote  sustainable  and  accessible  modes  of  transport,  such  as  low-carbon  collective  public 
transport, active modes of transport, that will reduce congestion, emissions, traffic accidents, etc.; 

  support development of urban transport systems in less-developed regions, such as light rail, metro 

and tram lines, cycling friendly infrastructure. 

Even though Romania has one of the highest shares of subscriptions to fast broadband in the EU, the 
coverage  of  fixed  and  mobile  (4G)  broadband  networks  remains  one  of  the  lowest  in  the  EU,  with  a 
very  pronounced  urban-rural  divide.  Investment  needs  are  identified  to  enhance  digital connectivity, 
and in particular to: 

  support white spots in densely populated areas or surroundings of urban areas and in rural areas ; 

 

reduce the cost of deploying high-speed electronic communications networks; 

76 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Romania 

 

improve the capacity of the programme authorities and beneficiaries. 

Policy Objective 4: A more social Europe – Implementing the European Pillar of Social Rights 

Unfavourable demographics,  high labour  force emigration, lack of relevant  skills, lead to tight  labour 
market  conditions.  High  priority  investment  needs  are  therefore  identified  to  improve  access  to 
employment  through  active  labour  market  policies,  anticipate  skills  needs  and  support  labour 
market transitions and mobility and in particular to: 

 

improve the design of active labour market policies, by a better integration with education and social 
services to ensure tailor-made assistance to jobseekers;  

  consolidate and support social entrepreneurship and social economy;  

  support the improvement of working conditions, provision of flexible working arrangements, as well 

as ensure employability of persons with disability and older workers; 

  build robust skills anticipations systems, implement targeted upskilling and reskilling measures that 
meet  labour  market  needs;  reinforce  participation  in  adult  learning  in  collaboration  with  relevant 
stakeholders, and develop services on lifelong guidance to foster career transition; 

  address  local  and  regional  labour  market  shortages  and  labour  force  migration,  by  improving  the 
internal  mobility  measures  and  supporting  new  type  of  businesses  matching  local  economic 
opportunities; 

The  education  system  is  characterised  by  low  attainment  levels  in  basic,  digital  and  soft  skills,  high 
early school leaving, and low labour market relevance of vocational education and training and higher 
education. High priority investment needs are therefore identified to improve the quality, effectiveness 
and labour market relevance of education and training systems; promote equal access to inclusive 
education and lifelong learning, and in particular to: 

 

improve the accessibility, quality and affordability of early childhood education and care, including 
related infrastructure;  

  prevent  early  school  leaving,  by  introducing  a  learner-centred  approach  for  children  at  risk,  and 
flexible  second  chance  programmes,  accompanied  by  relevant  counselling  and  career  guidance. 
Improve teachers’ skills to address children from vulnerable groups; 

 

 

 

improve access  to quality  inclusive education, in  non-segregated  facilities, in particular for  Roma, 
learners with disabilities and in rural areas, including relevant infrastructure; 

improve  quality  of  vocational  education  and  training  to  adapt  to  labour  market  developments, 
including necessary trainings and provision of equipment; 

improve labour market relevance of tertiary education, in particular for professions with high labour 
market demand, including joint training actions and traineeships in companies;  

  support development of innovative and effective teaching methods and technologies. 

Poverty, social exclusion and inequalities remain among the highest in the EU, with significant regional 
and  local  disparities  in  quality  and  access  to  social  and  healthcare  services.  High  priority  investment 
needs  are  therefore  identified  to  foster  active  inclusion,  to  promote  socio-economic  integration  of 

77 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Romania 

Roma  community,  to  enhance  access  to  quality  services  and  address  material  deprivation,  and 
invest in housing, health care and long-term care infrastructure and in particular to:  

  develop  and  consolidate  individualised  integrated  services,  in  particular  in  marginalised  areas; 

initiate targeted measures to support children at risk of poverty and social exclusion; 

 

increase quality and availability of social services and develop tailored family-based approach;  

 

improve access of Roma community to integrated support and mainstream services.  

  support  the  upskilling  of  social,  health-care  and  long-term  care  workers  and  tackle  territorial 

disparities;  

  support deinstitutionalisation of children and of adults with disabilities, including relevant training, 

services, and infrastructure; 

  develop social housing services and infrastructure for vulnerable groups, in a comprehensive way, to 

reduce spatial segregation, including by urban regeneration projects;  

  address material deprivation through food and basic material assistance to the most deprived; 

 

increase  access  to  primary  health  services  and  prevention;  develop  outpatient  care  and  e-health 
solutions, in particular at community level and for vulnerable groups; support health infrastructure 
with emphasis on primary/ambulatory care and intermediate care facilities;  

  develop  home  care,  long-term  care  and  community-based  services  and  infrastructure,  in  particular 

for the elderly and people with disabilities; support effective national active ageing measures 

Policy  Objective  5  –  A  Europe  closer  to  citizens  by  fostering  the  sustainable  and  integrated 
development of urban, rural and coastal areas and local initiatives 

Growth  is  mainly  confined  to  strong  agglomerations  and  is  marked  by  increasing  sub-urbanisation 
challenges. Smaller cities and surrounding territories face different challenges related to access to labour 
market, education, healthcare and other social services. High priority investment needs are identified, a 
compulsory urban earmarking is introduced and a coordinated approach to investments from all policy 
objectives  is  needed  to  foster  the  integrated  development  and  security  in  urban  areas,  and  in 
particular to:  

 

invest  in  metropolitan  areas  (growth  drivers)  marked  by  strong  growth  and  on-going  sub-
urbanisation  with  a  view  to  strengthen  the  planning  and  coordination  capacity  to  steer  integrated 
urban  investments  for  driving  growth,  innovation  and  productivity,  in  line  with  a  coordinated 
functional area approach;  

  support sustainable urban development of county capitals in order to ensure access to new jobs and 
basic public services at local  level, in line  with their growth potential and a  more tailor-made  and 
differentiated approach needed for these cities; 

 

increase  the  administrative  capacity  and  cooperation  possibilities  of  urban  authorities  in  the 
programming and the implementation phase. 

Disparities between regions, between rural and urban areas and between citizens remain very strong and 
call  for  tailor-made  investment  priorities  based  on  specific  territorial  and  socio-economic  needs  and 

78 

 
D. Investment Guidance on Cohesion Policy Funding 2021-2027 for Romania 

development  potential.  High  priority  investment  needs  are  identified  to  foster  the  integrated  social, 
economic, cultural and environmental local development and security and in particular to: 

  support integrated territorial strategies in structurally challenged areas, e.g. the counties  of Vaslui, 

Teleorman and Mehedinti; 

  support specific territorial initiatives aimed at the reconversion of the economy in regions affected 
by industrial decline and mining, such as the Jiu Valley (taking into account the results of the Coal 
and Carbon-Intensive Regions in Transition Initiative); 

  support  sensitive  areas  of  specific  environmental  importance,  such  as  the  current  Danube  Delta 

Integrated Territorial Investments; 

 

increase  the  administrative  capacity  of  the  local  authorities  in  the  programming  and  the 
implementation phase.   

Factors for effective delivery of Cohesion policy 

 

 

improved  and  simplified  procedures  in  order  to  eliminate  excessive  documentation  and  over-
bureaucratic requirements; enhanced use of simplified costs options; 

increased capacities of EU Funds managing authorities, intermediate bodies, final beneficiaries, and 
other  bodies  to  prepare  and  implement  projects,  especially  in  waste,  roads,  railways,  education, 
health  sectors  and  for  regional  and  local  public  authorities  in  preparation  of  their  integrated 
territorial development strategies and project applications;  

  development and implementation of a roadmap on administrative capacity building necessary for the 

effective administration and implementation of the EU Funds; 

 

improved  and  more  efficient  measures  to  prevent  and  address  conflict  of  interest,  fraud  and 
corruption;  

  strengthened social dialogue and capacity of social partners and of the civil society organisations, to 
participate  to  the  development,  implementation,  monitoring  and  evaluation  of  public  policies  and 
projects, especially by supporting coordination and networking structures;  

  continued  adequate  capacity  building  of  local  authorities  to  increase  quality  of  services’  delivery 

(especially in social, education and health sectors); 

 

investments  and  programming  under  the  five  policy  objectives,  taking  into  account  the  relevant 
national and/or regional and local strategies and investment plans and results from the Catching-up 
Regions Initiative and the Coal Regions in Transition Initiative; 

 

improved  public  procurement  performance,  in  particular  by  reducing  the  rate  of  "single-bidding" 
instances or "no calls for bids" numbers; 

  broader  use  of  financial  instruments  and  /or  contributions  to  Romania’s  compartment  under 

InvestEU for revenue-generating and cost-saving activities. 

79 

 
 
 
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