REPORT FROM THE COMMISSION TO THE COUNCIL Commission report to the Council pursuant to Article -11(2) of Regulation (EC) No 1466/97 on the enhanced surveillance mission in Romania, of 14-15 March 2019
Date: 2019-06-05
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Romania, budget deficit, economic convergence, economic reform, financial control, gross domestic product, multilateral surveillance, public debt, public finance, stability programme

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  EN 

   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 541 final  REPORT FROM THE COMMISSION TO THE COUNCIL Commission report to the Council pursuant to Article -11(2) of Regulation (EC) No 1466/97 on the enhanced surveillance mission in Romania, of 14-15 March 2019  
 
 
This  report  on  an  enhanced  surveillance  mission  to  Romania  is  transmitted  to  the  Council 
pursuant to Article -11(4) of Regulation (EC) No 1466/971. As foreseen by Article -11(5) of 
Regulation  (EC)  No  1466/97,  the  provisional  findings  of  that  mission  have  been  previously 
transmitted to Romanian authorities for comments. 

Romania – Significant Deviation Procedure 
enhanced surveillance mission, 14-15 March 2019 

Report 

1. Introduction 

Romania  has  been  under  significant  deviation  procedures  since  spring  2017.  Romania 
was the first Member State subject to a significant deviation procedure (SDP). The first SDP 
was  launched  in  spring  2017  as  a  consequence  of  Romania's  observed  significant  deviation 
from  its  medium-term  budgetary  objective  (MTO)  in  2016,  when  the  structural  deficit 
increased  to  2.6%  of  GDP,  from  0.6%  in  2015.  On  16  June  2017  the  Council  issued  a 
recommendation asking Romania for a structural adjustment of 0.5% of GDP in 2017, which 
is the Stability and Growth Pact preventive arm matrix-based requirement in "normal times". 
In  autumn  2017,  the  Council  concluded  that  Romania  had  not  taken  effective  action  in 
response to that recommendation, with efforts solely focused on avoiding breaching the 3% of 
GDP  headline  deficit  reference  value.  In  December  2017  the  Council  issued  a  revised  SDP 
recommendation  in  which  it  asked  for  a  structural  adjustment  of  0.8%  of  GDP  in  2018.  In 
spring  2018  the  Council  again  concluded  that  Romania  had  not  taken  effective  action. 
Regulation (EC) No 1466/97 does not provide for a further revised recommendation under a 
single SDP. Therefore, in June 2018 that SDP expired.  

Immediately  afterwards,  a  new  SDP  was  launched  in  2018  as  a  consequence  of  the 
significant  deviation  in  2017 from  the  adjustment  path  to  the  medium-term  budgetary 
objective.  In  its  recommendation  of  22  June  2018  the  Council  asked  Romania  to  take  the 
necessary  measures  to  ensure  that  the  nominal  growth  rate  of  net  primary  government 
expenditure  does  not  exceed  3.3%  in  2018  and  5.1%  in  2019,  corresponding  to  an  annual 
structural  adjustment  of  0.8%  of  GDP  both  in  2018  and  in  2019.  On  4  December  2018  the 
Council concluded that the authorities did not intend to act upon that recommendation, with 
their efforts solely focused on avoiding breaching the 3% of GDP headline deficit reference 
value. On that basis, the Council issued a revised recommendation in which it asked Romania 
to  take  the  necessary  measures  to  ensure  that  the  nominal  growth  rate  of  net  primary 
government  expenditure  does  not  exceed  4.5%  in  2019,  corresponding  to  a  structural 
adjustment of 1.0% of GDP in  2019. Romania was asked to  report by  15 April 2019 to  the 
Council on action taken, possibly as part of its Convergence Programme. The Commission’s 

1 Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance 
and coordination of economic policies, OJ L 209, 2.8.1997, p. 1 

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assessment of the report sent by Romania is being published as part of the European Semester 
package. 

This  report  presents  the  findings  from  the  enhanced  surveillance  mission  to  Romania 
that  took  place  on  14  and  15  March  2019.  The  mission  was  carried  out  on  the  basis  of 
Article  -11(2)  of  Regulation  (EC)  1466/97.  The  mission  team  met  the  Minister  of  Finance, 
Mr. Eugen Teodorovici,  the governor of the National  Bank of Romania (NBR), Mr. Mugur 
Isărescu, and the head of the Fiscal Council of Romania, Mr Ionuţ Dumitru, accompanied by 
their  respective  staff.  As  with  previous  similar  missions,  the  aim  was  to  discuss  the  fiscal 
measures  planned  by  the  authorities,  stress  the  existence  of  fiscal  risks,  and  encourage 
compliance with the SDP recommendation. This report is based on information obtained until 
and during the mission.  

2. Findings of the mission 

The 2018 headline deficit was around 3% of GDP, which implies no compliance with the 
2018 fiscal consolidation requirement. The 2018 government  deficit amounted to  2.9% of 
GDP in cash terms, a slight increase from 2.8% of GDP in 2017. The deficit in accrual (ESA) 
terms,  which  is  the  relevant  figure  under  the  Stability  and  Growth  Pact,  was  going  to  be 
available on 23 April 2019. Some revenue items,  such as super-dividends from  state-owned 
companies  or  reimbursements  (at  the  end  of  2018)  of  Union  funds  for  projects  executed 
before 2018, improved the 2018 cash revenues but will most likely not be part of the accrual 
figures for 2018. On the other hand, VAT refunds were atypically low in January 2019, with a 
positive  impact  on  2018  revenues  in  accrual  terms  (thanks  to  the  one-month  adjustment 
method of cash data), but negative impact on 2019. In addition, the difference between paid 
for and delivered military equipment should decrease the 2018 expenditures in accrual terms. 
The Ministry of Finance seemed confident that the 2018 deficit in accrual terms will be just 
below  3%  of  GDP,  while  the  Fiscal  Council  stressed  a  risk  of  the  2018  deficit  slightly 
breaching that threshold. 

The authorities target a marginal structural adjustment in 2019 and thus do not intend 
to  act  upon  the  SDP  recommendation.  The  Minister  of  Finance  confirmed  that  the 
government  has  no  intention  to  comply  with  the  Council  Recommendation  of  4  December 
2018. The authorities continue to focus on maintaining the headline deficit below the 3% of 
GDP  Treaty  threshold,  thus  aiming  to  avoid  the  corrective  arm  of  the  Stability  and  Growth 
Pact.  The  parliament  adopted  the  2019  budget  and  multiannual  fiscal  strategy  with  a 
substantial  delay,  on  14  March  2019.  The  budget  targets  a  cash  deficit  of  2.76%  of  GDP, 
above the target initially proposed by the government of 2.55% due to a parliament decision 
to  increase  social  spending  (child  allowance)  without  compensatory  measures.  The 
corresponding accrual deficit target is close to 2.8% of GDP. Based on the government’s own 
estimates  at  the  time  of  the  mission,  that  headline  would  entail  a  structural  adjustment  of 
around  0.1%  compared  to  2018,  significantly  short  of  the  Council’s  Recommendation  (a 
structural adjustment of 1% of GDP).  

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There are risks to achieving the 2019 budget target. The Minister of Finance stated that the 
tax  administration  (ANAF)  would  soon  announce  the  measures  underlying  the  tax  revenue 
projections  from  the  2019  budget.  According  to  the  Minister  of  Finance,  the  government  is 
working on measures concerning customs control and transfer pricing on the revenue side and 
increased  control  of  monthly  spending  by  government  entities  on  the  expenditure  side.  The 
mission  team  reminded  the  Minister  that  the  report  on  action  taken,  due  by  15  April  2019, 
should  contain  details  of  the  planned  measures  and  the  quantification  of  the  expected  fiscal 
impact per measure, including for the measures to improve tax compliance. According to the 
Fiscal  Council,  the  macroeconomic  assumptions  concerning  the  labour  market  (number  of 
employees and gross wage dynamics in the private sector) seem very optimistic, leading to a 
possible  overestimation  of  revenue  from  social  contributions.  Additionally,  the  budget 
assumes a significant improvement of VAT compliance without providing specific measures 
supporting the improvement. The Fiscal Council added that, on the expenditure side, pensions 
and the contribution to the EU seem to be underestimated. On the other hand, the budget does 
not  include  revenue  from  the  new  tax  on  bank  assets,  nor  diversion  of  social  contributions 
from  the  second  pension  pillar.  The  Fiscal  Council  argued  that,  assuming  unchanged  fiscal 
and budgetary policies, the risk balance is overwhelmingly inclined towards far higher deficits 
than  those  envisaged  by  the  government  and  significantly  higher  than  the  3%  of  GDP 
reference value of the Treaty.  

The  new  pension    law  poses  a  significant  upward  risk  to  the  fiscal  deficit  in  2020  and 
beyond. The Minister of Finance stated that the government plans a fiscal adjustment in 2020 
and beyond. The multiannual fiscal strategy accompanying the 2019 budget targets a headline 
deficit of 2.3% of GDP in 2020 and 2.0% of GDP in 2021. However, the Fiscal Council raised 
concerns over the fiscal impact of the pension law adopted in the end of 2018. It increases the 
pension point (the main parameter used for pension indexation) by 15% in September 2019 
and by 40% in September 2020. The law also revises upwards the other pension parameters 
from 2021. As such, the Fiscal Council projects the headline deficit to increase to around 4% 
of  GDP  in  2020  and  above  5%  of  GDP  in  2021,  a  similar  trend  to  the  Commission’s 
projection  and  contrasting  with  the  objectives  of  the  Ministry  of  Finance  of  a  fiscal 
adjustment in those years. 

The authorities are working on changes to the new tax on bank assets.  In late December 
2018,  the  government  adopted  an  emergency  ordinance  (GEO  114/2018)  containing  several 
fiscal  measures, including  a tax on banks’ assets, substantial  changes  to  the second pension 
pillar  and  taxes  for  energy  and  telecommunications  companies.  The  new  bank  asset  tax 
(which  the  government  names  "tax  on  greed")  is  levied  on  total  assets  and  is  linked  to  the 
level  of  the  interbank  interest  rate  (ROBOR).  The  mission  communicated  concerns  that  the 
tax can strain financial stability, lower banking sector intermediation and indirectly affect the 
normal,  smooth  conduct  of  monetary  policy.  The  Minister  of  Finance  informed  the  mission 
that, following discussions with stakeholders, the bank asset tax will be amended before the 
end  of  March.  The  NBR  shared  the  Commission’s  concerns  about  the  bank  asset  tax  and 
confirmed that the tax might be subject to changes which would mitigate its negative effects.  

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The  government  might  modify  recent  measures  weakening  the  second  pension  pillar. 
Based on a systemic reform introduced in 2008, a portion of social security contributions is 
directed to funded individual accounts (a defined contribution scheme) in privately-managed 
pension funds (second pension pillar). The contributions to the second pillar, which according 
to the original reform 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.  Ordinance  114/2018  introduced 
further changes with wide ranging impact. It made the second pillar optional, with employees 
now having the possibility to opt out after contributing for five years to the second pillar and 
transfer  future  contributions  to  the  first  pillar.  Companies  in  the  construction  sector  can 
exempt  their  employees  from  the  second  pension  pillar  altogether.  The  Ordinance  also 
significantly  increased  the  minimum  capital  requirements  for  pension  funds’  management 
companies  to  well  above  those  in  other  Member  States  and  reduced  the  administration  fee 
levied  on  gross  contributions.  Those  changes  make  the  operating  environment  for  pension 
funds’  management  companies  highly  unpredictable  and  negatively  affect  their  financial 
results. All seven managing companies operating in Romania have at some point announced 
that they are considering exiting the market. During the mission, the Minister of Finance said 
that  government  is  discussing  with  the  stakeholders  and  that  the  new  fees  and  capital 
requirements  might  be  amended.  The  mission  stressed  the  importance  of  predictability  of 
policy-making.  

The  government  is  advancing  with  its  plan  to  establish  a  Sovereign  Fund  for 
Development and Investment (FSDI). On 8 March 2019, the government adopted a decision 
setting up the FSDI. The FSDI will hold a mix of cash and equity in some of Romania’s most 
profitable State-owned enterprises (SOEs), with the stated objective of generating income to 
help finance domestic investment. The mission repeated the Commission concerns regarding 
the FSDI. Those concerns include (i) the extent to which corporate governance rules will be 
applied to the FSDI itself and  the SOEs in its portfolio; (ii) lack of clear investment strategy 
and  (iii)  the  risks  for  the  state  budget.  The  mission  recalled  that,  if  the  FSDI  is  classified 
outside  of  the  General  Government  sector,  the  general  government  balance  would  decrease 
due  to  foregone  dividends  from  SOEs  transferred  to  the  FSDI  (amounting  to  around  0.4  - 
0.5% of GDP annually). The Minister clarified that the FSDI will not be created before mid-
2019 and thus the foregone dividends would not fully impact the 2019 deficit. 

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