Recommendation for a COUNCIL RECOMMENDATION with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective in Romania
Date: 2019-06-05
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Romania, budget deficit, budgetary assessment, budgetary control, economic policy, gross domestic product, medium-term forecast, multilateral surveillance, stability pact, stability programme

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   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 533 final  Recommendation for a COUNCIL RECOMMENDATION with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective   in Romania {SWD(2019) 533 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to correcting the significant observed deviation from the adjustment path 
toward the medium-term budgetary objective  

in Romania 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular the second sub-paragraph 10(2),  thereof, 

Having regard to the recommendation of the Commission, 

Whereas: 

(1) 

(2) 

(3) 

In  accordance  with  Article  121  of  the  Treaty  Member  States  are  to  promote  sound 
public finances over the medium term through the coordination of economic policies 
and multilateral surveillance in order to avoid the occurrence of excessive government 
deficits. 

The Stability and Growth Pact (SGP) is based on the objective of sound government 
finances as  a means  of strengthening the  conditions  for price stability and for strong 
sustainable growth conducive to employment creation. 
In June 20172 and June 20183 the Council found in accordance with Article 121(4) of 
the Treaty that in, respectively, 2016 and 2017, there had been a significant observed 
deviation  from  Romania’s  medium-term  budgetary  objective  or  from  the  adjustment 
path towards it. In view of those established significant deviations the Council issued 
Recommendations for Romania to take the necessary policy measures to address them. 
The  Council  subsequently  found  that  Romania  had  not  taken  effective  action  in 
response to those Recommendations. In its most recent Recommendation, adopted on 
4  December  20184  the  Council  recommended  that  Romania  take  the  necessary 
measures  to  ensure  that  the  nominal  growth  rate  of  net  primary  government 
expenditure5  does  not  exceed  4.5%  in  2019,  corresponding  to  an  annual  structural 
adjustment of 1.0% of GDP. 

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5 

OJ L 209, 2.8.1997, p. 1. 
OJ C 216, 6.7.2017, p. 1 
OJ C 223, 27.6.2018, p. 3. 
OJ C 460, 21.12.2018, p. 1. 
Net  primary  government  expenditure  is comprised of  total government expenditure  excluding interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-

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 (4) 

(5) 

(6) 

(7) 

(8) 

In  2018,  based  on  the  Commission  2019  spring  forecast  and  the  2018  outturn  data 
validated  by  Eurostat,  the  growth  of  net  primary  government  expenditure  was  well 
above the expenditure benchmark, pointing to a significant deviation by a large margin 
(deviation of 2.4% of GDP). The structural deficit was not reduced, remaining broadly 
stable at around 3.0% of potential GDP, also pointing to a significant deviation from 
the recommended structural adjustment (a deviation of 0.8% of GDP). The size of the 
deviation  indicated  by  the  structural  balance  is  negatively  impacted  by  a  revenue 
windfall,  by  a  higher  GDP  deflator  and  by  higher  underlying  estimate  of  potential 
GDP  growth  as  compared  to  the  medium-term  average  underlying  the  expenditure 
benchmark.  On  the  other  hand,  the  size  of  the  deviation  indicated  by  the  structural 
balance  is  positively  impacted  by  low  public  investment  expenditures,  which  are 
smoothed  out  in  the  expenditure  benchmark.  Irrespective  of  that  difference,  both 
indicators confirm a significant deviation from the requirements of the preventive arm 
of the SGP in 2018. 

On 5 June 2019,  following an overall assessment,  the Commission  considered that a 
significant  observed  deviation  from  the  adjustment  path  toward  the  medium-term 
budgetary objective exists in Romania and issued a warning to Romania in accordance 
with  Article  121(4)  of  the  Treaty  and  the  first  subparagraph  of  Article  10(2)    of 
Regulation (EC) No 1466/97. 

In  accordance with  the second subparagraph of  Article 10(2) of Regulation  (EC) No 
1466/97 the Council is to address a recommendation to the Member State concerned to 
take  the  necessary  policy  measures.  Regulation  (EC)  No  1466/97  provides  that  the 
recommendation will set a deadline of no more than five months for the Member State 
to address the deviation. On that basis a deadline of 15 October 2019 for Romania to 
address  the  deviation  appears  appropriate.  Within  that  deadline,  Romania  should 
report on action taken in response to this Recommendation.  

Based on the output gap projections of the Commission 2019 spring forecast, Romania 
will  remain  in  normal  economic  times  in  2019  and  2020.  Romania's  general 
government debt ratio is below the 60% of GDP threshold. Henceforth, the minimum 
required  structural  effort  prescribed  by  Regulation  (EC)  No  1466/97  and  the 
commonly  agreed  adjusment  matrix  under  the  SGP,  which  factors  in  the  prevailing 
economic circumstances and possible sustainability concerns, amounts to at least 0.5% 
of GDP for both 2019 and 2020.  

Romania's  structural  deficit  has  gradually  increased,  from  0.1%  of  GDP  in  2015  to 
1.7% of GDP in 2016, 2.9% of GDP in 2017 and 3.0% of GDP in 2018. An additional 
and  persistent  effort  necessary  to  correct  for  the  cumulated  deviation  and  to  bring 
Romania  back  on  an  appropriate  adustment  path  following  the  persistent  slippages 
accumulated since 2016 should complement the minimum adjustment requirement. An 
additional  effort  of  0.5%  of  GDP  in  2019  and  0.25%  of  GDP  in  2020  seems 
appropriate  given  the  magnitude  of  the  observed  significant  deviation  from  the 
recommended adjustment path towards the medium-term budgetary objective. Such an 
effort would be in line with the adjustment recommended for 2019 by the Council on 4 

discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  four-year  period.  Discretionary  revenue  measures  or  revenue  increases 
mandated by law are factored in. One-off measures on both the revenue and expenditure sides are netted 
out. 

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December  2018.  It  will  accelerate  the  adjustment  back  towards  the  medium-term 
budgetary objective.  

(9) 

The  required  improvement  of  the  structural  balance  by  1.0%  of  GDP  in  2019  and 
0.75%  of  GDP  in  2020  is  consistent  with  the  nominal  growth  rate  of  net  primary 
government expenditure not exceeding 4.5% in 2019 and 5.1% in 2020. 

(10)  The Commission 2019 spring forecast projects a further deterioration of the structural 
balance by 0.7% of GDP in 2019 and by a further 1.2% of GDP in 2020. Therefore, 
the  required  structural  improvement  translates  into  the  need  to  adopt  measures  of  a 
total  structural  yield  of 1.7% of GDP in  2019 and additonal  measures  of a structural 
yield of 1.95% of GDP in 2020 compared to the current baseline in the Commission 
2019 spring forecast. 

(11)  The Commission 2019 spring forecast projects  a general  government deficit of 3.5% 
of  GDP  in  2019  and  4.7%  of  GDP  in  2020,  which  is  above  the  3%  of  GDP  Treaty 
reference  value.  The  required  structural  adjustment  seems  also  appropriate  to  ensure 
that Romania respects the 3% of GDP Treaty reference value in 2019 and 2020 with a 
margin. 

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

(13) 

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

(14)  Romania  should  report  to  the  Council  on  action  taken  in  response  to  this 

Recommendation by 15 October 2019. 

(15) 

It is appropriate that this Recommendation be made public, 

HEREBY RECOMMENDS THAT ROMANIA: 

(1) 

(2) 

(3) 

take  the  necessary  measures  to  ensure  that  the  nominal  growth  rate  of  net  primary 
government  expenditure  does  not  exceed  4.5%  in  2019  and  5.1%  in  2020, 
corresponding to an annual structural adjustment of 1.0% of GDP in 2019 and 0.75% 
in 2020, thereby putting the Member State on an appropriate adjustment path toward 
the medium-term budgetary objective;  

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

report  to  the  Council  by  15  October  2019  on  action  taken  in  response  to  this 
Recommendation;  the  report  should  provide  sufficiently  specified  and  credibly 
announced  measures  with  a  view  to  complying  with  the  required  adjustment  path, 
including  budgetary  impact  of  each  of  them,  as  well  as  updated  and  detailed 
budgetary projections for 2019-2020. 

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This recommendation is addressed to Romania. 

Done at Brussels, 

For the Council 
The President 

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