REPORT FROM THE COMMISSION Romania Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-02-14
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Romania, budget deficit, budget policy, budgetary control, budgetary expenditure, gross domestic product, macroeconomics, public debt, stability pact, structural adjustment

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 14.2.2020  COM(2020) 68 final  REPORT FROM THE COMMISSION Romania  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Romania 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

Article 126 of the Treaty on the Functioning of the European Union (the Treaty) lays down 
the excessive deficit procedure (EDP). That procedure is further set out in Regulation (EC) 
No  1467/97  on  speeding  up  and  clarifying  the  implementation  of  the  excessive  deficit 
procedure1, which is part of the Stability and Growth Pact (SGP).  

According to Article 126(2) of the Treaty, the Commission has to monitor compliance with 
budgetary discipline on the basis of two criteria, namely: (a) whether the ratio of the planned 
or actual government deficit to gross domestic product (GDP) exceeds the reference value of 
3%,  unless  either  the  ratio  has  declined  substantially  and  continuously  and  reached  a  level 
that comes close to the reference value, or, alternatively, the excess over the reference value 
is  only  exceptional  and  temporary  and  the  ratio  remains  close  to  the  reference  value;  and 
(b) whether the ratio of government debt to GDP exceeds the reference value of 60%, unless 
it is sufficiently diminishing and approaching the reference value at a satisfactory pace. 

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report shall 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”. 

Romania  has  been  under  consecutive  Significant  Deviation  Procedures  (SDP)  under  the 
preventive arm of the SGP since spring 2017. As a consequence of the significant deviation 
by Romania from its medium-term budgetary objective (MTO) in 2016, the Council launched 
an  SDP  in  spring  2017.  Since  then,  the  Council  has  issued  bi-annual  recommendations  to 
which  Romania  has  not  responded  with  effective  action,  repeatedly  significantly  deviating 
from the recommended adjustment path. 

Data notified by the Romanian authorities on 30 September 20192 and subsequently validated 
by Eurostat3 show that the general government headline deficit in Romania reached 3.0% of 
GDP in 2018, while debt stood at 35.0% of GDP. For 2019, the notification planned a general 

1  OJ L 209, 2.8.1997, p. 6. The report also takes into account the “Specifications on the implementation of the 
Stability  and  Growth  Pact  and  guidelines  on  the  format  and  content  of  stability  and  convergence 
programmes”, adopted by the Economic and Financial Committee on 5 July 2016, available at:  
http://ec.europa.eu/economy_finance/economic_governance/sgp/legal_texts/index_en.htm . 

2  According to Regulation (EC) No 479/2009, Member States have to report to the Commission, twice a year, 
their planned and actual government deficit and debt levels. The most recent notification of Romania can be 
found  at:  https://ec.europa.eu/eurostat/web/government-finance-statistics/excessive-deficit-procedure/edp-
notification-tables 

3  Eurostat  news 

release  No  161/2019,  https://ec.europa.eu/eurostat/documents/2995521/10064349/2-

21102019-AP-EN.pdf/61ae39d7-6764-2a16-ede5-e6da00249c27 

1 

 
 
 
                                                           
government  headline deficit  of 2.8% of GDP.  Taking into account  the revised GDP figures 
announced by the national  statistical  office  after  the publication of Eurostat’s press  release, 
the  headline  ratios  slightly  changed,  with  the  deficit  standing  at  2.9%  of  GDP  and  debt  at 
34.7% of GDP in 2018. 

On  10  December  2019  the  government  adopted  and  sent  to  the  Parliament  its  Fiscal-
Budgetary Strategy for 2020-22 (the Fiscal Strategy), with an accrual deficit target of 3.8% of 
GDP in 2019.  

The planned figure for the 2019 deficit provides prima facie evidence of the existence of an 
excessive deficit in Romania as set by the Treaty before, however, considering all factors as 
set out below.  

Table 1. General government deficit and debt (% of GDP)  

The Commission has therefore prepared the current report. Its purpose is to comprehensively 
assess  the  planned  departure  from  the  deficit  criterion,  with  due  regard  to  the  economic 
background  and  all  other  relevant  factors,  in  order  to  examine  whether  the  launch  of  an 
excessive  deficit  procedure  is  warranted.  Section  2  of  the  report  examines  the  deficit 
criterion. Section 3 examines the debt criterion. Section 4 deals  with public investment and 
other  relevant  factors,  including  the  medium-term  economic  and  budgetary  position  of 
Romania.  The  analysis  in  this  report  is  based  on  the  Commission  2020  winter  interim 
forecast, which only includes GDP and inflation figures and has thus been complemented for 
the purpose of this report with projections for fiscal variables. 

2. 

DEFICIT CRITERION 

Romania  registered  a  general  government  deficit  of  2.9%  of  GDP  in  2018.  Based  on  the 
Fiscal Strategy, Romania’s general government deficit is planned to have increased to 3.8% 
of  GDP  in  2019.  This  is  well  above  and  not  close  to  the  Treaty  reference  value  of  3%  of 
GDP.  

The excess over the Treaty reference value in 2019 is also not exceptional for the purposes of 
the  Treaty  and  the  SGP,  as  it  neither  results  from  an  unusual  event  nor  from  a  severe 
economic  downturn.  The  Commission  2020  winter  forecast  projects  real  GDP  growth  of 
3.9% in 2019 and 3.8% in 2020 while the output gap is projected to be around zero. One-off 
items amounted to 0.1% of GDP in 2019, and were due to a refund of the environment stamp 
duty on cars. 

Finally, the excess over the 3%-of-GDP reference value is not temporary for the purposes of 
the  Treaty  and  the  SGP.  Indeed,  the  budgetary  forecasts  by  the  Commission,  and  by  the 
government in the Fiscal Strategy, project the deficit to remain above the reference value in 
2020 and 2021. The Commission 2020 winter forecast, extended for fiscal variables, projects 
a general government deficit of 4.0% of GDP in 2019, 4.9% in 2020 and 6.9% in 2021. The 
projected increase in the deficit is mostly driven by significant pension increases enacted in 

2 

COMFSCOMFSCOMFSGeneral government balance-0.6-2.6-2.6-2.9-4.0-3.8-4.9-3.6-6.9-3.4General government gross debt37.837.335.134.735.736.437.837.141.937.82021Sources: Commission 2020 winter forecast, extended with fiscal variables (COM) and Fiscal Strategy 2020-22 (FS) 201520162017201820192020 
 
 
summer  2019,  in  particular  an  increase  in  pensions  of  40%  scheduled  for  September  2020 
and  a  further  upward  recalculation  of  pensions  scheduled  for  September  2021.  Moreover, 
between December 2019 and January 2020 the authorities adopted new tax cuts (reductions 
of  excise  duties  on  fuel  and  of  social  security  contributions  on  part-time  workers  and  a 
removal  of  special  taxes  on  banking  and  energy  sectors)  and  doubled  the  child  allowance 
(due to enter into force from August 2020). In the Fiscal Strategy, the government projects a 
general  government  deficit  of  3.6%  of  GDP  in  2020  and  3.4%  in  2021.  The  lower  deficit 
projection in the Fiscal Strategy, compared to the Commission’s forecast, stems, in particular, 
from:  (1)  more  optimistic  underlying  macroeconomic  projections;  (2)  a  moderation  of 
projected spending on goods and services, which is not fully supported by enacted measures; 
(3) the fact that the Fiscal Strategy seems not to take into account the full budgetary impact of 
the enacted  pension increases, in  particular in  2021 and beyond;  (4) the fact  that the  Fiscal 
Strategy does not take into account the impact of the tax cuts and of the doubling of the child 
allowance. 

In  sum,  the  planned  deficit  for  2019  is  above  and  not  close  to  the  3%-of-GDP  Treaty 
reference  value.  The  excess  is  considered  to  be  neither  exceptional  nor  temporary  for  the 
purposes  of the Treaty and the SGP.  The analysis thus  suggests that  prima facie  the deficit 
criterion  for  the  purpose  of  the  Treaty  and  Regulation  (EC)  No  1467/97  is  not  fulfilled. 
However, due consideration is given to all relevant factors set out below. 

3. 

DEBT CRITERION 

Romania’s  general  government  debt  amounted  to  34.7%  of  GDP  in  2018.  Both  the  Fiscal 
Strategy  and  the  Commission  2020  winter  forecast  project  general  government  debt  to 
increase until 2021 but to remain below the Treaty reference value. According  to  the  Fiscal 
Strategy,  the  debt  is  projected  to increase to 37.8% in 2021. The Commission 2020 winter 
forecast projects a sharper increase, to 41.9% in 2021. The difference between the two sets of 
projections  stems  mainly  from  lower  planned  general  government  deficits  in  the  Fiscal 
Strategy. 

Romania  thus  complies  with  the  debt  criterion  as  defined  in  the  Treaty  and  in  Regulation 
(EC) No 1467/97.  

4. 

RELEVANT FACTORS 

Article  126(3)  of  the  Treaty  provides  that  the  Commission  report  “shall  also  take  into 
account whether the government deficit exceeds government investment expenditure and take 
into account all other relevant factors, including the medium-term economic and budgetary 
position  of  the  Member  State”.  Those  factors  are  further  clarified  in  Article  2(3)  of 
Regulation  (EC)  No  1467/97,  which  also  provides  that  “any  other  factors  which,  in  the 
opinion  of  the  Member  State  concerned,  are  relevant  in  order  to  comprehensively  assess 
compliance with the deficit and debt criteria and which the Member State has put forward to 
the Council and to the Commission” need to be given due consideration.  

According to Article 2(4) of Regulation (EC) No 1467/97, whenever the government debt-to 
GDP ratio does not exceed the reference value, relevant factors will be taken into account in 
the  steps  leading  to  the  decision  on  the  existence  of  an  excessive  deficit  provided  for  in 
paragraphs 4, 5 and 6 of Article 126 of the Treaty.  

3 

 
 
In view of those provisions, the following subsections consider in turn (1) the medium-term 
economic  position;  (2)  the  medium-term  budgetary  position,  including  an  assessment  of 
compliance  with  the  adjustment  path  towards  the  MTO,  the  development  of  public 
investment  and  the  functioning  of  the  national  fiscal  framework;  (3)  developments  in  the 
medium-term government debt position, its dynamics and sustainability; and (4) other factors 
put forward by the Member State. 

4.1.  Medium-term economic position 

Real GDP has been growing robustly in recent years, driven by consumption. Potential GDP 
growth  is  high  but  projected  to  gradually  decline,  due  to  decelerating  total  factor 
productivity  growth  and  negative  demographic  trends.  Romania  has  made  limited  progress 
with respect to structural reforms. 

Cyclical conditions and potential growth  

Real  GDP  has  been  growing  robustly  in  recent  years,  driven  by  consumption.  Real  GDP 
growth  reached  a  peak  of  7.1%  in  2017  and  moderated  thereafter  to  4.4  %  in  2018  and  is 
projected  in  the  Commission  2020  winter  forecast  to  stand  at  3.9%  in  2019.  Private 
consumption remained the main  growth  driver, the result of  a tight  labour market  and high 
wage  increases,  particularly  in  the  public  sector.  Investment  is  expected  to  have  made  a 
significant  contribution  to  growth  in  2019,  supported  mainly  by  construction.  The 
contribution  of  net  exports  to  GDP  growth  has  been  negative  since  2014  in  a  context  of 
gradual  cost  competitiveness  losses.  It  became  even  more  negative  in  2019  as  growth  in 
exports slowed down more than that of imports. More sluggish external demand was the main 
driver behind the weaker export growth and also led to a decline in industrial production. As 
a result, the current account deficit has steadily increased, reaching a projected 5.1% of GDP 
in 2019. 

Real  GDP growth  is  forecast  by the Commission  to  moderate but  remain robust at  3.8% in 
2020 and 3.5% in 2021. The significant fiscal stimulus planned in 2020 and 2021 is expected 
to  give  a  new  boost  to  private  consumption  while  also  stimulating  imports.  Investment  is 
expected to remain strong in 2020, supported by construction and planned greater use of EU 
investment  funds.  The  contribution  of  net  exports  is  expected  to  remain  negative  over  the 
forecast horizon, contributing to the worsening of the already high current account deficit. 

According to the Commission’s estimates, based on the 2020 winter forecast, potential GDP 
growth  is  projected  to  gradually  decline,  from  4.7%  in  2018  to  3.9%  in  2021.  Total  factor 
productivity  is  set  to  decelerate,  but  remain  the  main  contributor  to  potential  GDP  growth. 
The contribution of capital accumulation is projected to remain relatively stable. On the other 
hand, the (already modest) contribution of labour is forecast to turn negative, mainly due to 
the trend decrease in the working age population.  

The output gap is projected to have decreased to 0.1% of potential GDP in 2019, from 0.6% 
in 2018. It is projected by the Commission to turn slightly negative afterwards, to  -0.1% in 
2020 and -0.5% in 2021. 

4 

 
 
 
Table 2: Macroeconomic and budgetary developments (% of GDP)  

Structural reforms  

the  Commission  concluded 

that  Romania  was  experiencing  
In  February  2019, 
macroeconomic  imbalances4.  The  Commission  found  that  vulnerabilities  are  linked  to  cost 
competitiveness losses and a widening current account deficit in a context of an expansionary 
fiscal  policy  and  an  unpredictable  business  environment.  In  July  2019,  the  Council  issued 
country–specific recommendations5 calling for measures to address these imbalances, among 
other structural issues. 

In particular, the Council recommended that Romania ensure the full application of the fiscal 
framework,  strengthen  tax  compliance  and  collection,  safeguard  financial  stability  and  the 
robustness of the banking sector, ensure the sustainability of the public pension system and 
the  long-term  viability  of  the  second  pillar  pension  funds,  ensure  minimum  wage  setting 
based on objective criteria, ensure that legislative initiatives do not undermine legal certainty 
and strengthen the corporate governance of state-owned enterprises. 

The  authorites  continued  to  derogate  from  the  rules  contained  in  the  national  fiscal 
framework, thereby rendering them largely ineffective. 

Compliance ratios for filing tax declarations have remained relatively stable. The VAT gap is 
estimated to have fallen in 2017 and 2018. However, it is still among the highest in the EU. 

4 See Commission Communication COM (2019) 150 final, 27.02.2019 "  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".  

5 Council Recommendation of 9 July 2019 on the 2019 National Reform Programme of Romania and delivering 
a Council opinion on the 2019 Convergence Programme of Romania, OJ C 301, 5.9.2019, p. 135–142. 

5 

 2018COMCOMFSCOMFSCOMFSReal GDP (% change)4.43.94.03.84.13.54.2GDP deflator (% change)6.36.96.04.64.24.43.5Potential GDP (% change) 4.74.54.74.04.33.94.3Output gap (% of potential GDP)0.60.1-0.4-0.1-0.6-0.5-0.6General government gross debt34.735.736.437.837.141.937.8General government balance-2.9-4.0-3.8-4.9-3.6-6.9-3.4Primary balance-1.8-2.8--3.7--5.6-One-off and other temporary measures-0.3-0.1-0.0-0.0-Government gross fixed capital formation2.73.2-3.1-3.5-Cyclically-adjusted balance-3.1-4.0--4.9--6.8-Cyclically-adjusted primary balance-2.0-2.8--3.6--5.4-Structural balanceb-2.8-3.9-3.7-4.9-3.4-6.8-3.2Structural primary balance-1.6-2.7--3.6--5.4-Notes:b Cyclically-adjusted balance excluding one-off and other temporary measures.Sources: Commission 2020 winter forecast, extended with fiscal variables (COM), Fiscal Strategy 2020-2022 and the autumn projection of the National Commission for Strategy and Prognosis (FS)202120202019a In percent of GDP unless specified otherwise. 
 
 
 
                                                           
Tax authorities did not meet their revenue collection targets for 2019, partially because of an 
over-optimistic prognosis of those targets.  

Sustainability of the public pension system has worsened with the new pension law, adopted 
in  summer  2019  which  significantly  increases  public  spending  on  pensions  in  a  very  short 
period. On the other hand, at the beginning of 2020 Romania repealed or amended part of the 
legal provisions that threatened the long-term viability of the second pillar pension funds. 

At the beginning of 2020, Romania also removed the bank tax on total assets, adressing the 
concerns regarding financial stability and the robustness of the banking sector.  

According  to  the  authorities,  the  increase  in  the  minimum  wage  as  of  1  January  2020  was 
based on a formula taking several economic indicators into account. However, an objective 
mechanism is not in place. 

Regarding the predictability of decision-making, the number of emergency ordinances is still 
very high, while ex-ante regulatory impact assessment continues to be lacking and the quality 
of  public  consultations  is  deteriorating.  The  State-owned  enterprises  corporate  governance 
law is still only loosely applied.  

4.2.  Medium-term budgetary position  

Since 2016, Romania has been pursuing an expansionary fiscal policy based on tax cuts and 
increases  in  current  spending.  The  structural  deficit  is  estimated  by  the  Commission  2020 
winter forecast (extended with fiscal variables) to have increased from 0.2% of GDP in 2015 
to  3.9%  in  2019.  Since  spring  2017,  the  Council  has  issued  bi-annual  recommendations 
under  the  SDP,  to  which  Romania  has  not  responded  with  effective  action,  repeatedly 
significantly  deviating  from  the  recommended  adjustment  path.  The  authorities  have 
systematically  derogated  from  national  fiscal  rules,  thereby  rendering  them  largely 
ineffective. 

Structural balance and adjustment towards the MTO  

MTO and structural balance 

In its 2019 Convergence Programme, Romania confirmed its MTO for the budgetary position 
as a structural  balance of  -1.0% of GDP.  This  MTO takes into account  the requirements  of 
the  Treaty  on  the  Stability,  Coordination  and  Governance  in  the  Economic  and  Monetary 
Union.  

Since 2016, Romania has been pursuing an expansionary fiscal policy, based on tax cuts and 
increases in current spending. As a consequence, Romania departed from its MTO in 2016. 
The structural balance amounted to -2.8% of GDP in 2018, well below Romania’s MTO. In 
the  Fiscal  Strategy,  Romania  targets  a  deterioration  of  the  structural  balance  in  2019  and  a 
gradual structural improvement in 2020-2022 but does not plan to achieve its MTO by 2022. 
According  to  the  Commission  2020  winter  forecast,  extended  with  fiscal  variables,  the 
structural  deficit  is  expected  to  steadily  and  significantly  increase  between  2018  and  2021, 
driven by the projected increase of the headline deficit. 

Compliance with the recommended adjustment towards the MTO 

Romania  has  been  under  consecutive  SDPs  since  spring  2017.  As  a  consequence  of  the 
significant  deviation  by  Romania  from  its  MTO  in  2016,  the  Council  launched  an  SDP  in 
spring  2017.  Since  then,  the  Council  has  issued  bi-annual  recommendations  to  which 

6 

 
 
Romania has not responded with effective action, repeatedly significantly deviating from the 
recommended  adjustment  path.  The  latest  Recommendation,  adopted  by  the  Council  on  5 
December 2019, asks Romania to ensure that the nominal growth rate of primary government 
expenditure,  net  of  discretionary  revenue  measures  and  one-offs,  does  not  exceed  4.4%  in 
2020, corresponding to an annual structural adjustment of 1.0% of GDP.  

Calculations based on the Commission 2020 winter forecast, extended with fiscal variables, 
point to a risk of significant deviation from both benchmarks in 2020. 

Table 3: Summary of SDP Recommendations to Romania 

Council  
Recommendation 

Recommended 
structural improvement 
(% of GDP) 

Structural effort at the 
time of assessment (% 
of GDP) 

Council 
conclusion 

Autumn 2019 

1.0 in 2020 

Spring 2019 

1.0 in 2019, 0.75 in 2020 

-0.8 in 2019, -0.8 in 2020  No action taken 

Autumn 2018 

1.0 in 2019 

-0.7 in 2019 

No action taken 

Spring 2018 

0.8 in 2018, 0.8 in 2019 

0.0 in 2018, -0.1 in 2019 

No action taken 

Autumn 2017 

0.8 in 2018 

-0.4 in 2018 

No action taken 

Spring 2017 

0.5 in 2017 

-1.1 in 2017 

No action taken 

Public investment  

Public investment hit a post-EU accession low of 2.6% of GDP in 2017, and increased only 
slightly, to 2.7% of GDP, in 2018. This is below the EU average and much below the average 
for  neighbouring  countries.  The  Commission  2020  winter  forecast,  extended  with  fiscal 
variables for the purposes of this report, projects public investment to have increased to 3.2% 
of GDP in 2019.  

National fiscal framework 

The  Fiscal  Responsibility  Law  sets  national  numerical  fiscal  rules  in  order  to  guide  the 
budgetary  process.  It  contains  a  structural  deficit  rule,  which  requires  compliance  with  or 
convergence to the MTO of a structural balance of  -1.0% of GDP. The national framework 
also contains several auxiliary rules concerning budget balance and 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.  

Since  2016,  the  government  has  systematically  and  repeatedly  derogated  from  many  fiscal 
rules, thereby rendering them largely ineffective. In particular, the original 2019 budget target 
of  a  headline  deficit  of  2.8%  of  GDP  (in  cash  terms)  was  inconsistent  with  the  structural 
deficit  rule.  Budget  amendments  adopted  in  August  and  November  2019  additionally 
derogated from a number of auxiliary fiscal rules, and, in the latter case, from the structural 
deficit rule, by increasing the 2019 deficit target to 4.4% of GDP (in cash terms). Moreover, 
in 2019, as in previous years, the authorities did not send an update of the medium-term fiscal 

7 

 
 
 
 
 
strategy  to  Parliament  by  the  statutory  August  deadline,  thereby  undermining  the  fiscal 
strategy’s guiding role. The 2020 budget and the accompanying fiscal strategy also derogated 
from the structural balance rule and from several auxiliary fiscal rules.  

4.3.  Medium-term government debt position  

Romania  faces high  fiscal  sustainability risks  in  the medium and long  term, driven by high 
fiscal deficits and costs of aging. 

Debt dynamics and debt sustainability6 

Romania’s  general  government  debt  is  currently  well  below  the  60%  of  GDP  Treaty 
reference value (34.7% of GDP in 2018). However, due to a high structural primary deficit, 
the  debt-to-GDP  ratio  is  set  on  a  steep  upward  path.  Assuming  no-policy  change,  it  is 
projected  to  breach  60%  in  2025  and  go  beyond  90%  of  GDP  by  2030.  The  debt  path  is 
sensitive to growth, fiscal and interest rate shocks. The maturity structure of government debt 
helps to mitigate vulnerabilities, with only about 3.3% of overall government debt having a 
maturity below 1 year. However, the high share of government debt denominated in foreign 
currency and the substantial holdings of debt by non-residents are sources of additional risk, 
as is the negative net international investment position.  

The value of the early-detection indicator of fiscal stress (ʻS0ʼ), developed by the European 
Commission to assess risks within one year, is below its critical threshold.  

The medium-term sustainability gap indicator (‘S1’) shows high risks. It shows that Romania 
would require a fiscal adjustment of 5.7 pps of GDP to contain the debt within 60% of GDP 
by 2034. That value is among the highest among Member States.  

The long-term  fiscal  sustainability  gap indicator  (ʻS2ʼ) also  shows high  risks.  It  points to  a 
required  fiscal  adjustment  of  8.8  pps  of  GDP  to  ensure  that  the  public  debt  ratio  stabilises 
over the long term. That value, the highest among Member States, is driven by the high initial 
budgetary position (a contribution of 5.1 percentage points) and by aging costs, in particular 
pensions and health care (a contribution of 3.7 percentage points). 

Financial  markets’  perceptions  of  sovereign  risk  of  Romania  are  at  the  lower  limit  of  the 
investment  grade,  with  a  ‘BBB-’  or  equivalent  rating  of  the  sovereign  debt  from  the  three 
major rating agencies. On 10 December 2019, S&P Global Ratings revised its outlook from 
stable to negative, due to Romania's budgetary stance. 

New pension law 

The  pension  law,  enacted  in  summer  2019,  significantly  changed  several  parameters  of  the 
public  pension  scheme.  It  contains  the  following  main  changes:  (i)  ad  hoc  increases  of 
pensions until 2021, instead of standard indexation:  by 15% from  September 2019 (already 
included in the 2019 budget law), 40% from September 2020 and 6% from September 2021; 
(ii) from 2022 onwards, the indexation of the pensions will be 100% of the inflation rate plus 
50% of the real average gross wage growth; (iii) new pensions will be calculated using at the 
denominator a fixed contributory period of 25 years, instead of 25-35 years (depending on the 

6  This  section  is  based  on  European  Commission,  Debt  Sustainability  Monitor  2019,  available  at: 

https://ec.europa.eu/info/sites/info/files/economy-finance/ip120_en.pdf 

8 

 
 
 
                                                           
year of retirement) under the previous law; (iv) from September 2021, existing pensions will 
be recalculated upwards to match this new formula.  

Due to its implementation schedule, the law is set to significantly increase public spending on 
pensions in a short period. It is the main driver of the projected rapid increase of the general 
government  deficit  and  of  high  fiscal  sustainability  risks.  Moreover,  the  law  is  not 
accompanied by measures aimed at increasing labour participation and duration of working 
lives beyond the statutory  minimum,  which  are key to improve both  pension  adequacy and 
the sustainability of the pension system. 

Graph 1: Gross public pension expenditure in 2018-2022 

Source: European Commission, Country Fiche on public 
pensions for the Ageing Report 2018 – Romania (2019 
update) 

4.4. 

Other factors put forward by the Member State  

On 6 February 2020, the Romanian authorities sent a letter presenting relevant factors for the 
Commission to consider in its assessment, in accordance with Article 2(3) of Regulation (EC) 
No 1467/97.  

The authories argue that the deterioration of the budget deficit in 2019 is largely explained by 
the  increase  in  personnel  spending,  social  assistance  and  investment,  whereas  revenue 
remained mostly unchanged as a share of GDP. In addition, the authories argue that on the 
expenditure side, the 2019 budget outcome was adversely affected by several one-off items7.  

The authorities point out that the  Fiscal  Strategy  shows a  gradual  adjustment of the budget 
deficit  over  the  medium  term  while  remaining  above  the  reference  value  until  2021.  The 
adjustment is planned after three years of continued budget deterioration. The authorities also 
explain that the pace of the envisaged fiscal consolidation is largely constrained by the legal 
framework  in  place,  in  particular  the  provisions  of  the  new  pension  law  approved  by  the 
Parliament in 2019. 

7  In  the  assessment  of  the  Commission,  one-off  expenditures  in  accrual  terms  amounted  to  0.1%  of  GDP  in 

2019, due to a refund of the environment stamp duty on cars. 

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7.47.37.37.37.27.57.88.910.312.120182019202020212022% GDPRO: previous lawRO: new pension law 
 
    
                                                           
Regarding macroeconomic conditions, the authorities explain that Romania's economy grew 
at  a  real  rate  of  4.1%  in  the  first  three  quarters  of  2019,  mainly  driven  by  investment  and 
private  consumption,  amidst  a  slowdown  in  the  latter.  The  authorities  forecast  real  GDP  to 
grow  by  4.0%  in  2019,  slightly  decelerating  compared  to  2018  and  marginally  below  the 
potential level. Nominal growth accelerated starting 2016 and is expected by the authorities 
to remain robust over the medium term. 

Finally, the authorities recall that Romania introduced a pension reform with the mandatory 
second pillar of private pension funds alongside the pay-as-you-go first pillar in 2008. They 
explain that the annual cost of the second pillar was on average close to 0.7% of GDP in the 
period  2014-15,  and  it  is  expected  at  0.8%  of  GDP  over  2016-2019.  This  is  in  line  with 
Commission  estimates  of  the  annual  costs  of  the  second  pillar.  However,  the  planned  2019 
budget deficit in Romania significantly exceeds a level that can be considered close to the 3% 
of GDP reference value and so, pursuant to Article 2(7) of Regulation (EC) No 1467/97, the 
budgetary implications of the pension reform cannot be taken into account in the assessment 
of the breach of the deficit criterion. 

The authorities add that, at the beginning of 2020, they removed a provision that weakened 
the mandatory nature of the second pension pillar which was in force in 2019. Namely, they 
removed the possibility for employees to opt-out of the second pension pillar after five years 
of  contributing  to  it,  and  to  redirect  their  annual  pension  contributions  to  the  first  pillar 
(emergency ordinance 1/2020, amending the provisions of emergency ordinance 114/2018). 

 5. 

CONCLUSIONS  

According to the Fiscal Strategy of the government, the headline general government deficit 
in 2019 is planned to have increased to 3.8% of GDP, above and not close to the 3% of GDP 
Treaty  reference  value.  The  planned  excess  over  the  reference  value  is  considered  to  be 
neither exceptional nor temporary.  

The general government gross debt remains well below the 60% of GDP reference value.  

The  analysis  presented  in  this  report  includes  the  assessment  of  all  relevant  factors,  which 
according to the Treaty and the SGP are to be taken into account in the steps leading to the 
decision  on  the  existence  an  excessive  deficit  whenever  the  government  debt-to  GDP  ratio 
does not exceed the reference value. The relevant factors in the current case do not provide 
mitigating elements and thus do not change the assessment. 

Overall,  the  analysis  suggests  that  the  deficit  criterion  as  defined  in  the  Treaty  and  in 
Regulation (EC) No 1467/1997 should be considered as not complied with, and that an EDP 
is thus warranted. 

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