Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Romania
Date: 2020-03-04
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Romania, budget deficit, economic policy, economic reform, gross domestic product, public debt, public finance, stability pact

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   EUROPEAN COMMISSION  Brussels, 4.3.2020  COM(2020) 91 final  Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Romania {SWD(2020) 53 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

with a view to bringing an end to the situation of an excessive government deficit in 
Romania 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 126(7) thereof, 

Having regard to the recommendation from the Commission; 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(TFEU) Member States are to avoid excessive government deficits. 

The Stability and Growth Pact (SGP) is based on the objective of sound government 
finances as a means of strengthening the conditions  for price stability and for strong 
sustainable growth conducive to employment creation. 

On [17 March] 2020, the Council decided, in accordance with Article 126(6) TFEU, 
that an excessive deficit existed in Romania.  

In accordance with Article 126(7) TFEU and Article 3(4) of Council Regulation (EC) 
No 1467/971, the Council is required to make recommendations to the Member State 
concerned with a view to bringing the situation of excessive deficit to an end within a 
given period. The recommendation has to establish a maximum deadline of six months 
for effective action to be taken by the Member State concerned to correct the excessive 
deficit. Furthermore, in a recommendation to correct an excessive deficit the Council 
should request the achievement of annual budgetary targets which, on the basis of the 
forecast  underpinning  the  recommendation,  are  consistent  with  a  minimum  annual 
improvement  in  the  structural  balance,  i.e.  the  cyclically-adjusted  balance  excluding 
one-off and other temporary measures, of at least 0.5% of GDP as a benchmark. 

According  to  the  Commission  2020  winter  forecast,  extended  with  fiscal  variables 
until 2022, real GDP growth is projected to have stood at 3.9% in 2019. Based on a 
no-policy-change  assumption,  real  GDP  growth  is  forecast  by  the  Commission  to 
moderate but remain robust at 3.8% in 2020 and at 3.5% in 2021 and 2022. On the one 
hand, the significant fiscal stimulus implied by current policies would continue giving 
some impetus to private consumption. On the other hand, a continued widening of the 
fiscal deficit would erode consumers’ and investors’ confidence in the sustainability of 
the  economy’s  growth  trajectory.  As  a  result,  investment  is  expected  to  weaken,  as 
private  investors  take  account  of  increasing  macroeconomic  imbalances.  The 
contribution of net exports is expected to remain negative over the forecast horizon, as 
exports continue to be affected by weak external demand while imports are supported 

1 

OJ L 209, 2.8.1997, p. 6. 

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(6) 

(7) 

(8) 

(9) 

(10) 

by  private  consumption.  This  in  turn  would  further  worsen  the  already  high  current 
account deficit.  

On 10 December 2019 the government adopted and sent to the Parliament its Fiscal-
Budgetary  Strategy  for  2020-22  (the  Fiscal  Strategy),  with  a  revised  general 
government  deficit  target  of  3.8%  of  GDP  in  2019,  above  the  3%  of  GDP  reference 
value. That revision, up from originally planned 2.8% of GDP in 2019, was based on 
budget execution data for the year to–date. The Fiscal Strategy was promulgated into 
law on 18 December 2019. 

The  Commission  2020  winter  forecast,  extended  with  fiscal  variables  until  2022, 
projects  the  general  government  deficit  to  remain  above  the  3%  of  GDP  reference 
value  for  the  entire  forecast  period.  The  Commission  projects  a  general  government 
deficit of 4.0% of GDP in 2019, 4.9% in 2020, 6.9% in 2021 and 7.7% in 2022 under a 
no policy change assumption. The structural deficit is projected to deteriorate by 1.0% 
of GDP in 2019, by further 1.9% of GDP in 2021 and by further 0.8% in 2022. The 
increase  in  the  deficit  projected  by  the  Commission  is  mostly  driven  by  significant 
pension  increases  enacted  in  summer  2019.  The  higher  spending  on  pensions  would 
contribute 0.9 pp. of GDP to the deficit increase in 2020, 1.7 pp. of GDP in 2021 and 
1.1 pp. of GDP in 2022. The doubling of the child allowance, due to enter into force 
from August 2020, is estimated to have an annualised budgetary cost of 0.6% of GDP. 
In its Fiscal Strategy, the government projects a general government deficit of 3.6% of 
GDP in 2020, 3.4% in 2021 and 2.8% in 2022. Based on government estimates, this 
would  lead  to  a  structural  adjustment  of  0.3%  in  2020,  0.2%  in  2021  and  0.6%  in 
2022. The adjustment in the Fiscal Strategy is mostly expenditure based. In particular, 
the  expenditures  on  compensation  of  employees,  on  goods  and  services  and  on  non-
EU-cofinanced  capital  spending  are  projected  to  decrease  as  a  share  of  GDP.  The 
lower deficit projection in the Fiscal Strategy, compared to the Commission’s forecast, 
stems  from  more  optimistic  underlying  macroeconomic  projections  in  the  Fiscal 
Strategy and from the fact that the Fiscal Strategy does not take into account the fiscal 
impact  of  some  enacted  measures  while  the  planned  moderation  of  current 
expenditures is not fully supported by enacted, or credibly announced, measures and 
could therefore not be taken fully into account in the Commission forecast. 

General government debt in Romania amounted to 34.7% of GDP in 2018. According 
to the Commission forecast, general government debt is projected to increase to 46.6% 
of GDP in 2022, thus remaining below the Treaty reference value.  

According  to  Article  3(4)  of  Regulation  (EC)  No  1467/97,  the  correction  of  the 
excessive  deficit  should  be  completed  in  the  year  following  its identification  (in this 
case by 2021), unless there are special circumstances. The adjustment path should be 
determined  in  line  with  Regulation  (EC)  No  1467/97,  taking  into  account  the 
economic and fiscal position of the Member State. 

In  the  present  situation,  such  special  circumstances  exist  in  Romania.  Correcting  the 
excessive deficit by 2021 would require a too sharp fiscal adjustment and result in a 
significant  output  loss.  A  longer  adjustment  path,  while  still  requiring  substantial 
annual  adjustments,  would  have  a  more  gradual  impact  on  growth  and  takes  into 
account  the  fact  that  the  budgetary  year  2020  has  already  started.  Structural  reforms 
pursued  in  parallel  with  fiscal  consolidation  will  contribute  to  ensure  a  durable 
correction  of  the  excessive  deficit.  In  light  of  this  and  taking  into  account  the 
economic and fiscal situation in Romania, setting the deadline for the correction of the 
excessive deficit by 2022 is warranted.  

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(11)  A credible and sustainable adjustment path under this deadline would require Romania 
to reach a headline general government deficit target of 3.6% of GDP in 2020, 3.4% of 
GDP in 2021 and 2.8% of GDP in 2022 which, based on the Commission forecast, is 
consistent  with  a  nominal  growth  rate  of  net  primary  government  expenditure2  of  
8.2%  in 2020, 5.5% in 2021 and 5.5%  in 2022. Such growth rate of net expenditure 
will  be  the  primary  indicator  used  to  assess  the  fiscal  effort  if  a  careful  analysis  is 
needed. The corresponding annual adjustment in the structural  balance is of 0.5%  of 
GDP in 2020, 0.8% of GDP in 2021 and 0.8% of GDP in 2022. Based on the current 
forecast,  those  targets  still  allow  for  annual  increases  in  real  net  expenditure. 
Achieving  the  targets  will  likely  require  reconsidering  the  large  legislated  pension 
increases and other recent measures which drive the sharp deterioration of the deficit 
in the baseline scenario. 

(12)  Budgetary  consolidation  measures  should  secure  a  lasting  correction,  while  being 
geared towards enhancing the quality of the public finances and reinforcing the growth 
potential of the economy.  

(13)  Since  2016,  Romania  has  systematically  and  repeatedly  derogated  from  fiscal  rules 
enshrined in the national fiscal framework, thereby rendering them largely ineffective. 
It is crucial that, in the future, Romania ensure the full application of the national fiscal 
framework. 

(14) 

In  the  medium  and  long  term,  risks  to  sound  public  finances  appear  high,  driven  by 
high fiscal deficits and costs of aging. The pension increases, enacted in summer 2019 
and scheduled to enter into force over 2019-2021, play a large part in those risks. This 
confirms  the  urgent  need  to  fully  restore  the  long-term  sustainability  of  public 
finances, 

HAS ADOPTED THIS RECOMMENDATION: 

(1) 

(2) 

(3) 

(4) 

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Romania should put an end to the present excessive deficit situation by 2022 at the 
latest. 

Romania should reach a headline general government deficit target of 3.6% of GDP 
in 2020, 3.4% of GDP in 2021 and 2.8% of GDP in 2022 which is consistent with a 
nominal growth rate of net primary government expenditure of 8.2% in 2020, 5.5% 
in 2021 and 5.5% in 2022, corresponding to an annual structural adjustment of 0.5% 
of GDP in 2020, 0.8% of GDP in 2021 and 0.8% of GDP in 2022. 

Romania should specify and rigorously implement the measures that are necessary to 
achieve  the  correction  of  its  excessive  deficit  by  2022.  Budgetary  consolidation 
measures  should  secure  a  lasting  correction  in  a  growth-friendly  manner.  Romania 
should use any windfall gains for deficit reduction. 

The  Council  establishes  the  deadline  of  15  September  2020  for  Romania  to  take 
effective  action  and,  in  accordance  with  Article  3(4a)  of  Regulation  (EC)  No 
1467/97, to report in detail the consolidation strategy that is envisaged to achieve the 
targets.  Thereafter  the  Romanian  authorities  should  report  on  progress  made  in  the 

Net  primary  government  expenditure  comprises  total  government  expenditure  excluding  interest 
expenditure,  expenditure  on  Union  programmes  fully  matched  by  Union  funds  revenue  and  non-
discretionary  changes  in  unemployment  benefit  expenditure.  Nationally  financed  gross  fixed  capital 
formation  is  smoothed  over  a  4-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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implementation  of  these  recommendations  at  least  every  six  months  until  the 
excessive deficit has been corrected. 

Furthermore, the Romanian authorities should ensure the full application of its national fiscal 
framework. To ensure the success of the fiscal consolidation strategy, it will be also important 
to back the fiscal consolidation by comprehensive structural reforms, in line with the Council 
recommendations  addressed  to  Romania  in  the  context  of  the  European  Semester  and  in 
particular those related to the Macroeconomic Imbalance Procedure. 

This Recommendation is addressed to Romania. 

Done at Brussels, 

For the Council 
The President 

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