Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Romania
Date: 2021-06-02
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, 2.6.2021  COM(2021) 530 final  Recommendation for a COUNCIL RECOMMENDATION with a view to bringing an end to the situation of an excessive government deficit in Romania {SWD(2021) 530 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) 

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According  to  Article  126  of  the  Treaty  on  the  Functioning  of  the  European  Union 
(Treaty) 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. 
Following a recommendation from the Commission of 4 March 20201 on the basis of 
an  excessive  deficit  planned  in  2019,  the  Council  decided  on  3  April  2020,  in 
accordance  with  Article  126(6)  of  the  Treaty  that  an  excessive  deficit  existed  in 
Romania2 and issued a recommendation to correct the excessive deficit by 2022 at the 
latest3,  in  accordance  with  Article  126(7)  of  the  Treaty  and  Article  3  of  Council 
Regulation (EC) No 1467/974.  

On  20  March  2020,  the  Commission  adopted  a  Communication  on  the  activation  of 
the general escape clause of the Stability and Growth Pact (SGP)5. That clause, as set 
out  in  Articles  5(1),  6(3),  9(1)  and  10(3)  of  Regulation  (EC)  1466/976  and  Articles 
3(5)  and  5(2)  of  Regulation  (EC)  1467/97,  facilitates  the  coordination  of  budgetary 
policies  in  times  of  severe  economic  downturn.  In  its  Communication,  the 
Commission set out its view that, given the severe economic downturn resulting from 
the COVID-19 outbreak, the conditions to activate the general escape clause were met. 
On  23  March  2020,  the  Ministers  of  Finance  of  the  Member  States  agreed  with  the 
assessment of the Commission.  

COM/2020/91 final. 
OJ L 110, 8.4.2020, p. 58. 
OJ C 116, 8.4.2020, p. 1. 
Council Regulation (EC) No 1467/97 of 7 July 1997 on speeding up and clarifying the implementation 
of the excessive deficit procedure (OJ L 209, 2.8.1997 p.6). 
COM/2020/123 final. 
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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(5) 

(6) 

(7) 

(8) 

(9) 

On 15 September 2020,  Romania submitted its  report on action taken in  response to 
the  Council  recommendation  of  3  April  2020.  That  report  pointed  to  a  major 
deterioration  of  the  public  finances  during  2020,  mainly  due  to  the  COVID-19 
pandemic. 

On  18  November  2020,  the  Commission  adopted  a  Communication  on  Romania’s 
fiscal  situation7.  In  light  of  the  continued  exceptional  uncertainty  created  by  the 
COVID  19  pandemic  and  its  extraordinary  macroeconomic  and  fiscal  impact,  the 
Commission  considered  that  no  decision  on  further  steps  in  the  excessive  deficit 
procedure  (EDP) initiated for Romania could be  taken at that juncture.  In particular, 
the  exceptional  uncertainty,  including  for  designing  a  credible  path  for  fiscal  policy, 
did  not  allow  the  Commission  to  put  forward  a  recommendation  for  a  Council 
recommendation  under  Article  126(7)  of  the  Treaty  at  that  stage.  The  Commission 
stated that it would reassess Romania’s budgetary  situation in  spring 2021, based on 
the 2020 outturn data, 2021 budget and the Commission 2021 spring forecast and that, 
if  appropriate,  it  would  propose  new  steps  under  the  EDP,  taking  into  account  the 
continued application of the general escape clause of the SGP in 2021. 

On 3 March 2021, the Commission adopted a Communication providing further policy 
orientations  to  facilitate  the  coordination  of  fiscal  policies  and  the  preparation  of 
Member  States’  Stability  and  Convergence  Programmes8.  The  Communication  of  3 
March 2021 announced  the Commission’s view that the decision on the deactivation 
or  continued  application  of  the  general  escape  clause  should  be  taken  as  an  overall 
assessment of the state of the economy, with the level of economic activity in the EU 
or euro area compared to pre-crisis levels (end-2019) as key quantitative criterion. On 
2  June  2021  the  Commission  adopted  a  Communication  on  Economic  policy 
coordination in 20219. According to that Communication, the general escape clause of 
the Stability and Growth Pact will continue to be applied in 2022 and is expected to be 
deactivated as of 2023.  

According  to  an  update  of  the  Commission’s  Debt  Sustainability  Monitor  2020  to 
reflect the latest Commission 2021 spring forecast, Romania’s medium and long-term 
fiscal sustainability risks remain high. Those risks need to be addressed by an adequate 
medium-term fiscal plan backed by structural measures. 

In  light  of  the  deep  contraction  in  economic  activity  linked  to  the  COVID-19 
pandemic  and  of  the  related  need  for  fiscal  policies  to  support  the  recovery  in  2021 
and  2022,  the  Council  recommendation  of  3  April  2020  does  no  longer  provide  a 
relevant basis for fiscal policy guidance for Romania.  

(10)  Pursuant  to  the  last  sentence  of  Article  3(5)  of  Regulation  (EC)  No  1467/97,  the 
Council may decide, on a recommendation from  the Commission, to adopt a revised 
recommendation under Article 126(7) of the Treaty in the event of a severe economic 
downturn  in  the  euro  area  or  in  the  Union  as  a  whole,  provided  that  this  does  not 
endanger fiscal sustainability in the medium term.  

(11) 

In accordance with Article 126(7) of the Treaty and Article 3 of Regulation (EC) No 
1467/97,  the  Council  is  required  to  make  a  recommendation  to  the  Member  State 
concerned  which  also  establishes  a  deadline  to  bring  the  situation  of  an  excessive 
deficit  to  an  end.  The  recommendation  is  to  establish  a  maximum  deadline  of  six 

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COM/2020/752 final. 
COM/2021/105 final. 
Communication from the Commission on Economic policy coordination in 2021: overcoming COVID-
19, supporting the recovery and modernising our economy, Brussels, 2.6.2021, COM(2021)500 final. 

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months for effective action to be taken by the Member State concerned to correct the 
excessive  deficit,  which  can  be  reduced  to  three  months  when  warranted  by  the 
seriousness of the situation. Furthermore, in a recommendation to correct an excessive 
deficit the Council is to 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. 

(12)  Real  GDP  in  Romania  contracted  by  3.9%  in  2020.  According  to  the  Commission 
2021  spring  forecast,  real  GDP  growth  is  forecast  to  rebound  to  5.1%  in  2021  and 
4.9% in 2022. Private consumption is expected to recover as the vaccination roll-out 
progresses and social distancing measures  are  gradually lifted, while wage growth is 
also  expected  to  remain  robust.  The  phasing  in  of  projects  under  the  Recovery  and 
Resilience  Plan  (RRP)  is  set  to  lend  new  impetus  to  investment  growth.  The 
contribution  of  net  exports,  that  is  export  minus  imports,  is  expected  to  remain 
negative over the forecast horizon. This is because imports are expected to be spurred 
by the recovery of private consumption as well as by growing investments. Exports are 
expected to  be supported by a recovery in  external  demand but  remain less dynamic 
than  imports.  The  growth  outlook  is  subject  to  balanced  risks.  On  the  one  hand,  a 
credible  medium-term  fiscal  strategy  can  help  dispel  concerns  about  fiscal 
sustainability,  in  particular  when  combined  with  ambitious  reforms  (including  those 
contained  in  the  RRP).  This  would  help  address  Romania’s  macroeconomic 
imbalances,  mitigate  financial  stability  risks  and  contribute  to  sustainable  growth, 
including  by  improving  the  investment  climate.  On  the  other  hand,  uncertainty  with 
regard to  public policy-making and delays or inefficiencies in  the implementation of 
the RRP could result in negative confidence effects.  

(13)  On  2  March  2021,  the  Romanian  Parliament  adopted  Romania’s  2021  budget  and 
medium-term  fiscal  strategy.  That  fiscal  strategy,  together  with  information  on  the 
profile  of  non-repayable  financial  support  and  loans  under  the  Recovery  and 
Resilience  Facility  (Facility),  has  been  taken  into  account  in  the  2021  Convergence 
Programme, which was submitted to the Commission on 5 May 2021. Starting with a 
general  government  deficit  of  9.2%  of  GDP  in  2020,  the  Convergence  Programme 
targets  a  general  government  deficit  of  below  3%  of  GDP  by  2024  in  the  following 
steps: 8.0% of GDP in 2021, 6.2% of GDP in 2022, 4.4% of GDP in 2023 and 2.9% of 
GDP in 2024. The fiscal adjustment set out in the Convergence Programme is mostly 
expenditure-based.  Expenditure  control  (reduction  as  a  percentage  of  GDP)  is 
envisaged  in  particular  for  public  sector  wages  (down  by  1.4  pps  between  2022  and 
2024) and social transfers (down by 0.9 pps between 2022 and 2024). 

(14)  The  Commission  2021  spring  forecast,  extended  up  to  2024,  projects  a  general 
government deficit of 8.0% of GDP in 2021, 7.1% of GDP in 2022 and 6.8% of GDP 
in  2023  and  2024.  That  forecast  takes  into  account  expenditures  expected  to  be 
financed by non-repayable financial support and loans from the Facility, as presented 
in the Romanian Convergence Programme and in additional information provided by 
Romania.  The  decrease  of  the  general  headline  government  deficit  projected  by  the 
Commission is mostly driven by the gradual expiry of emergency measures adopted in 
response  to  the  COVID-19  pandemic,  by  higher  revenues  driven  by  the  projected 
economic recovery, and by the additional positive impact of investments and reforms 
expected  to  be  financed  by  the  Facility.  Moreover,  the  Romanian  government  has 
decided to freeze public sector wages in 2021 and 2022, to postpone pension increases 

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in 2021 and to increase pensions moderately in 2022, which contribute to an improved 
outlook  as  compared  to  the  one  in  the  Commission  2020  autumn  forecast.  These 
changes have already been legislated. In addition, the government intends to adopt  a 
new  pension  legislation  that  would  keep  pension  expenditure  as  percentage  of  GDP 
broadly stable. The higher deficit projection in the Commission 2021 spring forecast, 
compared to Romania’s Convergence Programme, stems from the fact that the planned 
consolidation  is  not  fully  supported  by  enacted,  or  as  yet  credibly  announced, 
measures  and  could  therefore  not  be  taken  into  account  in  the  Commission  forecast. 
The structural deficit is projected by the Commission to improve by 0.7 pps of GDP in 
2021, by 0.5 pps of GDP in 2022 and to deteriorate by 0.1 pps of GDP in 2023 and 0.4 
pps of GDP in 2024. 

(15)  General government debt stood at 34.7% of GDP at end-2018, 35.3% of GDP at end-
2019  and  47.3%  of  GDP  at  end-2020.  According  to  the  Commission  2021  spring 
forecast,  it  is  projected  to  increase  to  49.7%  of  GDP  at  end-2021,  52.7%  of  GDP  at 
end-2022 and 59.5% of GDP at end-2024, thus approaching for the first time the 60% 
of GDP Treaty reference value in the absence of additional corrective measures than 
those already enacted or credibly announced.  

(16)  The  analysis  of  medium  to  long-term  debt  sustainability,  updated  after  the 
Commission 2021 spring forecast, confirms that risks to sustainability are high in the 
medium  term.  According  to  a  baseline  10-year  projection,  the  general  government 
debt-to-GDP  ratio  would  continue  increasing  over  the  projection  period  and  reach  a 
level  close  to  90%  of  GDP.  Risks  to  debt  sustainability  are  driven  by  large  fiscal 
deficits,  costs  of  ageing,  and  vulnerability  of  the  debt  path  to  macro-fiscal  shocks. 
Pension increases, legislated in summer 2019, and for the time being postponed until 
the end of 2022, are the predominant source of the debt sustainability risks. The debt 
structure, with a high share of foreign denominated debt and a significant share of debt 
held  by  non-residents,  further  adds  to  the  debt  sustainability  risks,  although 
interventions by the National Bank of Romania on the secondary market have helped 
keep  government  borrowing  costs  at  favourable  levels  in  2020.  Moreover,  there  are 
risks linked to contingent liabilities stemming from state guarantees (of 1.4% of GDP) 
granted to  firms and the self-employed during the COVID-19 crisis. Gross financing 
needs  are  projected  to  increase.  Conversely,  reforms  and  investments  under  Next 
Generation EU, if effectively implemented, are expected to have a positive impact on 
GDP growth in the coming years, thereby contributing to debt sustainability.  

(17)  Under  Article  3(4)  of  Regulation  (EC)  No  1467/97,  the  correction  of  the  excessive 
deficit  is  to  be  completed  in  the  year  following  its  identification  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.  

(18) 

In  the  present  situation,  such  special  circumstances  exist  in  Romania.  Granting 
Romania  one  additional  year,  which  would  be  in  line  with  the  rule  established  in 
Article  3(4)  of  Regulation  (EC)  No  1467/97,  would  require  a  very  sharp  fiscal 
adjustment  and  result  in  significant  output  losses,  thus  risking  compromising  the 
economic recovery after the COVID-19 pandemic. An adjustment path with a deadline 
for  correcting  the  excessive  deficit  by  2024,  while  still  requiring  substantial  annual 
adjustments,  would  imply  a  more  gradual  effort  and  strike  a  good  balance  between 
fiscal consolidation and supporting the economic recovery. The new adjustement path 
also takes into account the changed fiscal situation, including budgetary developments 
in  2020  and  the  new  budgetary  strategy  put  in  place  by  the  Romanian  government. 

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Reforms, including those that improve the management of public finances, would be 
instrumental in ensuring a durable correction of the excessive deficit. In light of these 
considerations,  and  consistent  with  the  fiscal  policy  orientations  set  out  in  the 
Commision  Communication  of  3  March  2021,  setting  a  deadline  to  correct  the 
excessive deficit by 2024 is justified.  

(19)  A credible and sustainable adjustment path under this deadline would require Romania 
to achieve a headline general government deficit target of 8.0% of GDP in 2021, 6.2% 
of GDP in  2022, 4.4% of GDP in  2023, and 2.9% of GDP in  2024, in  line with  the 
government’s own targets. This, based on the Commission forecast, is consistent with 
a nominal growth rate of net primary government expenditure of 3.4% in 2021, 1.3% 
in  2022,  0.9%  in  2023  and  0.0%  in  2024.10  Such  growth  rates  of  net  primary 
government expenditure will be the primary indicator used to assess the fiscal effort if 
a  careful  analysis  is  needed.  The  corresponding  annual  fiscal  adjustment  in  the 
structural  balance  is  0.7%  of  GDP  in  2021,  1.8%  of  GDP  in  2022,  1.7%  of  GDP  in 
2023 and 1.5% of GDP in 2024.  

(20)  To  assess  the  potential  impact  of  overall  fiscal  policy  on  output,  at  the  current 
juncture,  the  sizeable  payments  from  the  European  Union  budget  (under  the  Facility 
and other Union funds) should be included in the relevant expenditure aggregate, as a 
measure  of  fiscal  stance.11  On  this  basis,  Union  funds  are  expected  to  have  a 
significant  positive  impact  on  the  Romanian  economy  in  the  coming  years. 
Specifically, investments and reforms supported by the Facility provide an opportunity 
for Romania to improve its underlying fiscal position in the medium term while still 
supporting growth and job creation. 

(21)  Budgetary consolidation measures should secure a lasting correction on the excessive 
deficit,  while  being  geared  towards  enhancing  the  quality  of  the  public  finances  and 
reinforcing  the  growth  potential  of  the  economy.  Reforms  of  a  fiscal  and  broader 
economic nature, including reforms of the pension system, tax administration, public 
sector  wages  and  state-owned  enterprises  governance,  should  support  the  fiscal 
consolidation effort and make it sustainable. 

(22)  Since  2016,  Romania  has  systematically  and  repeatedly  derogated  from  its  national 
fiscal  rules  and  the  timeline  for  the  adoption  of  the  medium-term  fiscal  strategy, 
enshrined  in  the  national  fiscal  framework.  Going  forward,  Romania’s  budgetary 
adjustment  would  be  supported  by  the  full  application  of  the  national  fiscal 
framework. 

HAS ADOPTED THIS RECOMMENDATION: 

(1) 

Romania should put an end to the excessive deficit situation by 2024 at the latest. 

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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. 
The  overall  fiscal  stance  is  measured  by  comparing  the  change  in  primary  expenditure  (net  of 
discretionary revenue measures but including changes in expenditure financed by the Facility and other 
non-repayable financial support by the European Union) to the 10-year average potential growth rate. 
However,  this  estimate  does  not  include  the  impact  of  the  reforms  that  are  part  of  the  Recovery  and 
Resilience Plan and can boost Romania’s economic potential growth. A negative sign of the indicator 
corresponds  to  an  excess  of  the  primary  expenditure  growth  compared  with  medium-term  economic 
growth, which indicates an expansionary fiscal policy. 

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(2) 

(3) 

(4) 

Romania should reach a headline general government deficit target of 8.0% of GDP 
in  2021, 6.2% of GDP in 2022, 4.4% of GDP in 2023, and 2.9% of  GDP in  2024, 
which  is  consistent  with  a  nominal  growth  rate  of  net  primary  government 
expenditure of 3.4% in  2021, 1.3% in  2022,  0.9% in  2023 and 0.0% in  2024. This 
corresponds  to  an  annual  structural  adjustment  of  0.7%  of  GDP  in  2021,  1.8%  of 
GDP in 2022, 1.7% of GDP in 2023 and 1.5% of GDP in 2024. 

Romania  should  fully  implement  the  measures  already  adopted  for  2021.  It  should 
specify  and  implement  the  additional  measures  that  are  necessary  to  achieve  the 
correction of its excessive deficit by 2024. Budgetary consolidation measures should 
secure  a  sustainable  correction  in  a  growth-friendly  manner.  Any  windfall  gains 
should be used to reduce the general government deficit. 

The  Council  establishes  the  deadline  of  15  October  2021  for  Romania  to  take 
effective  action  and,  in  accordance  with  Article  3(4a)  of  Regulation  (EC)  No 
1467/97, to report the consolidation strategy that is envisaged to achieve the targets. 
Thereafter,  Romania  should  report  on  progress  made  in  the  implementation  of  this 
recommendation  at  least  every  six  months  until  the  excessive  deficit  has  been 
corrected. 

Furthermore, Romania should  ensure the full and effective  application of the national  fiscal 
framework. To ensure the success of the medium-term fiscal strategy, it will also be important 
to support the fiscal consolidation with comprehensive reforms. 

This Recommendation is addressed to Romania. 

Done at Brussels, 

For the Council 
The President 

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