Source: EURLEX
Language: en
Format: md

*|*

# 52013SC0373

**COMMISSION STAFF WORKING DOCUMENT Assessment of the 2013 national reform programme and convergence programme for ROMANIA Accompanying the document Recommendation for a COUNCIL RECOMMENDATION on Romania’s 2013 national reform programme and delivering a Council Opinion on Romania’s 2013 convergence programme for 2012-2016 /\* SWD/2013/0373 final \*/**

  

Contents

Executive Summary...................................................................................................................... 2

1.    Introduction........................................................................................................................... 4

2.    Economic
situation and outlook.............................................................................................. 5

3.    Programme
implementation.................................................................................................... 6

4.    Further
challenges and assessment of policy agenda.............................................................. 10

4.1.     Fiscal
policy and taxation............................................................................................. 10

4.2.     Labour
market, social policies and education................................................................ 14

4.3.     Structural
measures promoting growth and competitiveness........................................... 21

4.4.     Modernisation
of public administration.......................................................................... 28

5.    Overview
Table (CSR, targets)............................................................................................ 30

Executive
Summary

Economic Outlook

The
Romanian economy expanded by 0.7 % in 2012 and the Commission forecasts a
modest recovery for 2013, with growth picking up to around 1.6 %, driven
primarily by domestic demand and investment. Headline
consumer price inflation, at 3.4 % in 2012, is projected to remain high,
at around 4.3 % in 2013 on average. On the external side, the current
account improved significantly from a deficit of 4.5% of GDP in 2011 to 4% of
GDP in 2012, and is expected to remain below 4 % in 2013 and 2014.

The
labour market recovered somewhat in 2012 but challenges remain, in particular
regarding high youth unemployment. Unemployment
fell from 7.4 % in 2011 to 7 % in 2012 but youth unemployment,
currently at around 23%, is expected to remain high.

As
regards fiscal policies, Romania met the programme target for 2012 to reduce
its headline government deficit to below 3% of GDP. Romania's 2013 budget targets a headline deficit
of 2.4% of GDP, although the Commission's spring forecast indicates a deficit
of 2.6 % for 2013 and 2.4 % for 2014. To reach its target, Romania intends to improve its structural balance by 1.0 % of GDP in 2013, which is
appropriate. Romania’s medium-term objective is a structural deficit of
1 % of GDP, planned to be reached in 2014 which, when recalculated by Commission based on the commonly agreed
methodology, corresponds to reaching the MTO by 2015. Romania’s public debt is relatively low (37.8 % of GDP in 2012) and while it is
expected to rise to 38.6 % in 2014, it is still well below the 60% of GDP
limit.

Key Issues

Romania
is currently completing the implementation of the second economic adjustment
programme with the EU and the IMF. The programme
should be formally completed after a final review in the summer 2013.

·
As regards fiscal policies, Romania has fulfilled its programme commitment to reduce its general government deficit to
below 3 % of GDP in 2012. Fiscal governance reforms are being pursued, notably
through closer monitoring of state-owned enterprises that are part of the
general government sector and the prioritisation of public investment projects.

·
Important progress has also been made in the areas of structural reforms such as taxation, the banking
sector, and energy and transport.

·
However, the reform of key state-owned
enterprises has been insufficient. Arrears incurred
by the key state-owned enterprises under review remained somewhat above the
target in 2012. Progress in terms of introducing professional management and
selling minority and majority stakes in SOEs has been inadequate.

·
A number of corrective measures were agreed in
January and are to be implemented before the final review in summer 2013.
Progress needs to be made on reducing local government arrears, enacting a law
on the winding-up of insurance undertakings and continuing the reforms in the
gas, electricity, rail and healthcare.

·
Moreover, the overall absorption rate of EU
funds remains very low (at 20.2 % of the total
available structural, cohesion and agricultural funding by end 2012), leading
to a significant risk that an important part of structural and cohesion funds
will be no longer be available to Romania in 2013.

In
addition to short-term challenges identified under the programme, Romania faces a number of further, medium-term challenges in the bid to secure smart, sustainable
and inclusive growth. At 46 % of the EU
average, Romania’s GDP per
capita is one of the most telling indicators of the country’s developmental gap.
Particular challenges include the need to increase labour market participation,
improve overall competitiveness and reform the public administration. EU funds
can provide an important source of public investment to support Romania in addressing these challenges.

·
Labour market/education/social: Increasing the number of people in the labour market is the main
challenge. Although unemployment is relatively low (7.0 % in 2012), the overall
employment rate is only 63.8 %, which is amongst the lowest in the EU.
Meanwhile, youth unemployment is high (reaching 22.8 %
in 2012) and disadvantaged people, in particular Roma,
face great difficulties, with unemployment for Roma people more than six times
the average national rate (48.6 %). Poverty reduction continues to be a
major challenge; Romanians are the second highest most likely to be at risk of
poverty or social exclusion in the EU, and almost one in three Romanians is
severely materially deprived. Romania faces a major challenge in raising the
quality of education and training, with more than two out of five 15-year-olds
with inadequate reading, mathematical and scientific literacy.

·
Competitiveness: Romania has low general economic competitiveness. The major challenges are the
underdeveloped transport and ICT infrastructure, a weak business environment
and low support for research and development. Romania’s underdeveloped basic transport and broadband infrastructure
continue to present an obstacle to growth. The research
and development intensity is extremely low while the research and innovation
system is highly fragmented and there are few linkages
between education, research and businesses. Rapidly changing governance
arrangements and a heavy regulatory environment and the red tape impact
negatively on the business climate. Increasing energy
efficiency (Romania is the third most energy-intensive economy) will be crucial
for industrial competitiveness.

·
Public administration: Poor administrative capacity is a core concern for Romania. The public administration is characterised by an inconsistent legal framework,
frequent recourse to emergency ordinances, low levels of inter-ministerial
cooperation and excessive bureaucracy. It is also undermined by a lack of
skills, a lack of transparency in staff recruitment and high management
turnover rates. The poor
administrative capacity contributes to a low absorption of EU funds. Romania has scope to improve tax collection by implementing a comprehensive tax compliance
strategy.  Preventing and combating corrupt practices, particularly in the area
of public procurement, is a challenge, while Romania has the second worst rating
in the EU when it comes to the perceived independence of the justice system.

1. Introduction

Romania is currently completing the
implementation of the second economic adjustment programme with the EU and the
IMF. Following a request by Romania on 17 February 2011, the European Commission and the IMF negotiated a precautionary
economic adjustment programme with the Romanian
authorities. A two-year programme was agreed by the European Council on 12 May
2011 and by the IMF board on 25 March 2011. Its financial package envisaged up
to EUR 4.9 billion, comprising EUR 1.4 billion from the EU and around SDR[1] 3.1 billion
from the IMF. Both the EU and the IMF programmes have been treated as
precautionary and no disbursements have taken place. The programme seeks to facilitate a continued orderly adjustment of the fiscal and the
external deficits by strengthening the credibility of the government’s economic
policy, including the ongoing fiscal adjustment, the consolidation of financial
market reform, greater focus on product and labour market reforms and increased
absorption of EU funds. The
attainment of these objectives was expected to enhance Romania’s growth potential, underpin monetary and financial
stability, strengthen confidence in Romania’s currency, and reduce the likelihood of negative balance
sheet effects on companies and households. Since the
programme could not be completed on time because of delays in reforms, the
authorities requested and obtained a three-month extension of the IMF
programme. While the possibility to draw on funds under the EU programme
expired at the end of March 2013, the programme will not be completed until the
final programme review that is scheduled to take place in summer[2]. The economic adjustment programme implementation is monitored by
the Commission and the IMF on a quarterly basis by verifying compliance with
the terms set out in the Memorandum of Understanding (MoU) and the Memorandum
of Economic and Financial Policies (MEFP). Given the conditionality attached to
the programme under the MoU and the regular reporting and monitoring
requirements, programme countries have been exempted from the obligation to
submit national reform programmes (NRP) and stability or convergence programmes.[3]

This
Staff Working Document (SWD) under the 2013 European Semester provides a
synthesis of recent progress in implementing the programme and an assessment of
further challenges. Additional details on the implementation
of the programme can be found in the Commission's quarterly reviews of programme
implementation[4]. The SWD assesses policy measures in light
of the findings of the Commission's 2013 Annual Growth Survey (2013 AGS)[5], published in
November 2012, and Romania’s Europe 2020 targets. The 2013 AGS sets out the
Commission's proposals for building the necessary common understanding about
the priorities for action at national and EU level in 2013. It identifies five
priorities to guide Member States to renewed growth: pursuing differentiated,
growth-friendly fiscal consolidation; restoring normal lending to the economy;
promoting growth and competitiveness for today and tomorrow; tackling
unemployment and the social consequences of the crisis; and modernising public
administration. Against this background, and although Romania was formally exempted from the obligation, Romania presented an updated NRP and a convergence
programme in April 2013. These programmes provide detailed information on
progress made since early 2012 and on the government’s future plans. The
information contained in these programmes provides the basis for the assessment
made in this Staff Working Document. The national reform programme confirms
Romania’s commitment to addressing shortcomings in the areas of public
administration, the business environment, economic competitiveness and local
development, the labour market and education, social inclusion and poverty
reduction, research and development and climate change and energy. The convergence
programme demonstrates Romania’s commitment to improving its budgetary position
towards the medium-term objective and ensuring the long-run sustainability of
public finances in line with the Stability and Growth Pact. The programme
submitted had gone through a limited consultation process: both programmes were
approved by government via a memorandum.

2. Economic situation and outlook

The
Romanian economy expanded by 0.7 % in 2012 and a modest recovery is forecast
for 2013. Growth in 2012 was dragged down by a
severe summer drought that affected agricultural output and by a weak external
environment. In 2013, GDP growth is expected to pick up to around 1.6 %
with domestic demand, in particular investment, being the main driver. Whilst
exports are expected to grow somewhat, imports are expected to grow faster on
the back of economic recovery. Headline consumer price inflation, at 3.4 %
in 2012, is projected to remain high, at around 4.3 % in 2013 on average.
On the external side, the current account improved significantly from a deficit
of 4.5% of GDP in 2011 to 4 % of GDP in 2012; it is expected to remain
below 4 % in 2013 and 2014.

As regards fiscal policies, Romania met the programme’s 2012 fiscal
target of reducing its general government
deficit to below 3 % of GDP in ESA[6]
terms. For 2013, fiscal
adjustment is expected to continue. The budget adopted in February 2013 targets
a headline deficit of 2.4 % of GDP which would allow for a further
structural budgetary adjustment of at least 0.5 % of GDP.

Financial
market conditions have significantly improved since summer 2012, moving broadly
in line with the regional peers. The 5-year
sovereign spreads dropped to below 200 basis points in early January 2013. Results
in the banking sector have continued to suffer from the increase in impaired
assets and the related provisioning. Despite the on-going pressures on asset
quality, capital adequacy at system level remained at a re-assuring 14.7 %
at the end of December 2012.

The
labour market recovered somewhat in 2012 but
challenges remain, in particular regarding high youth unemployment. In 2012, employment grew by 1.9 %
in comparison to 2011, while unemployment was brought
down from 7.4 % of the labour force (age group 15-74) in 2011 to 7 %
in 2012. However, youth unemployment, currently at around 23 %, is
expected to be somewhat reduced but is to remain high in 2013. In 2013, as in the
previous year, public sector wage increases are expected to outstrip private
sector wage growth due to the last part of the
restoration of public wages following the earlier 25 % wage cut in 2010.

The
macroeconomic assumptions on which the national reform programme (submitted on 30
April 2013) and the convergence programme (submitted on 30 April 2013[7])
are based are plausible. Both programmes reflect
the objectives and actions required under the economic reform programme agreed under
the EU/IMF financial assistance. Both programmes reflect the same macroeconomic
scenario. The macroeconomic scenario set out in the convergence programme and in
the national reform programme is close to Commission forecast.

3. Programme implementation

As
regards fiscal policies, Romania has fulfilled its programme commitment to
reduce its general government deficit to below 3% of GDP in ESA terms in 2012. Arrears continue to be an important issue, especially at local
government level. Romania has missed the end-December IMF arrears' targets at
both the central and local government levels. Although specific measures were
taken in the autumn of 2012 to reduce local government arrears, the reduction at
the end of December 2012 was significantly less than expected. In January 2013,
the authorities agreed to additional measures to bring local government arrears
under control, including through accelerating the parliamentary approval of the
insolvency law for local governments, containing commitments on local
government investment projects co-financed by central government within the
budgetary allocations and stricter measures for monitoring and enforcing the
local government public finance law. The compliance with these additional
commitments has yet to be verified. For 2013, Romania should be able to cover
its gross financing needs (related to the budget shortfall, the rollover of
government debt, and the government part of the repayment to the IMF) from the
markets.

The
budget for 2013 targets a deficit of 2.1% of GDP in cash terms corresponding to
an ESA deficit of 2.4 % of GDP. It allows for
a 4% increase in pensions, an allocation to implement the EU Late Payments
Directive in the health sector, and a clear prioritisation of public
investments. Revenue measures include reductions in tax-deductible items,
improving the taxation of agriculture and making the turnover tax of 3 %
on small enterprises mandatory. The property tax and excise rates will also be
increased in an effort to keep up with inflation and a windfall tax will be
introduced following the deregulation of gas prices. Moreover, the minimum wage
was raised from RON 700 to RON 750 on 1 February 2013 and is expected to be
further increased to RON 800 on 1 July 2013.

Fiscal
governance reforms are being pursued through closer monitoring of state-owned
companies (SOEs) that are part of the general government sector and the
prioritisation of public investment projects. The
latter has become a top priority for the authorities who pledged to ensure
funding for projects that have at least an 80 % completion rate.
Furthermore a decision was taken to reorient a number of projects from being fully
financed through the national budget to being co-financed with EU funds and at
the same time to cancel a number of further projects previously fully financed
through the national budget. Further delays have been encountered in
integrating the accounting reporting system with the Treasury payment system in
the Ministry of Public Finance because of yet another appeal against the
tendering process.

Further
progress was made in the banking sector. These
relate to bank resolution, the implementation of European Systemic Risk Board
recommendations on foreign-exchange lending to unhedged SMEs, permanent
arrangements for prudential filters on solvency, reserves and loan-loss
provisions and the fiscal treatment of bank receivables sold to asset recovery
companies incorporated in Romania. The outstanding commitment for the final
review in summer 2013 is the enactment of the amended law on the winding-up of
insurance undertakings, for which the authorities did not meet the end-October
2012 programme deadline.

While
the regulatory reform commitments in the energy sector have been largely
honoured, a number of outstanding commitments need to be implemented before the
end of June 2013. A considerable part of the third
energy package was transposed by legislation passed in 2012, but certain
provisions still remain to be transposed. The first phases of electricity price
deregulation have been implemented in accordance with the electricity roadmap
that envisages complete deregulation of electricity prices for corporate customers
by the end of 2013 and for households by the end of 2017. The gas roadmap (with
gas prices converging to market prices by end-2014/2015 for corporates and by the
end of 2018 for households) has so far been implemented but uncertainties
regarding its future implementation remain. The authorities launched a new gas
trading platform in December 2012 in testing mode. The outstanding commitments
to be honoured before the final programme review mainly refer to: (i) allowing a better integration of Romania into the EU gas
market[8] by lifting the implicit gas export
restrictions and enabling reverse flows on the gas interconnectors on the
Hungarian and Bulgarian borders; (ii) ensuring
proper protection for energy consumers linked to energy price increases; and (iii) starting the certified unbundling of transmission
networks in electricity and gas by issuing preliminary certification of the
transport operators by the national energy regulator.

Government regulatory reform commitments in the area of transport
have also been largely honoured. Policy steps to
improve the regulatory framework under which the railway companies operate have
been taken. The rail regulator gained in independence
through the removal of ministry representatives from the regulator's board in
October 2012. The regulatory framework was revised to allow the rail
infrastructure company to determine access charges independently, while a study
on competitive tendering of the public service obligation contract for the
passenger rail was completed. With regard to the efficiency measures for the
rail sector, in line with programme commitments, the passenger company took the
intercity and international trains out of the public service obligation which allowed
for free price-setting on these lines and reformed the public service
obligation subsidy by introducing a 20 % passenger-km factor into a
previously purely line-km subsidy. Among the outstanding measures to be
honoured before the final review are: (i) leasing out the last part of
underperforming rail lines; (ii) introducing performance schemes related
to delays between the infrastructure company and the passenger/freight
companies; and (iii) signing performance-based contracts with the rail
infrastructure company to reinforce accountability on meeting investment and
maintenance targets.

Regarding reforms in key state-owned enterprises (SOEs), progress
has been insufficient. This was one of the main
reasons to postpone the completion of the programme review. The operational
performance of the key SOEs under review worsened somewhat in 2012 in
comparison to 2011 (losses of around 0.6 % of GDP by the end of 2012) but
remained within the IMF’s indicative programme ceiling. The arrears incurred by
these companies declined over the course of 2012 and came down to 2% of GDP by the
end of 2012 but still remained above the 1.5 % ceiling that was the
indicative programme target for the end of 2012. While there was some progress
on privatising and restructuring the SOEs, overall progress in terms of introducing
professional management and selling minority and majority stakes in state-owned
enterprises was clearly inadequate and fell behind programme commitments. A
number of commitments regarding corrective measures were agreed in January and
are to be implemented before the final review in summer 2013.

Healthcare
reforms have been initiated but progress so far has been slow. Rather than introducing a comprehensive framework law, the
government intends to implement the healthcare reforms via an action plan. This
action plan aims to strengthen ambulatory and preventive care, re-evaluate
hospital financing to lower the risk of building up arrears, revise the National
Health Programmes, define the basic benefits package and improve the regulatory
framework for healthcare services. To further increase the efficiency of
healthcare spending, the government plans to prepare a medium-term financing
strategy by September 2013. The government has established a monthly financial
reporting tool for hospitals in order to monitor their budgets in a timely way.
The introduction of the legal possibility to replace hospital managers, if a hospital
has run arrears for three consecutive months, has been introduced in the
framework contract between the National Health Insurance House and the
hospitals. However, it needs further legislative approval, and did not meet the
deadline of end-March 2013. Legislation on introducing a small co-payment for
elective hospital inpatient services was approved in mid-March 2013, but the
extent of implementation has yet to be evaluated. In line with the MoU
conditionality, the Ministry of Health provides information on both local and
central government-level hospital budgets to the Ministry of Public Finance,
which checks for over-spending on the part of individual hospitals.

The overall absorption
rate of EU funds remains very low, leading to a significant risk that an
important part of structural and cohesion funds will be de-committed in 2013[9].  The end-2012 absorption target was missed by a wide margin.
Cumulative absorption as at the end of December 2012 stood at EUR 5.53 billion,
some 20.2 % of the total available structural, cohesion and agricultural
funds. It was thus EUR 2.47 billion short of the programme's end-2012 target of
EUR 8 billion. The absorption of EU structural and cohesion funds stalled for
most of the second half of 2012, due to systemic deficiencies revealed in the
management and control system. Certain operational programmes (parts of the
transport and regional operational programmes, and all of the competitiveness,
environment and human resource operational programmes) were pre-suspended. The
proposed financial corrections have been accepted by the Romanian authorities. For
parts of the regional and environmental programmes payments resumed in December
2012 and in March 2013, respectively, and in February 2013 for the human
resources programme. For other programmes (competitiveness and transport)
payments are expected to resume only in the first half of 2013, once the
necessary checks by national and EU auditors have taken place and yielded
satisfactory results. The rural development programme made good progress in
2012 with the cumulated expenditure by the end of 2012 amounting to around EUR
3.9 billion, some 48.6% of the total fund allocation for 2007-2013. However,
this is substantially below the EU-27 average which is 62.7%. Financial uptake
has accelerated in early 2013 with EUR 408 million in expenditure declared for
the first quarter of 2013.

As
regards reforms of administrative capacity, the authorities continued to make some
progress in implementing the action plans based on the recommendations from the
functional reviews carried out in 2011. Most of the
contracts with the World Bank for implementing key medium- and long-term
actions have been signed. Moreover, through the General Secretariat of the
Government and in coordination with the Ministry of Public Finance, a
monitoring and evaluation system for public policies is being developed with
the support of the World Bank. Based on the outcomes of the functional reviews,
the authorities committed to develop personnel norms for each ministry and to
apply the 1-for-7[10]
rule more flexibly while keeping the wage bill close to 7 % of GDP. The
authorities have also committed to reviewing the Unified Public Wage Law in
order to identify key bottlenecks and challenges in its implementation.

There
has been good progress in putting in place a fully functional Point of Single
Contact required under the Services Directive but further steps to complete the
reform are needed. Not all administrative
procedures are available online and the involvement of certain authorities
(especially at local level) is not yet ensured. The usability of the portal
needs to be greatly improved if it is to be useful for service providers.
Moreover, Romania still needs to implement proper solutions for the
e-identification of users from other Member States. Furthermore, the Romanian
authorities could be more ambitious in setting up the Point of Single Contact
by offering e-government services beyond the scope of the Services Directive
and integrating various procedures that affect companies at different stages of
their business cycle.

4.
Further
challenges and assessment of policy agenda

In
addition to short-term challenges identified under the programme, Romania faces a number of further, medium-term challenges identified in the AGS 2013 and
through the Europe 2020 targets. At 46 % of
the EU average, Romania’s GDP
per capita is one of the most telling indicators of the country’s developmental gap. There are specific
challenges with regard to labour market participation (low
employment rate), education (high early school leaving rate, skill mismatches),
poverty and social exclusion (high number of people at risk of poverty or
exclusion) and low general economic competitiveness, as
reflected in a weak research
and innovation system, underdeveloped
infrastructure endowment, deficiencies in the business
environment as well as low energy efficiency and poor waste management. There
are further challenges in the area of the justice
system (low level of independence and poor efficiency), and in the government’s
generally weak administrative capacity and in the wide regional disparities. These
challenges are reflected in the country-specific recommendations. EU funds can help addressing these challenges, thereby fully
supporting the policy priorities set out in the Europe 2020 agenda. They
provide an important source of public investment to support Romania in tackling these challenges.

4.1.        Fiscal policy and taxation

Budgetary developments and debt dynamics

After having brought down the general government deficit to under 3 %
in 2012, in line with the Council recommendation, the main goal of the 2013 convergence
programme is to continue fiscal consolidation with a view to achieving the
medium term objective (MTO) during the programme period. The programme  tables a medium-term
objective of -1 % of GDP. The MTO was lowered from -0.7 % of GDP
following a regular horizontal re-assessment of the sustainability of public
finances in line with Regulation
1466/97. The updated
medium-term objective reflects the objectives of the Stability and Growth Pact.
The main goal of the budgetary strategy outlined in the programme is to reach
the MTO by 2014 which, when recalculated by Commission
based on the commonly agreed methodology, corresponds to reaching the MTO by
2015.

The macroeconomic scenario underpinning the budgetary projections in the
programme is plausible and in line with the assessment in the latest Commission
forecast. The programme provides
for a reduction in the general government deficit to 2.4 % of GDP in 2013,
from 2.9 % of GDP in 2012, which corresponds to a (recalculated)[11]
structural deficit of 1.7 % of GDP. Revenue-enhancing measures include reductions in
tax-deductible items, improvements in the taxation of agriculture, the
introduction of a windfall levy following the deregulation of gas prices and
the introduction of a special tax on the transmission of electricity and gas. The
2013 budget also allows for an increase in the minimum wage, a 4 %
increase in pensions, and an allocation to implement the EU Late Payments
Directive[12]
in the health sector. The Commission’s spring forecast indicates a general
government deficit of 2.6 % of GDP in 2013, as it assumes fewer gains from
the prioritisation of investment projects and a reduced impact from the package
of revenue measures.

In 2014, the general government deficit is set to decrease further to 2 %
of GDP, according to the programme, which corresponds to a (recalculated)
structural deficit of 1.3 % of GDP[13]. Based on the programme, the adjustment of the
headline deficit in 2014 will be mainly drawn from higher revenues as a
proportion of GDP, while expenditure to GDP will be broadly stable. The
programme mentions the main elements of fiscal consolidation in a medium-term
framework, without quantifying them. According to the programme, on the revenue
side, the authorities intend to enlarge the tax base, increase tax collection,
simplify the taxation system and reduce tax evasion. On the expenditure side,
the authorities intend to ensure a sustainable level of wage and pension
related-expenditure and to implement the law related to the restitution of
properties seized during the communist regime. Based on the customary
no-policy-change assumption, the Commission services forecast a higher headline
deficit for 2014, of 2.4 % of GDP, which reflects increases in the
revenue-to-GDP ratio in line with the expected acceleration in economic
activity and a higher expenditure-to-GDP ratio. The main risks associated with the
budget plans for 2013-2014 relate to: (i) further possible financial
corrections linked to the absorption of EU funds or to the financing of
priority projects from the national budget; (ii) a renewed accumulation of
arrears in the second part of 2013 and possibly continuing in 2014, especially
at local government level; and (iii) limited progress with restructuring
state-owned enterprises which could result in renewed pressure on the budget.

Based on the 2012 budget outcome of 2.9 % of GDP and given that the
Commission services forecast deficits below 3 % in 2013-2014, Romania appears to have corrected the excessive deficit (see box 1 for detals about the excessive deficit
procedure). For the coming years, in accordance with the preventive arm
of the Stability and Growth Pact, Romania should make appropriate progress
towards achieving the MTO. In structural terms, the programme's fiscal
adjustment is front-loaded in 2013 with a (recalculated) structural adjustment
of 1.0 % of GDP, higher than the 0.5 % benchmark. The adjustment in
2013 is therefore appropriate. Moreover, targeting a higher adjustment than the
benchmark at the beginning of the year is a prudent approach, given the
uncertainty of estimations. For 2014, the (recalculated) structural adjustment
of 0.4 % can also be considered appropriate.

Box 1. Excessive deficit
procedure for Romania

On 7 July 2009, the Council decided that an excessive deficit existed in Romania and addressed a recommendation to Romania with a view to bringing the excessive deficit
situation to an end by 2011 at the latest.

The most recent Council Recommendation under Art. 126(7) TFEU was adopted
on 12 February 2010. The Council, acknowledging that the Romanian authorities
had taken effective action in compliance with the Council Recommendation of 7
July 2009 and that unexpected adverse economic events with major unfavourable
consequences for government finances had occurred in Romania, addressed a
revised recommendation to Romania with a view to bringing the excessive deficit
situation to an end by 2012 at the latest. Specifically, in order to bring the
general government deficit below 3% of GDP in a credible and sustainable
manner, the Romanian authorities were recommended to (a) implement the fiscal
measures in 2010 as planned in the budget law and continue consolidation in
2011 and 2012; (b) ensure an average annual fiscal effort of 1¾% of GDP over
the period 2010-2012; and (c) specify the measures that are necessary to
correct the excessive deficit by 2012, cyclical conditions permitting, and
accelerate the reduction of the deficit if economic or budgetary conditions
turned out better than expected at the time the EDP recommendations were
issued.

An overview of the current state of excessive deficit procedures,
including additional steps adopted after the finalisation of this Staff Working
Document, is available on: http://ec.europa.eu/economy\_finance/economic\_governance/sgp/deficit/index\_en.htm
(please refer to country sections at the bottom of the page).

The expenditure benchmark is expected to be met. According to the information provided in
the convergence programme, the growth of government expenditure, net of
discretionary revenue measures, over 2013-2014, is expected to contribute to
the necessary annual structural adjustment towards the medium-term objective. This
is because the growth rate of this expenditure is below 1.43 % in 2013 and
1.09 % in 2014, the lower rates under the expenditure benchmark. Following
an overall assessment of the Member State's budgetary plans, with the
structural balance as a reference, including an analysis of expenditure net of
discretionary revenue measures, the adjustment path towards the medium-term
objective seems to be appropriate.

Long-term
sustainability

Romania does
not seem to be at risk of fiscal stress in the short term or in medium term
perspectives but is at medium risk in the long term. Romania’s public debt
remains relatively low, at 37.8 % of GDP in 2012. While it is expected to
rise to 38.6 % in 2014, it will remain well below the 60% of GDP reference
rate over the programme period. Since the debt-to-GDP ratio is below the
reference rate, the debt reduction benchmark is not applicable. Medium-term debt projections (see Graph below Table V in annex)
indicate that full implementation of the programme would allow for a slight
reduction of the debt by 2020, thereby remaining well below the 60 % of
GDP reference value. Containing age-related expenditure growth
is warranted in order to contribute to the sustainability of public finances in
the long term. In order to improve the adequacy of the pension system prolonging
working and contributory careers would be necessary.

Fiscal
framework

The
fiscal framework has remained largely unchanged since 2010, when it was
significantly reformed following the adoption of the Fiscal Responsibility Law.
In particular, the framework provides for
three-year rolling medium-term budget planning (the Fiscal and Budgetary
Strategy), numerical ceilings for the overall and primary balance, personnel
expenditure, total expenditure (excluding the impact of EU Funds) — and the
establishment of the Fiscal Council. In addition, Romania ratified the Treaty
on Stability, Coordination and Governance in the Economic and Monetary Union
and declared its intention to be bound by the provisions of Title III (Fiscal
Compact) as of 1 January 2013, thereby committing to putting in place a
structural budget balance rule and the corresponding correction mechanism by
the end of 2013.

Although
the national fiscal framework has contributed to stronger fiscal discipline,
further fine-tuning is warranted to increase its effectiveness and ensure
compliance with the European fiscal governance framework. While the Fiscal Council started operating in 2010, restrictions on
the hiring of public servants put in place to achieve the required fiscal
consolidation have prevented the Council from hiring additional staff. However,
at the beginning of 2013, a derogation from these restrictions was granted to
the Fiscal Council, allowing it to complete the recruitment of its staff.
Ensuring adequate resources is instrumental for its functioning and
independence, especially considering the requirements stemming from the Council
Directive 2011/85/EU on requirements for the budgetary frameworks of the Member
States and from the Fiscal Compact[14]
which was ratified by Romania. Regarding the budgetary process, while the
management of capital budgeting and the reporting system for the state-owned
enterprises (SOEs) that are part of general government have been enhanced in
the context of the EU/IMF assistance programme, several aspects could be
further improved. There is room for improvement in the context of the
medium-term budgetary framework as well as in terms of compliance with the
existing budget ceilings. Despite some steps taken to prioritise public
investments, a strategy needs to be developed and implemented in this area and
to be properly reflected in the medium-term budget planning.

Tax system

At
27.2% in 2011, Romania’s tax-to-GDP ratio is the second lowest in the EU. The
composition of tax revenue is favourable to growth.
Romania has the EU’s second-highest share of ‘growth-friendly’ taxes (mainly
driven by consumption taxes). Indirect taxes accounted for 46.9 % of overall
tax revenues in 2011 and direct taxation accounted for 21.2% (against an EU-27
average of 33.1 %), while social contributions accounted for 31.9 % (against
an EU-27 average of 33.5 %).

Low tax
compliance and high tax evasion represent major challenges for Romania's tax
system, in particular in the areas of VAT and labour taxation.  Tax evasion in these two fields was estimated at 10.3 % of GDP in
2010.[15]
In 2011, actual VAT receipts amounted to only 51.9 % of the theoretical
revenues at standard rates despite the relatively limited application of the
reduced rates. To tackle VAT fraud in particular, Romania is currently
implementing recommendations agreed with the Commission. There has been an
increase in revenues from indirect taxation compared to last years, mainly
driven by the increase of the standard VAT rate in 2010. Additional measures to
increase tax collection could be warranted. There is also scope to improve the
efficiency of the tax administration: despite certain improvements, the use of
electronic filing for tax-related information remains suboptimal for VAT and for
corporate and personal income taxes. Furthermore, the
high reliance on cash transactions — according to a recent Eurobarometer survey[16] only 27 % of
residents have a bank current account, which is the lowest ratio in the EU —
implies an elevated risk of tax non-compliance. In the
field of labour taxation, the high amount of concealed earnings is reflected in
the discrepancy between the relatively high tax wedge on labour (calculated on
the basis of  the theoretical tax obligation) and the low implicit tax rate on
labour (calculated on the basis of actual tax receipts). The relative ease with
which the self-employed can avoid taxes could also be a factor. The share of
self-employment in total employment is particularly high, amounting to 20 %
(ranking third in the EU).

There is scope to further increase the reliance of the tax system on
the taxes that are considered less detrimental to growth, in particular recurrent
property taxes and environmental taxes. Revenues
from recurrent taxes on immovable property, which are considered among the
least detrimental to growth only accounted for 0.7 % of GDP in 2011, while the
EU average was 1.3%. The tax base currently does not reflect the actual market
value of property. Romania’s environmental taxation is predominantly
based on energy taxes: energy accounts for most of the revenue, namely 1.6 % of
GDP, while taxation on transport only delivers 0.2 % of GDP and pollution taxes
are a negligible share. While acknowledging the burden on companies and
citizens, one may question whether these taxes serve Romania's environmental
goals. The implicit tax rate on energy is among the lowest in the EU and tax on
transport fuels is well below EU average rates (excise duties on both diesel
and petrol are among the lowest).

Several
measures to increase the environmental taxes are being prepared. The new pollution tax legislation for cars entered into force in
mid-January 2012, but its application has been suspended. More recently a new ‘environmental
stamp tax’ which differentiates car purchase taxation based on CO2 emissions
was introduced. This is consistent with efforts to tax environment-related
negative externalities. In early 2013 Romania also adopted a tax on the
exploitation of natural resources other than natural gas and a tax on the
surplus revenues gained as a consequence of natural gas price deregulation. A landfill tax is expected to be introduced in 2013.

4.2.        Labour market, social policies and education

Weak labour market participation continues to be a challenge for Romania. The insufficient institutional capacity and
low quality and coverage of the national employment services, an inadequate level
of basic skills acquired during compulsory education and a high early school
leaving rate, the persistent mismatch between the qualifications offered by the
education sector and the requirements of the labour market, difficult
transitions from school to work, a low rate of participation in life-long
learning and education for adults and the under-investment by businesses in
continuous vocational training are all likely to have a negative impact on
employment. Poverty reduction continues to present another major challenge, People
in Romania are the second most likely to be at risk of poverty or social
exclusion and suffer severe material deprivation rates that are almost twice the
EU average. Access to healthcare for disadvantaged
people continues to be an issue, as does the quality of services provided.

Employment

Increasing
labour market participation is one of the most crucial challenges for Romania. As the unemployment rate stands at a fairly acceptable level (7.0 %
in 2012), the low participation in the labour market is mainly driven by an activity
rate that is the third-lowest in the EU. In 2012, the
country continued to register a low employment rate among those aged 20-64
years (63.8 %), although a slight improvement was achieved compared to the year
before (62.8 %). Yet it is still to be seen if this
reverse of the previously negative trend is sustainable. Despite
this recent improvement, the national Europe 2020 target of 70 % by 2020 remains
difficult to reach. Moreover, labour productivity
measured as a percentage of the EU27 total is still one of the lowest in the EU
(at 49.4 %) despite having improved in the recent years.

Employment
challenges are particularly severe for a number of disadvantaged people. The youth employment and activity rates (20-29 years) were among
the lowest in the EU, whereas the youth unemployment rate increased reaching
22.8 % in 2012. Additionally, there is a high and increasing number of
young people in Romania that are not in employment, education or training (17.4
% in 2011). Other employment challenges concern older workers and women. Moreover,
Romania has the highest share of employment in agriculture in the EU (28.6 %
in 2011), with a major part in low productive subsistence and semi-subsistence farming.
Disadvantaged people, in particular Roma, face great difficulties in accessing
the formal labour market. In 2011, the employment rate among Roma people was
36.3 %, about two thirds that of the overall population, while the unemployment
rate among Roma people (48.6 %) was more than six times higher than the average
national unemployment rate.[17]

Close monitoring of the
effectiveness of the recent labour market reforms is warranted. In 2011, the Romanian government amended the Labour Code to address the limited flexibility of the Romanian labour market.[18]
The main changes are related to the extension of the probation period for
newly-hired employees, the conditions governing fixed-term individual
employment contracts, new terms related to collective dismissals and individual
redundancies, working-time flexibility and temporary agency contracts. In 2011,
the government also changed the legislation on social dialogue in order to make
collective bargaining more flexible and continued the reform by adopting the
Law on organising the Economic and Social Council in March 2013.

At
0.02 % in 2012, spending on active labour market policies as a share of
GDP in Romania is still very low compared to the EU27 average and it is
decreasing.[19]. Moreover, most of the spending goes on various forms of employment
subsidies, while training, guidance and counselling are underdeveloped. In
addition, the quality of employment activation, job search and retraining services
is still relatively low. Romania is currently modifying the legislation on the
unemployment insurance system and on employment stimulation. In this context, it
would be useful to reassess the current package of active employment measures. Beyond
efforts to strengthen the administrative capacity of
the National Employment Agency, it may be helpful to
focus policy efforts on better integrating active and passive labour market
policies, with improved targeting to the skill profiles and the needs of the
unemployed. Increased attention should also be given to anticipating labour
market needs.

A
number of measures have recently been undertaken to address the difficult
labour market situation of young people. While the
law on apprenticeship in the workplace was amended, the results of its
implementation are rather modest and could be further improved by providing
incentives to employers to hire apprentices. Moreover, the Romanian authorities
financed programmes dedicated to improving young people’s entrepreneurial
skills and helping young entrepreneurs to set up microenterprises. The
government is currently preparing the National Plan for Youth Employment, which
is a starting point for the introduction of the Youth Guarantee[20]. The measures
focus on improving the entrepreneurial culture among youth and support the SMEs,
as well as on adapting education and vocational training to the labour market
needs. To facilitate youth transition from school to labour market, the plan
proposes various measures, such as: granting mobility bonuses and job
subsidies, offering professional guidance and entrepreneurship counselling,
business simulation, supporting apprenticeships, higher graduates’
traineeships, developing partnerships between schools, universities, companies
and other organizations, and monitoring the labour market insertion of young
graduates. The plan's effectiveness may benefit from improved coordination and
partnership across policy fields for ensuring quality jobs, apprenticeships and
traineeships. Better targeted employment measures and services to young people
could help improving their labour market integration. The
European Social Fund will remain the main source of funding for youth
employment policies, in particular through the support of the EU Youth
Employment Initiative, which should deliver measures targeted to young people
not in employment, education or training.

Further
measures to promote longer working lives need to be undertaken, as older
workers have a high potential for growth. An entrenched culture of early retirement, notably for women, as
also indicated by the employment rates for older workers and the duration of
working lives, which are among the lowest in the EU, is a key reason for low
benefits. Going beyond the 2011 pension reform, Romania is currently rolling out a number of fiscal incentives for the employment of older
workers but labour market measures to promote longer
working lives are too few and too isolated to deliver the necessary change in
working and retirement practices. A comprehensive
active ageing strategy to facilitate longer working lives could enhance
synergies between the different current initiatives and would complement
efforts on lifelong learning, career guidance policies and good age management
in work places.

In
order to overcome women’s low level of participation in the labour market,
measures are being implemented to support the development of business
infrastructure and help women start companies. However,
the provision of full-time childcare facilities is particularly low, as is availability
of part-time childcare facilities for those under 3 years old[21]. Moreover,
flexible working arrangements and the review of fiscal treatment for second
earners could facilitate women’s participation in the labour market.

Some measures have been adopted to tackle low agricultural productivity
and under-employment in agriculture but further efforts are needed. The
European Agricultural Fund for Rural Development continues to be the main EU source
of funding to tackle these challenges. Using this fund, the government has
taken measures aimed at diversifying of economic activities in rural areas such
as by investing in non-agricultural activities and the tertiary sector. The
fund is also used for the modernisation of the agricultural sector, including
through investment support to increase competitiveness of farms and food processing
businesses, and to help young farmers set up semi-subsistence holdings that
offer the potential to develop into viable market-based farm businesses).
However, underdeveloped services in rural areas and poor quality infrastructure
are impeding other economic activities and the creation of alternative
employment opportunities. Continued investments and upgrading of skills in
agriculture as well as provision of new skills for ex-farmers are needed so as
to turn semi-subsistence employment into steady-income employment, and to exploit
agri-food sector’s potential as a competitive and sustainable engine of growth.

There need to be further reforms to allow for a
better integration of disadvantaged people, including Roma, into the labour
market. To improve the skills and employability of
disadvantaged people, including Roma, an integrated approach bringing together
literacy improvement measures, personalised counselling services and tailored
training could be considered. Gaps identified by the Commission when assessing
the National Roma Integration Strategy 2012-2020[22] concern
reducing unemployment among women, young people and those living in
disadvantaged micro-regions and segregated neighbourhoods as well as to
increasing skills and promoting the transition from undeclared to regular
employment. A revised strategy and a new action plan to be prepared by the
Romanian authorities in the summer of 2013 are expected to take on board the
Commission’s assessment.

Poverty
reduction

Poverty reduction continues to be a major challenge for Romania. Romanians are the second highest most likely to be at
risk of poverty or social exclusion in the EU, and almost one in three
Romanians is severely materially deprived. In general, the impact of social
transfers (excluding pensions) in reducing poverty remains significantly below
the EU average, although values were on the rise in the years preceding the
crisis. Romania also has an extremely high proportion of ‘in-work poverty’ (double
the EU average), especially among men. The risk of poverty has a strong impact,
especially on children, of whom 49.1 % were at risk of poverty or social
exclusion in 2011. Poverty has also a strong territorial dimension, as it
particularly affects people living in rural areas in the north-east, south-east
and south-west of the country.

The situation of people with disabilities and Roma continues to be a
key issue. Faced with low participation in the
labour market, difficult access to public services, low skills, poor
infrastructure and housing, and discrimination, these people have been among
the worst affected by the crisis. In addition, the Roma’s lack of identity
cards and registration prevents them from accessing the health system, social
benefits or education. Given the high proportion of Roma
people in the country (8.3% of the overall population), making sufficient
progress towards the Europe 2020 employment, social inclusion and education
targets will require the Roma’s situation to be addressed explicitly and
quickly. The implementation of Romania’s National Roma Integration strategy is
stalling. Particular attention needs to be paid to involving
all stakeholders in the process, ensuring an effective coordination of responsibilities
and instruments between the different layers of governance, setting up a robust
national monitoring system, and allocating adequate financial resources.
Stronger, more integrated, efforts are needed to address Roma inclusion, including
coordinated measures in the fields of education,
employment, housing and health.

There is also a high risk of poverty for the people older than 65
years.[23]
The 2011 pension reform brought significant improvements
but pension benefits are low, contributing to a high at
risk-of-poverty rate for this age group. In order to improve the adequacy of the pension system
prolonging working and contributory careers would thus
be necessary. Age-related expenditure growth needs to
be contained, as pension adequacy can only be addressed if the sustainability of the pension system is guaranteed.

To alleviate poverty, the effectiveness and efficiency of social
transfers could be strengthened by improving adequacy, take-up and coverage. In 2012, several pieces of legislation were
adopted to follow up the 2011 social assistance reform. The adoption of the remaining subsequent legislation (social economy, minimum insertion income, social protection measures
for vulnerable customers) would constitute an important
step towards completing the reform. The link between social transfers and
activation measures also needs to be strengthened.

Education

Romania faces a major challenge in
raising the quality of its education and training. The
quality of and access to upper secondary and tertiary education remain low. The
level of basic skills is also very low. A particularly
difficult challenge is low achievement: Romania is among the worst performers
in the EU on basic skills (40.4 % in reading; 47 % in mathematics and
41.4 % in science).[24]
More than two out of five 15-year olds have inadequate reading literacy, mathematical
and scientific literacy for adult life. Although the number of low achievers has
declined since 2006, Romania is still one of the worst performing countries in
the EU. A number of actions for primary and secondary
education aimed at increasing access to quality education and raising school
attainment rate are being prepared. These actions include initial assessment
tests for students and a framework programme designed to improve the results of
national evaluation exams. Early-school leaving is also
a significant challenge as, despite a number of measures implemented, the
early-school leaving rate was estimated at 17.4 %
in 2012 which is well above the EU average of 12.8 %. Romania lacks an
adequate mechanism to collect data on early school-leavers; a comprehensive
strategy to be adopted in 2013 should help in this regard.

The very low use of early childhood education and care services still
present a challenge. A high quality early childhood
education and care can have a particularly positive impact on children’s
development and contribute to breaking the cycle of disadvantage. The underfinancing of the sector is one of the main reasons why Romania is underperforming in this area. In 2009, Romania allocated the lowest proportion of GDP to investment in education
in the EU and the education budget has been cut even
further over the last three years.

There has been positive but slow progress in the implementation of
the transition from institutional to alternative care for children deprived of
parental care. Current efforts should be maintained
to strengthen prevention services, improve staff qualifications and quality of delivery
and to improve the social and professional integration of young people leaving
the child protection system. More efforts are needed to
speed up the deinstitutionalisation of children deprived of parental care.

The education law of 2011, a major reform that set a
long-term agenda for upgrading the quality of education at all levels is not
yet fully operational.
Once implemented, it will overhaul the management of higher education
institutions and raise requirements for masters and doctoral programmes. A
number of shortcomings remain. There is not enough differentiation between
universities according to each one’s mission which hampers their
internationalisation. There is also a need to adjust the provisions for
distribution of higher education funding by taking into account the cycle of
studies in accordance with best international practices, and to develop
performance indicators in universities’ strategic and operational plans.

Mismatches
between skills and labour market demands are characteristic of a large proportion
of vocational and tertiary education, with the poor level of vocational skills
being a specific challenge. There are a number of national programmes that aim to improve
vocational training but the overall vocational training system remains largely
embryonic. Completing upper-secondary general or vocational education is a
prerequisite for skilled employment and access to higher education. The employment rate of recent graduates has declined further during
the economic crisis and is well below the EU average. This situation reflects, at
least in part, a significant mismatch between the education offered by universities
and the needs of the labour market. The links between higher education and
business could be strengthened through the inclusion in the university
curricula, in addition to core competencies, of critical skills needed for a
knowledge-based economy, such as entrepreneurship as well as transversal skills
like communication, marketing and management. For the 20-24 age group, 29.4 %
of tertiary graduates were unemployed in 2011 compared to 22.9 % of
secondary graduates. Attracting more students from
lower-income families, particularly those from rural areas, to higher education
remains an important challenge. While the legal framework on adult training has
been reformed, adult participation in lifelong learning
remains stagnant at very low levels (1.6 % in 2011), significantly lower
than the EU average (8.9 %). Participation rates are particularly low
among low-skilled adults. According to CEDEFOP skill forecasts, Romania will have
a deficit of medium and high-level skills by 2020. Initiatives
to strengthen the national qualification framework and to encourage the
recognition of informal learning would facilitate labour mobility. Romania
lacks an adequate skills forecasting system which could provide better guidance
to individuals and to industry as to the future needs of the labour market but
a lifelong learning strategy that has been long delayed is currently under
preparation.

Health

Healthcare
reforms that aim to improve the efficiency of the sector have been initiated
but continuous efforts are needed. The Romanian population is increasingly ageing but the old-age
dependency ratio is still below the European average.[25] Regarding the
health status, Romania has one of the highest rates of infant mortality[26] in the EU and
life expectancy at birth is one of the lowest in the EU.[27] Romania also has
one of the highest instances of the population stating that they have unmet
needs for medical examination because it is ‘too expensive’. The national
health budget for 2010 represented 9.0 % of public government expenditure (far
below the EU average of 14.9 %). Public expenditure on health accounted
for 4.5 % of GDP in 2009 (far below the EU GDP-weighted average of 8 %).[28]
This is against a backdrop of a cumulative annual increase of 15.5 % in
public expenditure between 2003 and 2009..As described in Section 4, to better
use existing resources some measures, such as claw-back tax and co-payments,
have already been implemented, while other structural measures, such as
hospital reform, e-health, health technology assessment and a new medium-term
financing strategy are being developed. Health sector
reforms need to be continued to increase the efficiency of the healthcare
system. In particular, a hospital master plan should be developed to increase to
increase cost-efficiency and reduce the excessive use of hospital inpatient
care by strengthening primary care and referral systems and by improving the
monitoring of the quality of health services provided.
These investments in the health system can have a positive spill-over effect as
any successful move toward the Europe 2020 employment target will also require an
improvement in health outcomes. Romanians of working age are currently among
the least healthy in the EU.

4.3.        Structural measures promoting
growth and competitiveness

Romania
faces a number of challenges in economic competitiveness with productivity in
industry and services remaining low. The major challenges here are the underdeveloped
transport and ICT infrastructure, a weak business environment and low support for
research and development (R&D).

Research
and Innovation

The
R&D intensity is extremely low (0.48 % in 2011), making the achievement
of the 2 % target by 2020 rather unrealistic. The
government and the private sector continue to underinvest, with a serious risk
to fall below a critical mass needed to maintain a viable base for the
knowledge economy. Considering national fiscal constraints, a sensible strategy would
be to tap into European Structural and Investment Funds as much as possible, now
and during the next programming period. If underpinned by adequate
administrative capacity, this strategy would allow Romania, if not to achieve
the Europe 2020 strategy targets, than at least to improve its position
significantly.

In
parallel, the efficiency and effectiveness of the investment need to be
substantially improved. The system is highly
fragmented, as reflected in the large number of research institutions (universities,
national research institutes and institutes of the Romanian Academy) combined
with a lack of critical mass of quality research results. Romania scores badly in
terms of both high-impact scientific publications and patent applications. A
process of certification of national R&D institutes was carried out during
2012 while the university reform of 2011 paved the way towards greater autonomy
and differentiation between research universities and those more oriented
towards teaching and local needs. However, these measures are not being
implemented well. This is also the case both for the National Research and
Innovation (R&I) Strategy 2007-2013 and for the Action Plan for R&I
adopted in July 2011. The wider reform of the R&I system is hampered by a lack
of long-term vision and a lack of awareness of the added value of research and
innovation in terms of increasing competitiveness and securing high-quality
jobs. The governance of the system could also be improved: while the research
and innovation policies are developed mainly by the research part of the
Ministry of National Education, the links to policy instruments that are under
the responsibility of the other ministries are weak, as is the involvement of
these ministries in the identification of priorities.

There is a need to prioritise those research and
development activities that have the potential to attract private investment
and to strengthen the intellectual property rights framework with a view to
increasing the marketability of research results. Business R&D expenditure is extremely low (0.17 %
of GDP in 2011, one of the lowest values in the EU) and there is almost no
patenting activity. Furthermore, businesses do not exploit research results to
any great extent and there are few linkages between education, research and
businesses. Intellectual property rights are regulated by a variety of laws and
ordinances, providing unclear and contradictory provisions. Also, the
finalisation of the Patents Law (which has been under revision since 2010)
would need to be accelerated and its provisions aligned to international best
practices. The finalisation of the law is expected to contribute to an increase
in foreign direct investments for innovative activities that would contribute
to higher productivity. There is a need to explore to what extent the current
Romanian intellectual property rights legislation hampers the development of
knowledge-based activities in Romania.

To
improve its competitiveness, Romania needs to increase synergies between
research, innovation and industry, in particular
by prioritising research and development activities that have the potential to
attract private investment. Romania’s economy is
characterised by the prevalence of low- and medium-technology sectors, with a
weak demand for knowledge and an underdeveloped innovation culture. Research,
innovation and industrial policies are not sufficiently integrated, due to the
lack of a national strategy for industrial policy and to insufficient
cooperation between the institutions responsible for policy design and
implementation. As a result, the current R&I Strategy for 2007-2013 is somewhat
disconnected from the economic development of the country. To foster structural
change, Romania should further examine how knowledge is transferred into
industry. Currently there are two strategies under preparation: a National
Competitiveness Strategy for the period 2014-2020, which aims to ensure a
horizontal approach to industry, SMEs, and business environment policies, and a
Strategy for Research and Innovation for 2014-2020, which focuses
strongly on the smart specialisation required for the next programming period
of the structural funds. It will be essential to align and coordinate the two
strategies, in order to ensure closer links between research, innovation and
industry.

Transport
infrastructure and ICT

Physical accessibility is a major driver in attracting investors and
laying the foundations for development. This is particularly so in the regions
with high growth potential but also in remote and landlocked regions, such as
rural areas. Romania’s
underdeveloped basic transport infrastructure continues to present an obstacle
to growth and employment. The declining
quality of the railway infrastructure and the very low motorway endowment mean
that it is difficult to access Romania from abroad and to travel between
regions, in particular between growth poles. The underdeveloped
infrastructure is the result of underinvestment in new infrastructure and poor
maintenance of the existing one. This is due both to the lack of a strategic
vision for the development of the transport system (e.g. there is no comprehensive
long-term transport plan for all modes of transport) and to the lack of
matching identification and programming of financing sources. At the same time, the implementation of trans-European transport
network projects is advancing slowly, due mainly to the low absorption of the EU
funds.[29]

There
are still a number of policy challenges in the rail transport sector. First, the length of the rail network is excessive with respect to
the traffic and the capacity to finance it. Second, private railway
undertakings perceive discrimination as regards the prices charged and
conditions imposed to access tracks. Third, Romania often makes direct awards
of infrastructure concessions and rail passenger services. This results in low value
for money for the state and for the user, while contractors run the risk of
incurring losses. Fourth, the link currently in place between the safety
authority and the body responsible for procuring services contracts creates
conflicts of interest. Moreover, the current administrative handling of railway
undertakings’ certification is unnecessarily laborious and costly both for the
companies and for the safety authority. Underinvestment and poor maintenance of the railway network have led to increases
in travel time due the introduction of speed
restrictions and disruptions and also to reduced
reliability and safety of the network. As a consequence, railway transport has
witnessed a decline of freight and passenger demand.[30]

There
are also a number of policy challenges in the road transport sector. The quality of road infrastructure, including motorway endowment,
is particularly poor compared to that in other EU Member States.[31] Romania ranked highest in the EU in 2010 in
terms of road fatalities. The cost recovery for road infrastructure is very low
(about 10 % of total outlays on national roads, including construction).
Furthermore, all revenues from road tolls have been committed by the Romania
National Company for Motorways and National Roads to servicing debt on supplier
credits from commercial banks loans until at least 2016, leaving the company
with no own sources to finance maintenance. In addition, there is no
differentiation of toll rates according to environmental standards. The
Ministry of Transport and Infrastructure has not established a multimodal
transport master plan that would map the future structural network based on
realistic and politically endorsed budgetary assumptions.

There
are also some outstanding issues with regard to freight transport on inland waterways. While freight transport on inland waterways has been growing steadily
over the past two decades, it remains far below its actual potential, particularly
on the Danube. There is no policy strategy in place to upgrade or develop the
inland waterways infrastructure. Intermodal transport also remains
underdeveloped.

One
ongoing challenge is that the take-up of broadband in Romania is the lowest in
the EU. This is linked to a lack of ICT skills,
literacy and lack of investments. Both the proportion of ICT professionals and
the share of the population that have advanced ICT skills are among lowest in
the EU. Romania also has the highest proportion of the population having no or limited
computer and internet skills among the EU Member States. The implementation of
e-government is still a challenge for Romania. The country has the lowest
levels of use of e-government services by both citizens and small businesses. Broadband infrastructures needs to be extended to areas where there
are market failures to boost regional attractiveness and the economy. In
parallel, the extension of New Generation Access needs to be promoted where
there are market failures. Monitoring and mapping tools of ICT coverage and
performance need to be developed. In parallel, the use of and demand for ICT
should be fostered through developing products and services and e-commerce, but
also through awareness-raising in areas where these is low take-up and
supporting ICT training and certification.

Energy
and environment

Reforms to enhance competition and efficiency in network industries,
as promoted by the IMF/EU financial assistance programme, need to continue. In 2012, Romania made progress in
transposing the third energy package directives. However, transposition of some
provisions is still outstanding, including those relating to the protection of
vulnerable consumers and certain duties of the energy regulator. To improve market efficiency, Romania has
committed to a roadmap for the liberalisation of gas and electricity prices that is to be completed by the end of 2017 for gas and by the end of
2018 for electricity. The third energy package requires
that the Romanian gas and electricity transmission system operators be certified.
It is essential to continue with the unbundling of
transmission system operators that should be able to perform all their core
tasks. The corporate governance reform of state-owned enterprises which promotes
a more transparent and merit-based appointment of the supervisory boards and
management of these companies is currently in its early stage of implementation
with only slow progress and regular delays. More appointments of professional
board members and managers and less political interference are needed to show
that the corporate governance legislation put in place in 2011 is effective.

Increasing energy efficiency is a strategic issue for
Romania’s industrial competitiveness. Romania is
the third most energy-intensive economy in the EU whose
energy intensity is 2.5 times higher than the EU average. It is also the third most carbon-intensive economy in the EU. While
this partly reflects the high proportion of energy-intensive industries in the
production structure in Romania, there are also strong indications of large
energy inefficiencies. Residential buildings in Romania use eight times more
energy than the EU-15 average due to an inefficient district heating system and
the lack of appropriate thermal isolation of buildings. The reforms of recent
years aimed to achieve more
consistent use of high-efficiency cogeneration and to improve industrial
efficiency. Large-scale programmes were set up to insulate buildings and to
revamp district heating systems. These projects resulted in significant savings
but some of them have been put on ice. Progress has been made in implementing the road maps on
gas and electricity price deregulation but efforts need to continue in order to
provide the right incentives to reduce energy consumption. Due to the rapid and
steady rise of the transport sector’s share in final energy consumption (from 15.8 % in
2000 to 24.1 % in 2010), the limited improvements in energy efficiency in
road, rail and inland waterway transport need to be significantly stepped-up
and specific attention needs to be paid to upgrading the urban transport infrastructure. In
general, the housing, district
heating, industry and transport sectors are in a need of comprehensive,
decisive and effective action to improve energy efficiency.

Waste management is another key challenge for Romania. The country’s
recycling rate (1.3 %) is well below the EU average. Romania produces below-average volumes of municipal waste (365 kg of
waste per capita in 2012 compared to the EU average of 502 kg), due for a large
part to its below EU-average income per capita. However, it has the highest
landfilling rate in the EU (98.7 %) and without further policy action it
will most likely have difficulties in meeting the EU targets for waste
management on time. There is currently no landfill tax but it is expected to be
introduced in 2013. Private waste collection and cost-efficient recycling are made
difficult by a lack of effective schemes for collecting reusable/recyclable
waste separately, the limited implementation of the Extended Producer’s Responsibility
principle and the lack of a 'Pay As You Throw' system. Full implementation of
the existing waste legislation and meeting the targets under the Resource
Efficient Europe Roadmap has the potential to boost ‘green growth’ generating
additional jobs in the waste sector while reducing pollution and greenhouse gas
emissions.

While Romania is well on track to meet its overall commitments
regarding greenhouse gas emissions, the emissions have increased substantially in
the transport sector. The current projection is
that Romania will increase its non-ETS greenhouse gas emissions by 9 %,
thus staying within the target by a margin of 10 percentage points. While
taxation of transport is low, newly registered vehicles are significantly less
efficient in Romania than in many other Member States. Aside from existing
taxes on fuels, a quota for biofuels, and a new one-off vehicle registration
fee, no other significant policies are being implemented in order to address
the increasing emissions from transport.

Romania
is also on track to meet its Europe 2020 renewable energy target. Romania’s use of renewable energy has increased steadily since 2005
to reach 21.4 % of total energy consumption in 2011, almost hitting the
country’s goal of 24 % by 2020, but back down below levels before 2008. In
the electricity sector, the proportion of renewable energy dropped after 2005
but recovered in 2010 to hit 2005-levels of approximately 35 %. In 2012,
Romania installed 1.58 GW of new renewable power capacity, now totalling
2.68 GW. Romania is revising its Green Certificate support scheme to avoid
overcompensation and to reduce prices for customers. However, attention should
be given to maintaining a stable investment climate and to avoiding changes that
would affect the legitimate expectations of investors. To further improve the
cost-effective use of renewables and ensure a level playing field with other
power sources, Romania needs to also develop the
electricity grid further and ensure that non-discriminatory rules are
implemented so that a higher share of renewable energy sources can be
integrated into the grid. A functioning and non-discriminatory balancing market
for all power sources is necessary for further cost-effective market
integration of renewable electricity. Romania also
needs to make greater efforts with regard to transport in order to reach the 10 %
target by 2020.

Wholesale
market trading in gas and electricity is underdeveloped in Romania and it is
not yet fully integrated with the EU. To achieve
this for gas, there needs to be a proper gas balancing system and gas-grid
rules that facilitate the trading of day-ahead products. With regard to
electricity it is important that traded products reflect the demand from electricity
market participants. Romania’s participation in market coupling with the electricity
markets of Hungary, the Czech Republic and Slovakia is still in its early
stages. Similarly, pending full implementation of the interconnection projects
with Bulgaria and Hungary, Romania’s gas networks are integrated in the EU
market only to a very limited degree. In line with the obligations under
Regulation 994/2010 regarding the security of gas supplies, Romania still has
to notify to the European Commission several pieces of information, in
particular its preventive action and emergency plans if gas supplies are
disrupted.

SMEs
and business environment

Manufacturing,
a key factor for Romania’s export performance, plays a bigger role in Romania
than in the EU as a whole[32]
but productivity is low due to a number of factors. Productivity in industry and services remains at 60 % of the EU
average as the economy is overwhelmingly composed of small and medium-size
enterprises that are concentrated in low value-added areas, with specialisation
in labour-intensive industries. There is an overwhelming dominance of
microenterprises that represent 90 % of all companies. There are persistent
territorial imbalances in the location of SMEs, between regions and between
urban and rural areas. Export performance is predominately driven by
manufacturing[33]
but productivity improvements are hampered by several obstacles: a shortage of a
medium- and high-skilled labour force, access to finance, excessive
bureaucratisation and a weak business environment, a fragmented and
inconsistent institutional set up as well as weak entrepreneurship, in
particular in rural and maritime areas.

Romania
faces important challenges in creating a business environment conducive to
growth. The fragmented institutional set-up and the
rapidly changing governance arrangements for the business environment are major
bottlenecks that are responsible for a lack of continuity and efficiency in the
implementation of business-friendly policies. In addition, the heavy regulatory
environment and the significant red tape in all sectors of public administration
impact negatively on the business climate. According to the World Bank Doing
Business report 2013, Romania ranked 72nd in the global ranking on ease of
doing business. Despite some progress, for instance in business start-up
procedures, fiscal reporting requirements and in the registration and transfer
of property, there continue to be complex procedures
that need to be improved in many areas that are important for doing business.
These include obtaining an electricity connection,
paying taxes, dealing with construction permits and resolving insolvency. Two strategies containing provisions for the business environment
and SMEs sector have been elaborated — the Strategy for the improvement and
development of the business environment until 2014, and the Strategy for
the development of the SME sector until 2013 — but neither of them has been
adopted so far. Romania needs a comprehensive and effective strategy for
improving the business environment, with clear principles, objectives, targets
and monitoring indicators, to be applied to the whole government. In this regard, there is scope to improve the governance structure,
as a functional institutional design is fundamental to ensuring the much-needed
coordination, oversight and enforcement of policies for improving the business
environment.

Making
legislation clearer, more accessible and easy to comply with is a major challenge. In the area of regulatory tools and mechanisms to improve the
business environment, no major advances have yet been made. The regulatory
environment is still not stable with legislative acts often changing. The
implementation of the Strategy for Better Regulation for 2008-2013 has
been very slow. While some progress has been made with the monitoring of
administrative costs, a key challenge is to improve the regulatory quality
through adopting and implementing a comprehensive and coherent strategy, in
line with the EU Smart Regulation Agenda. In this respect, it is essential to identify
unnecessary costs and areas for performance improvement. At the same time, this
requires the full implement and use of evidence-based tools such as quantified
impact assessments, competitiveness proofing and fitness checks to reduce the
overall costs of regulation for businesses.

Greater
reliance on electronic data exchange and online interfaces could significantly
facilitate administrative procedures for businesses and citizens. The Strategy for the Broadband Communications Development in
Romania for the period 2009-2015 sets out ambitious objectives for e-government
and e-business. However, the implementation of this strategy has been
limited. According to the 2013 Digital Agenda Scoreboard report, e-government
take-up by Romanian citizens aged 24-54 years old is, at 37 %, the third
lowest in the EU and e-government take-up by enterprises is, at 59 %, the
lowest in the EU. The take-up of e-commerce is the lowest in the EU, with only
5.3% of the population buying online (the EU average is 44.8 %).[34] A National Strategy on the Digital Agenda
and a Next Generation Access network plan are currently being developed. In
order to improve the communication flow between public administrations and
enterprises and to reduce administrative burdens, priority should be given to
the application of the EU Small Business Act ‘only once’ principle in order to
avoid requesting enterprises and citizens to provide the same information that has
already been made available in the context of other procedures.

Access
to finance is one of the most pressing problems facing Romanian SMEs. Romania ranks among the lowest performers in the EU in terms of
total loan volumes granted to SMEs.[35]
At the same time, Romania ranks second highest in terms of the average interest
rates for loans up to EUR 1 million.[36]
Alternative forms of financing and new financial products are underdeveloped,
in particular in the venture capital market. The risk facility under the
JEREMIE[37]
programme became operational at the end of 2011 but its success has been rather
limited mainly due to the lack of local expertise in using financial
engineering instruments. Financial support to SMEs is being provided primarily through
multi-annual national programmes and guarantee instruments. Recent initiatives
of 2011 include Mihail Kogalniceanu Programme, which aimed to facilitate
SMEs’ access to guarantees and credit by granting a credit line with subsidised
interest and, if need be, partially guaranteed by the state under certain
conditions, and the Programme for Young Entrepreneurs, which aimed to
stimulate young entrepreneurs (those under 35 years) to set up and develop
small businesses. However, these measures should be made more accessible, in
particular by providing assistance on the application procedures and cutting
red tape.

Often
unclear land ownership rights represent a further challenge for Romania's
business environment. Currently, less than one
third of the country is covered by the traditional land registry thus making
investment in land or infrastructure difficult and hampering the development of
the real estate market. Developing a digitalised systematic land registry
covering the whole country is thus essential.

More
efforts are needed to help Romanian companies to access international markets,
in order to offset the decline in domestic demand.
In this respect, further support for the internationalisation of SMEs could be
important. Some services for SMEs, such as trade missions, co-financing
participation in international trade fairs and developing market studies, are already
provided through the annual SME export development programme but a number of
challenges remain in supporting the internationalisation of the SMEs, in
particular in providing training and practical guidance on procedures and in
enabling access to financing instruments. Furthermore, a National Export
Strategy for the period 2012-2016 has not been adopted.

The
general lack of transparency in the regulatory process and the persisting high
number of non-fiscal barriers continue to affect the retail sector. Non-fiscal barriers, mostly the requirement to pay for authorisations,
remain very high. While efforts have been made to render the retail supply
chain more efficient by introducing legislation that strengthens the position
of suppliers, a heavily fragmented retail market could indicate that competition
could be further strengthened. Given the economic importance of the sector,
which contributes around 4 % to the GDP and employs 7 % of the
workforce, smooth functioning for the regulatory framework of the retail market
is essential.

Romania has
been engaged in a process of reforms with the goal of improving the quality of
justice and the independence of the judicial system but a number of
deficiencies persist. They include a decreasing efficiency
in resolving cases and a lack of consistency between judgments. Romania’s
progress with judicial reform and the fight against corruption is monitored
under the Cooperation and Verification Mechanism of the European Commission. Although
the EU Justice Scoreboard[38]
shows that the time needed to resolve non-criminal cases, administrative cases
and litigious civil and commercial cases is within the EU average (but lags
behind for insolvency cases) the case resolution rate for all categories has
been falling continuously. The courts’ low capacity to resolve cases will, if
not improved, create backlogs and increase the time to resolve cases. The use
of e-justice tools needs to be improved significantly. Furthermore, there are
no regular evaluations of courts’ activities or defined quality standards,
although some steps have been taken recently.[39]
The perceived independence of justice in Romania has the second worst rating in
the EU.[40]
The January 2013[41]
report of the Cooperation and Verification Mechanism shows that Romania could
not implement commitments aimed at enhancing the independence of the judiciary
and that politically motivated attacks on the judiciary have not ended. Studies
and polling evidence also reveal a perception that the level of corruption in
Romania is particularly high by European standards. This has a direct bearing
on the efficiency of economic activity and can act as a serious disincentive to
inward investment. Implementing the National Anti-Corruption Strategy would
have a positive impact on the confidence of economic operators that
commercially significant decisions taken by the national and local government
and by the judicial authorities are fully transparent.

4.4.        Modernisation of public
administration

Poor
administrative capacity is a core concern for Romania. The ineffectiveness of the Romanian public
administration with overregulation and cumbersome and inefficient procedures hampers
the business environment and the capacity for public investment. The public administration is characterised by an inconsistent legal
framework, frequent recourse to emergency ordinances, inadequate inter-ministerial
cooperation and excessive bureaucracy. It is also undermined by a lack of
skills, poor transparency in staff recruitment and management, and high
turnover rates. This situation has contributed to a low rate of absorption of EU
funds under the current programming period, with Romania in last place in the
EU rankings for structural, cohesion and fishery funds. It will be essential
to reinforce the effectiveness of the public administration. This will imply
shifting to a streamlined, stable and more consistent legal framework, and
ensuring that procedures are simpler and are proportionate. One way forward
would be to improve the coordination and policy making-capacity of the
government and to undertake comprehensive ministerial modernisation, relying
whenever relevant on the action plans derived from the functional reviews. To
give one example, Romania does not have a comprehensive system for impact
assessment of policies and legislative proposals. A comprehensive and coherent
e-government strategy would promote an administrative culture of transparency
and certainty while, at the same time, improving the business environment. This should include in particular the completion of a fully
functioning Point of Single Contact that allows for the electronic completion
of procedures, including beyond the scope of the Services Directive, and
integrating various procedures affecting companies at different stages of their
business life cycle.

Weak
management and control systems and a poorly functioning public procurement
system are the source of systemic irregularities leading to financial
corrections and suspension of payments of EU funds.
While the legislation is appropriate, frequent
amendments to the national public procurement legislation, together with a lack of uniform practice and guidance by the
institutions concerned and inconsistent decisions by review bodies and courts
are a source of uncertainty for stakeholders. Contracting authorities are not
well equipped to prepare sound tender documents, define adequate selection and
award criteria or to evaluate the offers, all of which creates inefficiency and
lack of transparency. Similarly, there are problems with the frequent recourse
to artificial shortcuts such as shortening deadlines or transferring
unreasonable risks and obligations to contractors. No adequate solution for
preventing of conflicts of interest has yet been found.
Nor has the independent status of the Romanian review
authority been fully secured. Reforms in this area need to continue, in line
with the recommendations of the Commission inter-service group on public
procurement.

There
are serious concerns that corruption that continues to be a systemic problem in
Romania. There are considerable difficulties with
the ineffectiveness of policies to prevent and combat corrupt practices,
notably in the area of public procurement. 96 % of Romanian respondents to
the Eurobarometer survey agreed that corruption has been a major problem in
Romania, 3 points higher than in 2009. Romania scores poorly on Transparency
International’s Corruption Perception Index for 2012 and on the World Bank’s
control of corruption ranking for 2011. Particularly vulnerable sectors appear
to be healthcare and infrastructure projects. Romania’s progress in preventing and sanctioning corruption related to public
procurement, as evaluated on a regular basis by the
Commission in the Cooperation and Verification Mechanism, has been limited. Few perpetrators
of public procurement fraud have been handed down dissuasive sanctions by the
courts. A more systematic approach to ex-ante checks that would ensure uniform
and systemic implementation could offer a useful way forward.

5. Overview Table (CSR, targets)

2012 commitments || Summary assessment

||

Europe 2020 (national targets and progress)

Employment rate target: 70 % || In 2012 the employment rate rose to 63.8 %, 1 percentage point higher than in 2011 and 6.2 percentage points below the national employment target (20-64 age group). It remains to be seen if this reverse of the previously negative trend is sustainable. Despite the recent improvement, the national target of 70 % by 2020 under the Europe 2020 strategy remains ambitious.

R&D target: 2 % by 2020 || In the last decade, R&D intensity in Romania increased from 0.37 % in 2000 to 0.59 % in 2008, to drop back to 0.48% in 2011. Romania currently has one of the lowest R&D intensity scores in the EU, at less than a quarter of its 2 % target for 2020. Private R&D investments of 0.17% of GDP in 2011 are also among the lowest in the EU. It would be welcome if the new R&I Strategy 2014-2020, under preparation, was accompanied by a multi-annual funding framework and a monitoring system.

Greenhouse gas emissions target: maximum increase of greenhouse gas emissions not covered by the EU Emission Trading Scheme by 19 % in 2020, compared to 2005. || Change in non-Emission Trading Scheme greenhouse gas emissions between 2005 and 2011: decrease of 7 %. According to the latest national projections submitted to the Commission, when existing measures are taken into account, the target is expected to be achieved with an increase of 9 %, thus staying within the target.

Renewable energy target: 24 % Share of renewable energy in the transport sector: 10 % || Share of total renewable energy in gross final energy consumption was 21.4 % in 2011 and 2.1 % in the transport sector. (Source: Eurostat. April 2013. For 2011, only formally reported biofuels compliant with Art. 17 and 18 of Directive 2009/28/EC are included).

National indicative energy efficiency target for 2020: Reduction of 10 Mtoe (19%) in the primary energy consumption || Romania has set an indicative national energy efficiency target in accordance with Articles 3 and 24 of the Energy Efficiency Directive (2012/27/EU). However, it has neither expressed it, as required, in terms of an absolute level of primary and final energy consumption in 2020, nor has provided information on the basis on which data this has been calculated.

Early-school leaving target: 11.3 % || The early school-leaving rate (17.4 % in 2012) is well above both the EU average (12.8 %) and the 10 % EU benchmark and is the same as in 2011 (17.5 %). Problems persist especially for rural areas and the Roma minority.

Tertiary education target: 26.7 % || The tertiary or equivalent attainment rate (21.8 % in 2012) is 14 percentage points below the EU average (35.8 %). However there has been constant progress over the past five years with a noteworthy increase from 2011 (20.4 %). There is still a significant mismatch between the education offered by universities and labour market requirements.

Risk of poverty or social exclusion target: reducing by 580 000 people (compared to 2008). || In order to monitor this target, Romania has opted to use one of the three sub-indicators of the headline indicator, more precisely the ‘at risk of poverty rate’. The latest Eurostat data show a slight improvement in this indicator to 22.2 % in 2011, from 23.4 % in 2008. In absolute terms, 240 000 people were lifted out of poverty between 2008 and 2011.

Table I. Macroeconomic indicators

Table II. Comparison of macroeconomic developments
and forecasts

Table III. Composition of the budgetary adjustment

Table IV. Debt dynamics

Table V. Sustainability indicators

Table VI.  Taxation indicators

Table VII. Financial market indicators

Table VIII. Labour market and social indicators

Table IX. Product market performance and policy
indicators

Table X. Green Growth

[1] Special drawing rights, equivalent to around EUR 3.5 billion.

[2] As regards further support from international financial
institutions, the World Bank's development policy loan with a deferred drawdown
option of EUR 1 billion became effective on 11 January 2013. The World Bank
also continues to provide EUR 500 million through results-based financing of
social assistance and health reforms in Romania.

[3] As per the Secretariat General’s letter to ambassadors of 13
September 2012 (Ares(2012)1063684).

[4] These reports, along with other information related to the
financial assistance programme, can be found at
http://ec.europa.eu/economy\_finance/eu\_borrower/balance\_of\_payments/romania/romania\_en.htm.

[5] COM(2012) 750 final.

[6] The European System
of Integrated Economic Accounts (ESA) is the system of national accounts and
regional accounts used in the EU.

[7] A corrigendum was submitted on 9 May 2013.

[8] The gas
interconnection with Hungary that opened in 2010 is not yet bi-directional. Two
other interconnection projects with Bulgaria are currently ongoing. Besides the
the lack of availability of export capacity (virtual as well as physical
reverse flows) this is also due to the existence of legal provisions or
equivalent measures that prevent gas exports.

[9] According to the Commission’s current estimations (at end-March
2013), the de-commitment risk for the European Regional Development Fund and
the Cohesion Fund for 2013 is at EUR 5.8 billion and EUR 1.16 billion for the
European Social Fund.

[10] The 1-for-7 rule implies that only one in seven public sector
workers is replaced.

[11] Cyclically adjusted balance net of one-off and temporary measures,
recalculated by the Commission services on the basis of the information
provided in the programme, using the commonly agreed methodology.

[12] According to the EU late payments directive all new contracts
signed after March 2013 will have to be paid by the public administration
within 60 days in the healthcare sector and within 30 days in the other
sectors. Currently payment delays in the healthcare sector stand at 210 days.

[13] Due to differences in methodology to estimate the potential output,
the structural balance, as recalculated based on the commonly agreed
methodology that uses the macroeconomic scenario from the programme, may depart
from the structural balance as calculated by the national authorities. The
structural deficit of 1.3% of GDP in 2014 is based on the commonly agreed
methodology. If national authorities' methodology is used, structural deficit
would be at the MTO of 1% of GDP already in 2014.

[14] Title III of the Treaty on Stability, Coordination and Governance
in the Economic and Monetary Union

[15] România —  Consiliul Fiscal (2012) —  Raport anual pe anul 2011 —
Evoluții și perspective
macroeconomice și bugetare: http://www.consiliulfiscal.ro/Raport2011.pdf

[16] Source: Special Eurobarometer 373: Retail
Financial Services (2011).

http://ec.europa.eu/internal\_market/finservices-retail/docs/policy/eb\_special\_373-report\_en.pdf

[17] ‘Roma from Romania, Bulgaria, Italy and Spain between Social
Inclusion and Migration: comparative study’, 2012,  http://www.soros.ro/en/publicatii.php#

[18]According to the Global Competitiveness Index Report 2012-2013,
Romania ranks 104th out of 144 countries on labour market efficiency
(with the rankings for cooperation in labour-employer relations 141/144 and for
hiring and firing practices 97/144).

[19] 0.04 % for Romania compared with 0.54 %
for the EU27 in 2009.

[20] Council Recommendation of 22 April 2013 on establishing a Youth
Guarantee (2013/C 120/01) to ensure that all young people under the age of 25
years receive a good-quality offer of employment, continued education, an
apprenticeship or a traineeship within four months of becoming unemployed or
leaving formal education).

[21] In 2010, only 4 % of children less than three years old were
in formal childcare up to 29 hours per week and a further 3 % were in
formal childcare for 30 or more hours per week. Among those aged from 3 years
to compulsory school age, 49 % were in formal childcare for up to 29 hours
of care per week and 17 % were in services providing 30 hours of more of
care per week.

[22] http://ec.europa.eu/justice/discrimination/files/com2012\_226\_en.pdf

[23] The rate of people
at risk of poverty and social exclusion in old age (above 65) is 35.3 % in Romania compared
to 20.5 % in the EU (2011).

[24] PISA 2009 results

[25] Old-age-dependency ratio is 21.4 against 25.9 for the EU.

[26] 9.8 per 1000 live births against 4.2 in the EU.

[27] 77.4 for females and 69.8 for males, against 82.6 and 76.7
respectively in the EU.

[28]Romania provides to Eurostat two different figures regarding public
expenditure on health. The first is based on national accounts, on the
functional classification of government expenditure (statistics on general
government expenditure by function). According to this statistic, public
expenditure on health in Romania was 3.8 % of GDP in 2009 and 3.6 %
of GDP in 2010. The second is based on the system of health accounts. According
to this statistic, public expenditure on health was 4.5 % of GDP in
2009, the latest available data.

[29] Long procedures for land acquisition,
limited administrative capacity, inadequate project preparation and limited
availability of national funding are the main factors
underlying this low absorption capacity.

[30] Romania’s railways services are considered by consumers as
performing relatively poorly. According to the Commission’s 8th
Consumer Markets Scoreboard, it has the third lowest assessment in the EU and
second lowest assessment among the 30 domestic services markets.
(See: http://ec.europa.eu/consumers/consumer\_research/editions/docs/8th\_edition\_scoreboard\_en.pdf).

[31] According to the World Economic Forum
Global Competitiveness Report 2011-2012, Romania ranks lowest in the EU on
satisfaction with the quality of road infrastructure. See World Economic Forum, The Global Competitiveness Report 2011-2012,
available at: http://www3.weforum.org/docs/WEF\_GCR\_Report\_2011-12.pdf.

[32] RO — 22 % vs. EU — 14.5 %
of total value added in 2009.

[33] In particular, in motor vehicles,
electrical equipment, machinery and equipment and basic metals.

[34] As regards companies, in 2012, only 5.0 %
sold online (EU average is 14 %), and only 4.8 % of SMEs sold on-line
(EU average is 13.4 %).

[35] EUR 1.9 million per EUR 1 million GDP, well below the EU average of
EUR 5.3 million loan volume per EUR 1 million GDP.

[36] European Central Bank’s
Statistical Data Warehouse, the Monetary Financial Institution (MFI)
interest rate and Loan
volumes sections — data
for January-March 2012.

[37] JEREMIE (Joint European Resources for Micro to
Medium Enterprises) is an initiative of the European Commission developed
together with the European Investment Fund promoting the use of financial
engineering instruments to improve access to finance for SMEs via Structural
Funds interventions.

[38] The EU Justice Scoreboard: a tool to promote effective justice and
growth, COM(2013) 160 final.

[39] A comprehensive evaluation of the Romanian judicial system
http://courtoptimization.wix.com/ewmi#

[40] The EU Justice Scoreboard: a tool to promote effective justice and
growth - COM(2013) 160 final, p. 21.

[41] COM(2013) 47 final.

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