EC 2018 spring forecast projected for Romania a public deficit of 3.4 percent and 3.8 percent of GDP for 2018 and 2019

The European Commission issued a warning to Romania on Wednesday for significant deviation from the adjustment path toward the medium-term budgetary objective, estimating a risk of a deviation from that recommendation in 2018, and recommends the government to take the necessary measures to limit the growth rate of expenditure.

“The Council also adopted a subsequent recommendation confirming the need for Romania to take the necessary measures to ensure that the nominal growth rate of net primary government expenditure does not exceed 3.3 percent in 2018, corresponding to an annual structural adjustment of 0.8 percent of GDP,” the Commission said.

For 2019, the Commission recommended Romania to take the necessary measures to ensure that the growth rate of net primary government expenditure does not exceed 5.1 percent.

The Commission estimates there is a risk of a deviation from that recommendation in 2018 and 2019.

The European Commission 2018 spring forecast projected for Romania a public deficit of 3.4 percent and 3.8 percent of GDP for 2018 and 2019, above the 3 percent-of-GDP Treaty reference value.

“Overall, the Council is of the opinion that significant further measures will be needed as of 2018 to comply with the provisions of the Stability and Growth Pact, in light of a strongly deteriorating fiscal outlook, in line with the recommendation addressed to Romania with a view to correcting the significant observed deviation from the adjustment path toward the medium-term budgetary objective,” the Commission points out.

Regarding the cut of social contributions transferred to the second pension pillar (Pillar II) from January 2018, EC said in the specific recommendation to Romania that this is set to have a positive short-term effect on government revenues, but , but could affect capital markets and generate the obligation to pay old-age pensions in the future.

Romania’s government has partially reversed the past systemic pension reform by lowering the proportion of social contributions transferred to the second pension pillar from 5.1 percent of gross wages in 2017 to 3.75 percent from January 2018.

“This cut is set to have a positive short-term effect on government revenues and thus on the general government balance. However, that fiscal gain is set to dissipate in the long term as the social contributions diverted from the second pillar are be accompanied by an obligation to pay old-age pensions in the future,” the report said.

The private pension system including mandatory pension funds (Pillar II) and voluntary pension funds (Pillar III) recorded a positive trend until 2017.

According to European Commission data, the total net assets of the Pillar II pension funds increased from 0.2 percent of GDP in 2008 to roughly 4.6 percent of GDP in 2017.

“The recent reduction in the contributions to the pre-funded second pillar pension funds eased short term fiscal concerns but could have negative implications for the development of capital markets,” the European Commission warns.

Romania will actively participate in debates on specific country recommendations issued by the European Commission, according to a press statement released on Wednesday by the Foreign Ministry (MAE).

"The Ministry of Foreign Affairs has taken note of specific country recommendations published by the European Commission in the framework of the European Semester 2018 and will coordinate the process of drawing up the national position on this issue in order to secure active participation in the decision-making process, which will result the Council of the European Union adopting such recommendations," says MAE.

The European Commission also said to have addressed Romania three country specific recommendations on fiscal policy (1), employment, health, education (2) and public administration (3).

"The number of recommendations addressed to Romania has ranged from eight in 2013 to three in 2018, with the European Commission noticing that Romania has made progress with 68pct of the recommendations of the last five years. In addition, the Country Report 2018 places Romania in the category of member states without macroeconomic imbalances, which is why it does not contain an in-depth review. For 2018, the commission has drawn up in-depth reviews of 12 member states, namely France, Germany, the Netherlands, Bulgaria, Croatia, Ireland, Italy, Portugal, Slovenia, Spain and Sweden," according to MAE.

In the period immediately ahead, according to MAE, the proposals for recommendations submitted by the European Commission will be subject to an in-depth analysis at the level of the ministries responsible for the areas concerned so that the concrete implementation measures can be identified.

MAE informs that the National Reform Programme and the Convergence Program, unveiled by Romania in May, include measures in line with the Romanian Government Programme 2018-2020 and other strategic priorities taken up at the government level, "which largely converge with the recommendations made by the European Commission and contain measures to respond to these challenges."

"In the process of decision-making related to country-specific recommendations, Romania and the other member states may make comments on the text proposed by the European Commission by May 28, 2018, in the spirit of the constant and constructive dialogue that takes place as part of the European Semester. In its capacity as a national coordinator and technical contact point for the Europe 2020 Strategy, MAE is paying increased attention to drawing up and monitoring the implementation of the National Reform Programme, designed to correlate the main action priorities with the Government Programme and involving a wide range of organisational players.''

Further steps will be taken to consult with the relevant stakeholders on the subjects covered by the European Semester, and a new meeting with high-level representatives of stakeholders is expected to take place in the next period, MAE says.

MAE mentions that on Wednesday the European Commission published the European Semester 2018 Spring Package, which comprises country- specific recommendations for EU member states, including Romania. These are based on the priorities taken up as a result of the Annual Growth Survey 2018 and the challenges highlighted by the European Commission in the country reports unveiled in March 2018. The recommendations are intended to guide member states in implementing national reforms, thus supporting the achievement of the Europe 2020 objectives," MAE explains.

"Procedurally speaking, the country-specific recommendations will be discussed at the different levels of the Council of the European Union with a view to being endorsed by the June 2018 European Council meeting and formally adopted in July. The publication of country-specific recommendations is part of the European Semester, a tool for coordinating economic policies and structural reforms in the European Union."

According to MAE, the role of these recommendations is to provide member states with guidance on actions to be taken on macroeconomic, budgetary and structural reform policies, in accordance with Articles 121 and 148 in the Treaty on the Functioning of the EU.

"The country-specific recommendations 2018 are based on the European Commission's assessments included in the country reports released on March 7, 2018, after bilateral meetings and review visits in the context of the European Semester, as well as on the elements provided by member states in their national reform programmes and stability and convergence programmes."

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