EU Warns Romania On Growing Budget Def, Recommends Fiscal Consolidation

"Romania needs a comprehensive strategy to accelerate structural reforms and fiscal consolidation. In particular, a credible medium-term expenditure planning and a multi-annual budget are urgently needed. Coupled with structural reforms, budgetary consolidation will help address the overheating of the economy and promote a more balanced catching up process with the rest of the EU" said Joaquín Almunia, Economic and Monetary Affairs Commissioner.

The Commission said the approach is necessary to address the growing imbalances in the economy, while allowing Romania to continue its fast convergence towards the average income levels in the EU.

The EC said Romania recorded a nominal budget deficit of 2.5% of GDP in 2007, double than in 2005 and, according to the Commission’s spring forecast, this is projected to increase to 2.9% in 2008 and 3.7% in 2009, under the customary no-policy-change assumption.

It sees structural deficit much higher and increasing from 3.4% of GDP in 2007 to a forecast 3.7% in 2008 and 4.1% in 2009.

“This reflects an expansionary fiscal policy, notwithstanding some recent budgetary measures, and a lack of a credible and predictable-medium term framework,” the EC said in the report.

The EC said Romania needs to maintain its rapid convergence process towards the average income level in the EU (its GDP per capita is 40% of the EU average). It said fiscal policy can play an important role in cooling down internal demand but this would require Romania to make further improvements in its budgetary planning and execution.

The Commission believes that reforms and budgetary consolidation should work together to address the overheating of the economy and promote a more balanced catching up process.

It recommends Romania to take urgent action to implement a binding medium-term fiscal framework with a view to improving the quality of public finances.

“Romania should aim for more ambitious budgetary targets, also to help containing external imbalances, and accelerate structural reforms. In particular, those structural reforms should include an integrated set of measures designed to increase employment, activity rates and productivity levels, especially by: accelerating reforms of the education system to respond better to labour market needs, reducing early school leaving, significantly increasing adult participation in education and training; and transforming subsistence/semisubsistence farming into sustainable employment,” the EC said.