EC opens excessive deficit procedure in Romania’s case

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The European Commission (EC) on Wednesday opened the excessive deficit procedure in the case of Romania, Poland, Lithuania and Malta. The decision was taken in accordance with the relevant provisions of the Treaty establishing the European Community and the Stability and Growth Pact.

On April 1, 2009, the four countries – of which only Malta is a member of the Eurozone and is not for the first time facing excessive government deficits – notified the Commission about their government deficits having exceeded 3 percent of the Gross Domestic Product (GDP) in 2008.

The spring projections of the European Commission indicate that Romania’s government deficit should be 5.1 percent of the GDP in 2008, compared with 5.4 percent in 2008. Within three weeks after the notification, the Eurostat statistics office of the European Community verified the data released by the member states concerned.

European Commissioner for Economic and Monetary Affairs Joaquin Almunia said government deficit in the case of Romania is well known at the level of the European Commission because discussions were conducted in the past months with Romanian authorities agreeing upon some fiscal adjustment measures.

The European Commission will verify whether the measures adopted by Romania are also in accordance with the country’s commitments to the International Monetary Fund and the European Union in exchange for international financial assistance. A memorandum of understanding concerning this financial assistance is currently underway.

Almunia underscored that the excessive deficit procedure is not a sanction against the countries involved, but an instrument designed to solve existing economic issues.

The implementation of the Stability and Growth Pact and the recommendations for containing the government deficit, said Almunia, is a matter of coordination and collaboration, and the excessive deficit procedure is not a blame and shame attitude.

On the other hand, the commissioner said that in times of crisis, such the current ones, the existence of government deficits is normal, but they should not become a reason to give up financial supervision.

The existence and observance of national commitments, he said, are an important element in boosting the confidence of investors and consumers in the economy of a country.

The European Commission is expected to draw up an analytical report comprising its proposals for correcting the excessive deficit issue; the document will then be submitted to the ECOFIN Council, which is scheduled to meet in July, which will come up with recommendations for containing the government deficits in Romania, Poland, Lithuania, Malta and Latvia, a country which situation was analysed in March and which excessive government deficit is still to be confirmed.

At the same meeting, the ECOFIN Council is expected to present the necessary measures to correct the deficit, accompanied by time limits for their application and the adjustment pace.

Six months after the Council approves the recommendations, which means toward the close of the year, the European Commission will evaluate again the situation to see whether the measures have been adequately applied and whether or not they were efficient.

The report from the European Commission concerning the government deficit of Romania released on Wednesday says ‘Romania pursued a pro-cyclical fiscal policy during the demand boom between 2005-2008, with headline deficits rising from 1.2 percent of GDP in 2005 to 5.4 percent of GDP in 2008, in a context of average real GDP growth of 6.5 percent…

Deficit developments were due to a large degree to overall weak budgetary planning and implementation.’

‘The general government deficit in Romania has reached 5.4 percent of GDP in 2008, above and not close to the 3 percent of GDP reference value.

The breach of the threshold mainly reflects significant slippages with respect to current spending, notably on public wages and social benefits as well as overly optimistic revenue projections and, to a lesser extent, a sudden drop in revenue collection in the last quarter of 2008 owing to the economic slowdown,’ reads the report.

From 2009, in view of the significant external and internal imbalances and in line with the authorities’ economic programme adopted in April 2009 in response to the international financial assistance extended to Romania, fiscal policy is more clearly aiming at correcting such imbalances.

Nevertheless, the Commission services’ spring 2009 forecast still projects the general government deficit to reach 5.1 percent of GDP in 2009 and 5.6 percent of GDP in 2010 against a background of a significant economic slowdown.

These deficit developments also reflect a lack of fiscal consolidation efforts when economic conditions were favourable.

‘The excess over the reference value cannot be qualified as exceptional within the meaning of the EC Treaty and the Stability and Growth Pact, neither can it be considered temporary.

This suggests that the deficit criterion in the Treaty is not fulfilled,’ mentions the report.

The same document indicates that in an attempt to address its macroeconomic imbalances, the Romanian government undertook fiscal consolidation measures in the 2009 budget adopted in February 2009 and amended in April.

Within this budget envelope Romania planned a set of measures aimed at relaunching and stimulating economic growth, notably by allocating a substantial part of spending to public investment.

Several countries have taken measures to stabilise the financial sector, some of which impact on the debt position or constitute a risk of higher deficits and debt in the future, although some of the costs of the government support could be recouped in the future.

Romania took limited financial sector measures of this kind, e.g. mainly a recapitalisation of the two state-owned banks.

The report shows that, according to data with Eurostat, government debt was 13.6 percent of the GDP in Romania in 2008 and is expected to reach 18.2 percent of the GDP in 2009 and 22.7 percent of the GDP in 2010.

‘The excess over the 3-percent threshold in 2008 is to a large extent a reflection of the fact that, since 2006, fiscal policy in Romania has been expansionary, not providing any safety margin to avoid an excessive deficit in a downturn.

The structural balance also deteriorated sharply since 2006 and despite strong economic growth, the government did not plan any structural adjustment in the successive convergence programmes.

In 2008, the deficit outturn was more than twice the official target and this significant deviation is mostly due to weak budgetary management with frequent ad- hoc budgetary amendments, using overly optimistic revenue projections to increase expenditure and shifting capital to current spending,’ says the report.

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