European Commission’s requirements of Romania prior to approving its 7-year deficit reduction

The Ministry of Finance asked the European Commission that returning to the 3% of GDP deficit target should occur over a period of 7 years and Prime Minister Marcel Ciolacu announced on Tuesday that Romania would sign an agreement to this effect with the next European Commission.

For this to occur, the Ministry of Finance must send to Brussels a series of statistics and analyses this fall, claim sources close to the negotiations.

Romania is in the excessive deficit procedure since before the pandemic and the crises triggered by Russia’s invasion of Ukraine.

The Commission’s list of requirements

The European Commission, which is going to supervise a customized budget plan for Romania and other states against which the decision was taken to initiate excessive deficit procedures, communicated to Romania that it must receive a series of data in order to allow the return to the maximum period for deficit target permitted by the new fiscal rules:

• A detailed analysis of public spending at the level of institutions and companies with state capital.
• A plan to improve the revenue collection degree, stressing the VAT gap reduction.
• A plan for digitalization and fighting tax evasion measures over the period of deficit adjustment.
• An analysis of revenues resulted from natural resources exploitation and state assets capitalization.

The Commission has indications that the “reforms” operated by the government targeting the VAT gap and budgetary structures.

The big problem for Brussels is not Romania’s revenues – with the notable exception of VAT fraud – but how the state spends these revenues, hence the insistence with which Romania is asked to carry out structural reforms.

Romania pleads in Brussels for the granting of the maximum period to return to the 3% deficit, arguing the high level of public investments for this year and the next two years – a critical period for implementing PNRR projects and making investments in Defense.

New tax rules

EU’s new fiscal rules enforced since April this year maintain the original deficit and debt thresholds of 3% and 60%, respectively, of the annual GDP, established by the Stability and Growth Pact (SGP) of the 1990s. However, the SGP requirement to reduce national debt excess in relation to GDP by 1/20 each year was relaxed.

Member states breaching these two limitations must follow customized budgetary plans recommended by the European Commission, detailing the manner in which they may approach fiscal compliance given a term of four years or, if the external debt level is moderate and specific reforms are made, seven years.

Last month, the European Commission announced it would initiate so-called “excessive deficit procedures” (EDP) against Belgium, France, Italy, Hungary, Malta, Poland and Slovakia, their deficits exceeding 3% of the annual GDP in 2023.The Commission also found that Romania “has not taken effective measures to improve its general fiscal position”, being estimated to record the largest deficit in the bloc this year and the only country in the EU subject to an ongoing Excessive deficit Procedure.

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