EU gives Romania an extra year to cut budget deficit

09/02/2010

The European Commission applauds efforts Romania is making to bring its deficit under control, and offers it more time.

(Financiarul, Nine o' Clock - 09/02/10; AFP, Reuters, DPA, Mediafax, HotNews.ro, European Commission - 08/02/10)

"Romania has made a serious effort to limit the deterioration of its budget deficit and to preserve macroeconomic stability during the past year," EU Monetary Affairs Commissioner Joaquin Almunia said. [Getty Images]

The European Commission (EC) proposed on Monday (February 8th) that the deadline given to Romania to trim its budget deficit should be extended by one year to 2012, because of the severity of the economic downturn.

"Romania has made a serious effort to limit the deterioration of its budget deficit and to preserve macro-economic stability during the past year," said Joaquin Almunia, outgoing EU Economic and Monetary Affairs commissioner. "The worsening of the economic situation since the initial recommendations were made justifies extending the deadline by one year."

Announcing its new proposal, Brussels said that Romania took effective action to trim its fiscal gap last year, citing the reduction of the country's public wage bill and of public expenditure on goods and services.

Despite the moves, Romania's exports have dropped significantly and domestic demand has shrunk due to the global economic and financial crisis. As a result, the economy is believed to have contracted by about 7% in 2009, well above the 4% the EC had forecast last spring.

After years of strong economic growth, Romania was hit hard by the global recession and requested international assistance in March 2009 to cushion the impact. In return for a 20 billion-euro IMF-led rescue package, including a 5 billion-euro contribution from the EU, the country promised a series of reforms to curb public spending.

Last June, Brussels proposed that an excessive deficit procedure (EDP) be opened against Romania in light of its 2008 budget gap of 5.4% of GDP. This exceeded the 3% of GDP limit for bloc members. Recommendations were made to bring it into line by 2011.

Endorsing the EC's proposal, the EU finance ministers adopted a decision on July 7th, setting a six-month deadline for Bucharest to take effective action, while specifying needed corrective measures.

"The 2010 budget also includes a package of measures cutting expenditure by around 2% of GDP and raising revenue by around 0.5% of GDP … a Fiscal Responsibility Law introducing a binding medium-term fiscal framework has been submitted to parliament. It can be concluded that Romania has taken effective action as required by the recommendation," the EC said in a statement.

Warned Almunia: "The consolidation effort must continue ... to ensure the correction of the deficit by 2012."