EUROPEAN COMMISSION RECOMMENDS: Cut Budget Deficit Below 3% By 2011

Ana Săbiescu

The European Commission has recommended Romania to reduce the budget deficit to less than 3% of the gross domestic product by 2011. For the time being, Romania is targeting a budget deficit of 5.1% of the GDP and is planning to reduce it to less than 3% of the GDP by 2011 in order to achieve compliance with the requirements of the Treaty of Maastricht. The consolidated budget deficit for January - April 2009 has been calculated at 9,357.1 million RON, equal to 1.8% of the GDP.

The Commission also recommended Romania to take the necessary steps to achieve the deficit target for 2009 and specify how it is planning to reduce the budget deficit in 2010 and 2011. Specifically, the Commission wants to know how the Romanian authorities are planning to reduce the payroll in the public system, to strengthen fiscal policy, to introduce limitations on budget revisions and to expedite the reform of the public pension system.

The Commission also wants Romania to strengthen the economy by implementing structural reform, especially by improving the efficiency of the public administration, the improvement of the business environment, the resolution of problems related to illegal employment and the improvement of EU fund absorption.

Romania will have to explain the measures taken to correct the budget deficit, six months after the start of the procedure, on 7 January 2010, according to Joaquin Almunia, E.U. Commissioner for Economic and Monetary Affairs, quoted by NewsIn. He added that, should the explanations to be provided in January prove unsatisfactory, the Commission would most probably reiterate the recommendations.

"The memorandum of understanding will probably prevent such situation. We now have a very powerful instrument to convince the authorities to implement economic measures. If not, we will stop payments, which can lead to even more serious economic difficulties," Commissioner Almunia said.

The risk of having a larger budget deficit and the adjustment of the current account deficit can lead to twin deficits, in which context both imbalances have similar values, according to Lucian Croitoru, Monetary Advisor to the Governor of the National Bank. Adrian Vasilescu, Advisor to the Governor of the National Bank, believes that the budget deficit in 2010 will probably exceed 3%, but there is still time to reduce it until 2011.

• The Romanian economy will show signs of recovery in 2010, Commission says

The European Commission estimates that Romania"s gross domestic product will recede by 4% this year, gain 0.1% in 2010 and then gain 2.4% in 2011. The Commission"s report on the matter indicates that the current economic crisis has drastically reduced private capital flows to Romania and thus caused a significant reduction of economic activities as of the last quarter of 2008. The Commission anticipates that Romania will prefer a restrictive fiscal policy in 2009-2011 in order to correct the fiscal imbalances of the last few years.