PSD and PNL won the merger, we donated a Patriot system to Ukraine, Naţionala reached the eighth at Euro 2024

The first month of summer was more hectic than usual due to the fact that, in addition to the budgetary problems faced by the Government, on June 9 we had European parliamentary and local elections, new amendments to normative acts in the field of taxation, but also the continuation of the policy of budget rectification through the decisions by which the Ciolacu Cabinet supplements the amounts allocated to the subordinate ministry, a policy criticized many times by the Fiscal Council.

It is certain that the budget rectification through a number of government decisions, as well as the adoption of normative acts that increase the envelope of budget expenditures - for example, the increase of the gross minimum wage in the economy from July 1, 2024 or new hires in the public system - has materialized negative in the budget execution for the first five months of the year. Thus, according to the budget execution published on June 28 by the Ministry of Finance, at the end of May the budget deficit amounted to 3.4% of GDP, i.e. 60.1 billion lei, so that according to the preliminary data, at the end of the first semester it will reach 3. .61% of GDP, which does not give any hope that the Government will reach at the end of 2024 the target of 5% budget deficit - 87 billion lei - assumed with the European Commission and approved by the state budget law.

Under these conditions, on June 19, the officials of the European Commission warned in a report that the Government has not been able to put a brake on budget spending and therefore they expect that at the end of 2024 we will record a deficit of 7% of GDP.

Under these conditions, the need to finance budget expenditures increased, so that the Ministry of Public Finance launched in June two titles of issues Fidelis and Tezaur, issues through which it attracted over 7 billion lei to the state budget in the first six months of the current year .

The acute need for financing is also felt in the private business environment, according to the report on financial stability for the first semester published last month by the National Bank of Romania, which shows that the sector of non-financial companies is characterized by a series of persistent vulnerabilities, the most important among these consisting of the high share of undercapitalized companies (about a third, i.e. over 260 thousand companies).

In all this financial landscape, the Government managed to organize the combined elections of June 9, after which the PSD-PNL alliance won the lion's share of the European Parliament with 19 deputies sent to Brussels, the two parties each taking more than 30% of the votes in the local elections. The unpleasant surprises in these elections were the vote given to far-right parties and the below-expected score recorded by Alianţa Dreapta Unită (USR-FD-PMP0, a score that led to the resignation of Cătălin Drula from the position of president of USR, upon the organization of internal elections fast-forward within the respective political formation, elections after which Elena Lasconi - the re-elected mayor of the Câmpulung Muscel municipality - became the USR president, and after the June 29 Congress, the party's candidate for the position of president of Romania in the presidential elections scheduled in November 24 (first round) and December 8 (second round).

The pleasant surprises on the occasion of the local and European parliamentary elections consisted in the fact that it was the first time since 2007, when the citizens decided to send, through their direct vote, an independent to the European Parliament - Nicu Ştefănuţă and that in the vote for the European Parliament they were present at the polls, 52.4% of the total number of voters, i.e. more than 8.9 million Romanians voted.

Regarding the presidential elections in the fall, we mention that last month the fate of President Klaus Iohannis was practically decided, who, following the refusal of the great powers, had to give up his candidacy for the position of Secretary General of NATO, a position that he will hold from on October 1 by former Dutch Prime Minister Mark Rutte, despite the fact that Iohannis decided together with CSAT members to donate a Patriot system, worth one billion dollars, to Ukraine.

Moreover, President Klaus Iohannis stated at the European Council summit at the end of last month that he will not even obtain a high-ranking position at the level of the European Union, a fact that increased the number of personal failures recorded recently by the occupant of the seat from Cotroceni .

Throughout this hot month at the beginning of summer, we also recorded the fact that the Romanian men's national football team managed, after 24 years, to get out of the first place in the group from the Euro 2024 final tournament after beating Ukraine 3-0, lost 0-2 to Belgium and drew 1-1 with Slovakia. Unfortunately, the national road to Euro 2024 stopped in the round of 16, when Romania lost 0-3 to the Netherlands, after a game dominated by the Batavian players. Euro 2024 also recorded a first: in the four matches played on German grounds, the Romanian national team was supported by more than 92,000 compatriots in the stands of the stadiums.

• Government decisions with a direct impact on the budget deficit

Marcel Ciolacu's government took decisions throughout last month that led to an increase in budget expenditures and a deepening of the budget deficit. Thus, in the June 6 meeting - only three days before the local and European parliamentary elections - the Executive decided to supplement the IMM Plus state aid scheme with 2.49 billion lei, which means funding for another 2,300 companies. Also in the same meeting, the Government increased, as of July 1, the gross minimum wage for the economy from 3,300 lei per month to 3,700 lei per month, a measure that would benefit more than 1.8 million employees.

Moreover, the Ciolacu Cabinet decided on the positive rectification of the Ministry of Transport budget through two government decisions by which it allocated over 4.5 billion lei, but also the start of new investments - a hospital in sector 6 of the Capital worth 145.8 million euro, for which money will be allocated from a loan taken from the Development Bank of the Council of Europe and from the state budget, and a football stadium in the municipality of Slatina, in the total amount of 397 million lei, the sum to be provided as well from the state budget.

Only one week later, on June 13, the Government positively rectifies, also by decision, the budget of the Ministry of Finance, by almost 3 billion lei, in order to allocate an additional 1.36 billion lei to the Ministry of Development at the end of June and to decide to maintain another three months of capping prices on RCA policies.

In order to counteract the increase in budget expenses, the Ciolacu Cabinet also took a set of measures aimed at improving the collection of revenues at the state budget and also increasing some taxes. Thus, on June 13, the Executive decided to increase by 10.4% - the rate of inflation, all the mining taxes provided for by the mining law 85/2003, after which on June 21 it upset the entire business environment, by adopting two emergency ordinances, without prior consultation of the social partners, normative acts that modify the e-Invoice system and introduce the e-VAT system.

Regarding the e-Invoice, the Government decided to extend the use of the electronic invoicing system also for transactions between businesses and final consumers (B2C), optionally between July 1, 2024 and December 31, 2024 and mandatory from January 1, 2025. Thus , with a few well-defined exceptions in the emergency ordinance, all taxable persons issuing invoices to consumers will have to report them in the RO e-Invoice system. If the beneficiaries do not receive the invoices through the RO e-Invoice national system within the stipulated period, for the deliveries of goods or the provision of services paid at the time of delivery/provision, they will be able to notify the competent tax authorities.

Regarding e-VAT, the Government decided to introduce the pre-completed VAT statement that must be modified and/or completed and submitted by taxpayers by the 25th of each month. According to the Executive, the pre-filled RO e-TVA statement is a tool for reducing the current percentage of the VAT fiscal gap, in accordance with the targets of the National Recovery and Resilience Plan, increasing the compliance of revenues with the consolidated state budget, as well as combating fraud and tax evasion . At the same time, through the implementation of the pre-filled VAT statement, the digitization of the National Tax Administration Agency is also targeted, through the introduction of modern digital tools with a role in highlighting and collecting the value added tax. Marcel Boloş, the Minister of Finance, stated that the introduction of the pre-completed VAT statement was made to reduce the unpaid VAT GAP which amounts to 35 billion lei annually. Following protests from the private business environment, the Government decided that, until January 1, 2025,

no sanctions will be applied for not sending the response to the "RO e-TVA Compliance Notice" if there are inconsistencies between the data uploaded into the system by economic operators and those held by state institutions.

• Loans to finance the budget deficit

In addition to the above measures, the Government approved on June 13 a memorandum on the negotiation of a loan agreement with the International Bank for Reconstruction and Development. According to the memorandum, the loan will be used to finance the state budget deficit and refinance the government's public debt. The new loan amounts to the euro equivalent of 650 million dollars, with a maturity of up to 15 years, repayment to be made in a single installment at the end of the maturity period, taking into account a grace period of 14 ,5 years.

The interest rate is equal to the reference rate (based on the 6-month EURI BOR rate) plus the variable margin, with the possibility of subsequent conversion, according to the financier's policy.

In addition to this loan, the Ministry of Public Finance launched in June two titles of shows Fidelis and Tezaur, shows through which it attracted over 7 billion lei to the state budget in the first six months of the current year.

However, the budget execution for the first five months of 2024 published by the Ministry of Finance on June 28 shows us a deficit of 60.1 billion lei, respectively 3.4% of GDP compared to the deficit of 36.91 billion lei, respectively 2 .30% of the GDP related to the five months of 2023. Total revenues amounted to 225.38 billion lei in the first five months of 2024, registering an increase of 14.1% (year/year), mainly supported by the receipts from current income - profit tax, insurance contributions, payroll tax, VAT and non-tax income. The expenses of the consolidated general budget in the amount of 285.48 billion lei increased in nominal terms by 21.8% compared to the same period of the previous year. Expressed as a percentage of the Gross Domestic Product, spending in 2024 increased by 1.6 percentage points compared to the same period in 2023, from 14.6% of GDP to 16.2% of GDP. Personnel expenses totaled 63.87 billion lei, up 20.9% compared to the same period of the previous year. Expressed as a share of GDP, personnel expenses represent a level of 3.6% of GDP, 0.3 percentage points higher compared to the same period of the previous year, taking into account the wage increases granted in 2023.

Expenditure on goods and services was 38.01 billion lei, up 25.7% compared to the same period of the previous year. An increase is reflected in local budgets, respectively 19.8% compared to the same period of the previous year, as well as in the budget of the Single National Health Social Insurance Fund of 26.9% for the settlement of medicines with and without personal contribution and medicines used in national health programs.

From the preliminary data on budget execution at six months, we note that the first semester will end with a deficit of 3.61% of GDP, a level that puts in real danger the achievement of the assumed target for the end of 2024, of 5% of GDP.

• Systemic vulnerabilities reported by the NBR

Under these conditions, the National Bank of Romania drew attention in the report on financial stability for the first semester of the current year, that there are several systemic risks and vulnerabilities regarding the national economy and the state of public finances.

The cited document states: "The sector of non-financial companies is characterized by a series of persistent vulnerabilities, the most important of which is the high share of undercapitalized companies (about a third, over 260 thousand companies). The latter have limited access to financing sources, investment activity is modest, affects productivity and reduces the efficiency of resource allocation in the economy. In addition, capitalization deficiencies affect payment discipline and reduce firms' resilience in times of stress. In this context, the payment discipline of non-financial companies deteriorated in the first half of 2023, with payment arrears in the economy being 4.8 percent above the level of the same period of the previous year. The phenomenon of insolvency remained relatively constant, the stock of companies in insolvency proceedings increasing marginally in 2023 compared to the previous year (+0.7 percent). Insolvent firms are relevant from the point of view of arrears to non-banking partners, generating almost half of them (2022), as well as from the perspective of non-performing bank exposures, representing 26 percent of the total (December 2023). Among the companies in insolvency proceedings, a third represent companies with capitalization deficiencies (33 percent, 2022). Another persistent structural vulnerability in the domestic economy concerns the low degree of financial intermediation. Romania maintains its last position in the ranking of European Union countries in terms of the degree of financial intermediation (49.9 percent, calculated as the share of banking sector assets in GDP, Q3 2023), the indicator being at values much lower than similar economies in region (89.2 percent in Poland, 91.8 percent in Bulgaria, 112.4 percent in Hungary), being about 4.4 times lower than the European Union average. Similarly, the level of bank credit granted to the private sector in Romania remains at its lowest level in the EU (24 percent of GDP). The maintenance of financial intermediation at low levels in Romania is largely due to structural factors".

The BNR experts also show that in the short term, the most important risk factors for financial stability in Romania are: uncertainties at the global level in the context of the war in Ukraine and the conflict in the Middle East, the tension in internal macroeconomic balances, the risk of non-payment of contracted loans by the non-governmental sector and the risk associated with cyber security and financial innovation challenges.

They also argue that delays, especially in the case of projects financed by PNRR grants, could generate additional indirect pressure on the fiscal-budgetary balance, by materializing late and in small proportions, the favorable impact on economic growth. The report also shows that the tension in macroeconomic balances continued to manifest itself, with the level and persistence of twin deficits generating important risks to financial stability. The report states that the budget deficit is among the highest in the EU (-6.6 percent in 2023, according to the SEC 2010 methodology), after those recorded in Italy and Hungary, and the level of tax revenue collection is still among the highest reduced from Europe, they represent 26.61 percent of GDP, against an EU average of 40 percent (data for 2023), while current expenditure amounts to around 33 percent of GDP. That is why BNR experts claim that there is a need to improve collection, but also to make public spending more efficient.

• Social democrats and liberals, beneficiaries of combined elections

The decision to merge the local elections with the European Parliament elections on June 9 was auspicious for PSD and PNL, which ranked in the first two positions in the citizens' preferences. In the European parliamentary elections of June 9, the PSD-PNL alliance obtained 48.55% of the votes, which means 19 of Romania's 33 MEPs. AUR obtained 14.93%, Alianţa Dreapta Unită - 8.71%, UDMR - 6.48%, SOS Romania - 5.03% REPER - 3.74%, Nicu Ştefănuţă - 3.08%.

Following the elections for the European Parliament, the following mandates were obtained: PSD-PNL Alliance - 19 seats, AUR - 6 seats, ADU - 3 seats, UDMR - 2 seats, S.O.S. Romania - 2 seats and one seat for the independent candidate Nicolae Ştefănuţă.

52.4% of voters participated in the vote, i.e. 8,942,629 citizens with the right to vote. 542 Romanians applied to fill one of the 33 seats allocated to Romania in the European Parliament. That is, there were 16 Romanian candidates for one seat, of which only 32% were women.

As for the local elections, 207,389 people registered as candidates. The local elections concerned the voting of mayors in 3,186 localities, the voting of local and county councilors. Of the 11,386 candidates registered for the positions of mayors, 9,776 ran in rural areas, and 1,610 in urban areas. In rural areas, for the positions of mayor, 10.56% of candidates were women, and in urban areas - 12.36% of candidates were women. The youngest candidate for the elections held on June 9 is 23 years old, and the oldest is 100 years old.

Following the vote for the local elections, the Central Electoral Bureau recorded the following results: PSD - 2,987,993 votes (34.92%), PNL - 2,543,571 votes (29.73%), AUR - 544,144 votes (6 .36%), United Right Alliance (USR - PMP - Forţa Dreptei) - 493,147 votes (5.76%), PSD-PNL electoral alliance (in several urban localities) - 458,224 votes (5.36%), UDMR - 378,591 votes (4.42%), independent candidates - 324,258 votes (3.79%). The voter turnout was 49.97%. The total number of validly cast votes was 8,555,788 (96.78% - of the number of those who went to the polls).

Among the surprises recorded are the re-election of Nicuşor Dan as general mayor of the Capital with 47.94% of the votes, the re-election of Elena Lasconi (USR) and Dominic Fritz (USR) as mayors in Câmpulung Muscel and Timişoara, the loss of the elections in Sector 1 of the Capital by the incumbent mayor Clotilde Armand (USR) in favor of the liberal George Tuţă, the victory of the independent Mihai Poliţeanu in the Ploiesti mayor's office, the victory of the liberal Valeriu Iftime in the Botoşani County Council, but also the loss of the leadership of the Suceava County Council by the liberal leader Gheorghe Flutur.

The mandates of mayors, local councilors, county councilors and presidents of county councils elected on June 9 will begin on November 1, 2024.

• Patriot system donated to Ukraine

In the CSAT meeting on June 20, President Klaus Iohannis and the members of this structure decided what US President Joe Biden had asked of Iohannis since the beginning of June: the transfer of a Patriot system to Ukraine. The Presidential Administration's press released show in during the meeting of the Supreme Council of Defense of the Country, Angel Tîlvăr, the Minister of National Defense, presented to the CSAT members a detailed analysis regarding the situation of the operationalization of the four Patriot systems, the progress of the program of endowment with the other three systems, the importance their operational at national and allied level, as well as the impact generated by a possible transfer of a system. The cited source shows that, given the significant deterioration of the security situation in Ukraine, as a result of Russia's constant and massive attacks on civilians and civilian infrastructure, especially on energy, as well as the regional consequences of this situation, including on security Romania, in close coordination with the Allies, Council members decided to donate a Patriot system to Ukraine. This donation is made on the condition that our country continues its negotiations with the Allies, especially with the American strategic partner, in order to obtain a similar or equivalent system, which meets the need to ensure the protection of the national airspace, to modernize the Romanian Army and to ensure interoperability with the NATO system, being, at the same time, necessary to identify a temporary solution to cover the operational vulnerability thus created. The decision was based on an in-depth technical evaluation of the Romanian authorities, all measures being taken to eliminate the risk of creating possible vulnerabilities for Romania. At the same time, they will continue discussions with allies so that our country's air defense is further strengthened.

A single recently produced Patriot battery costs more than $1 billion, with $400 million for the system and $690 million for the missiles in a battery, according to the Center for Strategic and International Studies think tank.

During the same CSAT meeting, Klaus Iohannis announced that he was giving up his candidacy for the post of NATO Secretary General and the members of the Council approved that Mark Rutte be supported by our country for this position as well, a fact confirmed at the meeting of the representatives of the member states of the alliance that took place at the end of last month and which established that, from October 1, the former Dutch Prime Minister will take over the mandate from Jens Stoltenberg.