Romania to undergo excessive deficit procedure

• The European Commission will avoid applying some drastic measures for the duration of the economic crisis

Andreea Arăboaei

On Wednesday, the European Commission will launch the excessive deficit procedure against Romania, Malta, Poland and Lithuania for exceeding the budget deficit limit of 3% of the GDP, set by the Maastricht agreement, which is a requirement for being accepted as part of the Euro zone.

On "Wednesday, the Commission will take the first step for launching the excessive deficit procedure against several countries", an official of the Commission said, as quoted by Reuters, who added that, the Commission would set deadlines next week for reducing the deficits. Economic and Monetary Affairs Commissioner Joaquin Almunia also said that the Commission would proceed with disciplinary steps versus the aforementioned countries, but did not elaborate on the matter.

Prime Minister Emil Boc yesterday blamed the previous government for the decision of the EC, saying that the Tăriceanu government left behind a deficit amounting to 5.4% of the GDP. "Unfortunately, the European Commission will launch the excessive deficit procedure against Romania, due to the irresponsibility of the previous government, which allowed to the deficit to rise to 5.4% without directing it towards investments", the prime-minister said.

Member of the European Parliament Daniel Dăianu said that the European Commission should be more lenient towards the countries which have exceeded the allowed deficit levels than it was before the economic crisis, because it was the Commission itself that recommended using economic stimuli to mitigate the effects of the crisis, which would by default cause the budget deficit to increase.

"It must be said that, bringing the budget deficit below 3% of the GDP for all these countries, including Romania, would take some time, and it is easy to see that the 2010 forecasts for European countries exceed the levels set in the Maastricht agreement", Mr. Dăianu said.

Mr. Dăianu also added that, in Romania"s case, the Commission will take into consideration the fact that during the period of economic growth the budget deficit was larger, whereas it should have been lower, which is the monitoring will take into consideration the fact that the deficit is not caused by the economic crisis alone.

The need to secure long term financial resources will also be taken into consideration, as a result of unfavorable demographic evolution, Daniel Dăianu added.

Following the monitoring, the Commission will issue recommendations for Romania, Mr. Dăianu said: "We will most likely be asked to reform the public sector and public spending, a true multi-annual scheduling, as well as increasing the responsibility of the public administration".

According to the agreement concluded with the IMF, Romania is required to lower its budget below 3% of the GDP by 2011, and according to the forecasts of the European Commission, the budget deficit would reach 5.6% of the GDP next year.

Laurian Lungu, Managing Partner for Macroanalitica, considers that the launching of the excessive deficit procedure against Romania is not a big issue, especially as this is something that happened to several other countries. He says this should be considered more like a warning than a penalty from the European Commission.

• Will Romania"s sovereign rating be affected?

The initiation of the excessive deficit procedure will not impact Romania"s sovereign rating, Moody"s analyst Kenneth Orchard says, who said that the 5% deficit was already known in March when Moody"s affirmed Romania"s sovereign rating.

Andrew Colquhoun, of Fitch Ratings, said that they would take into account Romania"s fiscal situation. "The lack of fiscal discipline when the economy is working and the risk that this attitude entails are reflected by our current "BB+" rating with a negative outlook".

In turn, Marko Mrsnik of Standard and Poor"s, said that the inclusion of Romania on the excessive deficit watchlist of the European Commission would not impact Romania"s sovereign rating.

Theoretically, the excessive deficit procedure could lead to fines for countries that exceed the maximum allowed budget deficit for a long time, or to the freezing of the European aids for countries that are not part of the Euro zone.

However, the European Commission said it would avoid drastic sanctions while the economic crisis lasts and issued generous deadlines for adjusting the fiscal deficits.