COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Romania and delivering a Council opinion on the updated Convergence Programme of Romania 2011-2014

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COUNCIL OF Brussels, 20 June 2011

(OR. en) THE EUROPEAN UNION

11390/11

ECOFIN 370 UEM 146 SOC 516 COMPET 275 ENV 489 EDUC 156 RECH 191 ENER 191 LEGISLATIVE ACTS AND OTHER INSTRUMENTS

Subject: COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Romania and delivering a Council opinion on the updated Convergence Programme of Romania 2011-2014

COUNCIL RECOMMENDATION

of

on the National Reform Programme 2011 of Romania

and delivering a Council opinion

on the updated Convergence Programme of Romania 2011-2014

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular

Articles 121(2) and 148 (4) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the

surveillance of budgetary positions and the surveillance and coordination of economic policies , and

in particular Article 9(3) thereof,

Having regard to the recommendation of the European Commission,

Having regard to the conclusions of the European Council,

Having regard to the opinion of the Employment Committee,

After consulting the Economic and Financial Committee,

Whereas:

(1) On 6 May 2009, the Council adopted Decision 2009/459/EC to make available to

Romania medium-term financial assistance for a period of three years under the provisions

of Article 143 of the Treaty. The accompanying Memorandum of Understanding signed

on 23 June 2009 and its successive supplements lay down the economic policy conditions

on the basis of which the financial assistance was disbursed. Decision 2009/459/EC was

amended on 16 March 2010 by Decision 2010/183/EU. Following Romania's successful

implementation of the programme, and given a partial adjustment of the current account

because of remaining structural weaknesses in Romania's product and labour markets

which make the country sensitive to international price shocks, on 12 May 2011 the

Council adopted Decision 2011/288/EU to make precautionary medium-term financial

assistance available to Romania for a period of three years under Article 143 of the Treaty.

The accompanying Memorandum of Understanding is to be signed in [June 2011].

(2) On 26 March 2010, the European Council agreed to the Commission's proposal to launch a

new strategy for jobs and growth, Europe 2020, based on enhanced coordination of

economic policies, which will focus on the key areas where action is needed to boost

Europe's potential for sustainable growth and competitiveness.

(3) On 13 July 2010, the Council adopted a recommendation on the broad guidelines for the

economic policies of the Member States and the Union (2010 to 2014) and,

on 21 October 2010, adopted a decision on guidelines for the employment policies of the

Member States, which together form the "integrated guidelines". Member States were

invited to take the integrated guidelines into account in their national economic and

employment policies.

(4) On 12 January 2011, the Commission adopted the first Annual Growth Survey, marking

the start of a new cycle of economic governance in the EU and the first European semester

of ex-ante and integrated policy coordination, which is anchored in the

Europe 2020 strategy.

(5) On 25 March 2011, the European Council endorsed the priorities for fiscal consolidation

and structural reform (in line with the Council's conclusions of 15 February

and 7 March 2011 and further to the Commission's Annual Growth Survey). It underscored

the need to give priority to restoring sound budgets and fiscal sustainability, reducing

unemployment through labour market reforms and making new efforts to enhance growth.

It requested Member States to translate these priorities into concrete measures to be

included in their Stability or Convergence Programmes and National Reform Programmes.

(6) On 25 March 2011, the European Council also invited the Member States participating in

the Euro Plus Pact to present their commitments in time to be included in their Stability or

Convergence Programmes and their National Reform Programmes.

(7) On 2 May 2011, Romania submitted its 2011 Convergence Programme update covering

the period 2011-2014 and its 2011 National Reform Programme. The two programmes

have been assessed at the same time.

(8) Between 2002 and 2008 the Romanian economy grew strongly, with real GDP growth

averaging 6,3 %, above its level of potential growth. Economic growth was primarily

driven by domestic demand, as strong credit and wage developments boosted private

consumption and investment. This boom was also fuelled by foreign capital inflows, which

led to overheating and unsustainable external and fiscal imbalances. The current account

deficit peaked at 13,4 % of GDP in 2007 and decreased only marginally to 11,6 % of GDP

in 2008. According to the Commission's latest long-term sustainability assessment, the

risks with regard to long term sustainability of public finances appear to be high. However,

this assessment does not yet take into account the comprehensive pension reform measures

undertaken in 2010, which have substantially improved the long run sustainability of the

Romanian pension system. The high external borrowing was driven by a pro-cyclical fiscal

policy, with headline deficits increasing from 1,2 % of GDP in 2005 to 5,7 % of GDP

in 2008 as a result of recurrent budgetary slippages, notably with respect to current

spending. The financial crisis and the ensuing global economic downturn increased

risk-aversion amongst investors, leading to a significant tightening of capital flows to

Romania. Labour market participation did not rise despite the favourable economic

conditions and the employment rate changed very little during the boom years. The

employment rate then fell to 63,3 % by 2010 while the unemployment rate increased

from 5,8 % in 2008 to 7,3 % in 2010 as a result of the economic downturn. Unemployment

remains particularly high among vulnerable groups, e.g. the Roma population. Against this

background and facing acute private financing needs, the Romanian authorities requested

international and EU financial assistance in May 2009.

(9) Following the successful implementation of the EU-IMF adjustment programme, and in

order to consolidate these positive achievements, a precautionary EU-IMF programme

for 2011-2013 was negotiated with the authorities. That new programme continues the

fiscal consolidation, fiscal governance reforms and preservation of financial stability

started under the 2009-2011 programme. In addition, it puts a strong emphasis on the

structural reforms in product (in the energy and transport sectors) and labour markets

necessary to unleash Romania's growth potential, foster job creation and increase the

absorption of EU funds. Romania remains on track to achieve the cash deficit target

of 4,4 % of GDP in 2011 (below 5 % of GDP in ESA terms). This would also provide an

adequate basis for achieving the deficit target of below 3 % of GDP for 2012, although

additional measures may be needed according to the Commission services' spring 2011

forecast. The authorities have also taken steps to achieve the structural reform objectives of

the new programme and continue to maintain financial stability.

(10) Based on the assessment of the updated Convergence Programme pursuant to

Regulation (EC) No 1466/97, the Council is of the opinion that the macroeconomic

assumptions underpinning the projections in the programme are plausible. The

Convergence Programme aims to correct the excessive deficit by the 2012 deadline set by

the Council in its recommendation of 16 February 2010. The programme targets headline

deficits of 2,6 % of GDP in 2013 and of 2,1 % of GDP in 2014, with the envisaged

consolidation being mostly expenditure-based. According to the structural balance

recalculated by Commission services, the medium-term objective (MTO) will not be

achieved within the programme period. The consolidation strategy appears to be

frontloaded with the structural improvement being concentrated in 2011 and 2012. By

contrast, there is no improvement in the structural balance in 2013 and 2014. The deficit

path foreseen is appropriate in 2011 and 2012, but not in 2013 and 2014. The main risks to

the budgetary targets are implementation risks, the arrears of state-owned enterprises

which represent a serious contingent liability for the budget, and the reservations expressed

by the Commission (Eurostat) about Romania's excessive deficit procedure notification. In

view of the latter, Romania has committed to give priority to improving the compilation of

government finance statistics in ESA 95 within the National Statistical Institute.

(11) Romania has made its commitments under the Euro Plus Pact in its National Reform

Programme and Convergence Programme, which were submitted on 2 May 2011. Most of

these commitments have been or are being met as part of the medium-term financial

assistance programme and are broadly appropriate to address existing challenges under

the Pact.

(12) The Commission has assessed the Convergence Programme and National Reform

Programme, including the Euro Plus Pact commitments. It has taken into account not only

their relevance to sustainable fiscal and socio-economic policy in Romania but also their

conformity with EU rules and guidance, given the need to reinforce the overall economic

governance of the EU by providing EU level input into future national decisions.

(13) In light of this assessment, also taking into account the Council Recommendation under

Article 126(7) of the Treaty on the Functioning of the European Union

of 16 February 2010, the Council has examined the 2011 update of the Convergence

Programme of Romania and its opinion is reflected in the recommendation below. Taking

into account the European Council conclusions of 25 March 2011, the Council has

examined the National Reform Programme of Romania,

HEREBY RECOMMENDS that Romania:

Implement the measures laid down in Decision 2009/459/EC as amended by

Decision 2010/183/EU, together with the measures laid down in Decision 2011/288/EU and further

specified in the Memorandum of Understanding of 23 June 2009 and its subsequent supplements,

and in the Memorandum of Understanding of [June 2011] and its subsequent supplements.

Done at Brussels,

For the Council

The President

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