Romania is under intense scrutiny from the European Union due to its escalating budget deficit and failure to adhere to fiscal consolidation plans. The European Commission has initiated disciplinary proceedings, potentially leading to the suspension of EU funds if Bucharest does not present a credible plan to rein in its spending by the end of June.
EU Demands Urgent Fiscal Action
The European Commission has formally concluded that Romania has breached its national medium-term fiscal-structural plan, agreed upon in November 2024. With the budget deficit projected to hit 8.6% of GDP this year, significantly above the 7% target, the EC is pushing for immediate and effective corrective measures. The ECOFIN Council is set to discuss these findings on June 20, with a decision on potential disciplinary actions, including the suspension of cohesion and Resilience Facility funds, expected by July 8.
- Romania’s budget deficit is projected to reach 8.6% of GDP, exceeding the 7% target.
- The EC found that Romania’s net expenditure grew by 19.9% year-on-year in 2024, against a target of 14.4%.
- Failure to present a credible fiscal consolidation plan by the end of June could result in the suspension of EU funds.
IMF Recommendations and Domestic Challenges
The International Monetary Fund (IMF) has offered a series of recommendations to help Romania address its fiscal woes. These include increasing VAT to at least 20% in 2025, raising excise duties, and introducing a progressive income tax system with rates of 15% and 25%. The IMF also suggests reducing the microenterprise turnover threshold and increasing dividend taxes.
Romanian President Nicusor Dan has emphasized the urgency of the situation, stating that a credible plan to lower the deficit must be approved by the end of June. While the government is reluctant to implement unpopular tax hikes, focusing instead on spending cuts, the EU and ratings agencies indicate that significant revenue-side adjustments are necessary. The political landscape, with a strong far-right opposition, further complicates the adoption of stringent fiscal measures.
Potential Consequences and Path Forward
The stakes are high for Romania. Failure to comply with EU demands could lead to a downgrade of its credit rating, increasing borrowing costs, and the loss of access to crucial EU funding. The European Commission has made it clear that if no effective action is taken by the ECOFIN Council in July, the macroeconomic conditionality framework will be triggered, impacting both the Recovery and Resilience Facility and cohesion funds.
Romanian officials, including Finance Minister Tanczos Barna, have expressed confidence that EU funds will not be suspended, asserting that teams are working on a comprehensive package of fiscal consolidation measures. However, the pressure is mounting for Bucharest to deliver a concrete and effective strategy to bring its finances back in line with EU requirements.
Sources
- EC concludes Romania breached fiscal consolidation plan, defers disciplinary steps, Romania Insider.
- European Commission concludes Romania breached fiscal consolidation plan, bne IntelliNews.
- Romania to Win Reprieve From EU in Struggle to Contain Deficit, Bloomberg.com.
- IMF recommends Romania to increase VAT and excise duties, introduce two income tax rates in latest report |
Romania Insider, Romania Insider. - Romania must approve credible plan to lower deficit by end-June, president says, Reuters.
