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The Excessive Deficit of Romania – Context and Possible Sanctions

The Excessive Deficit of Romania – Context and Possible Sanctions

The excessive deficit procedure is a major factor in fighting the fiscal deficit for Romania, which is expected to rise to approx. 7% of GDP this year. Due to COVID-19, the EU suspended its budgetary rules for all Member States between 2020 and 2023 by activating the general escape clause. As of 2024, the general escape clause is no longer in effect. The EU has therefore relaunched the deficit-based EDP process under the new rules of the revised economic governance framework.

On 26 July 2024, following the Commission proposal, the Council adopted decisions establishing the existence of excessive deficits for Belgium (-4.4%), France (-5.5%), Hungary (-6.7%), Italy (-7.4%), Malta (-4.9%), Poland (-5.1%) and Slovakia (-4.9%). It also established that the excessive deficit procedure for Romania (-6.6%) should remain open, as the country has been under the excessive deficit procedure since 2020 and has not taken effective action to correct its deficit.

Towards the end of the year, the Council will be invited to adopt recommendations addressed to the Member States to take effective action to correct their deficit within a given time period.

Regarding debt-based excessive deficit procedure (EDP), no debt-based EDPs (referring to 60% of GDP limit) are being opened in 2024. This is because compliance with the new economic governance rules, in force since 30 April 2024, cannot yet be properly assessed. Under the new rules, all Member States need to prepare national medium-term fiscal-structural plans. These must contain a net expenditure path.

As long as highly indebted countries follow their net expenditure path as set by the Council, bringing their debt onto a plausibly downward path and approaching the treaty reference value at a satisfactory pace, they will not be subject to an excessive deficit procedure. Compliance will be assessed regularly.

The EU’s new economic governance framework, in force since 30 April 2024, has changed the way the EDP is carried out. The process involves several key steps. If a Member State exceeds the reference values for deficit or debt, or is at risk of exceeding them in the near future (eventually, Romania for public debt, aside from public deficit), the Commission prepares a report in which it analyses whether the Member State concerned is running an excessive deficit.

If, all relevant factors taken into consideration, the Commission believes that an excessive deficit procedure is warranted for a Member State, it informs the Council accordingly and proposes that the Council adopt a decision establishing that there is an excessive deficit in the Member State concerned. Following the Commission’s proposal, the Council considers any observations made by the Member State concerned and then adopts a decision containing an overall assessment as to whether there is an excessive deficit.

If the Council has concluded that there is an excessive deficit, it then adopts a recommendation, based on a Commission recommendation, setting out how the situation should be rectified. The recommendation may contain a corrective budgetary path, expressed in numerical terms, and a deadline. It is then up to the Member State concerned to take the necessary action within six months.

If, by the deadline, no effective action has been taken, or the Member State does not comply with the recommendation, the Council may impose sanctions, including, for euro area Member States, a fine of up to 0.05% of the previous year’s GDP. The fine needs to be paid every six months until the Council assesses that the Member State concerned has taken effective action. If the Member State continues to fail to comply, the Council has the right to intensify the sanctions.

Council decisions and recommendations are adopted under specific voting rules. The Member State concerned does not have a vote. A qualified majority is reached when at least 55% of the members of the Council representing the participating Member States, representing at least 65% of the population of those states, vote in favour. Any blocking minority must include at least the minimum number of Council members, representing more than 35% of the population of the participating Member States, plus one member.

 

Photo source: PxHere.com.

 
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