Sunday, 6 June 2010

EU: Convergence programme Romania

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro.

You can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).

You can then move on to the EU Council opinion on the convergence programme of Romania, published in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated convergence programme of Romania, 2009-2012; OJEU 3.6.2010 C 144/12

Economic background

On 26 April 2010 the Council of the European Union examined the updated convergence programme of Romania, which covers the period 2009 to 2012. The EU Council started its assessment with a brief introduction to the economic situation in Romania:

With an average annual GDP growth rate of 6.8 % between 2004 and 2008, Romania was one of the fastest growing EU Member States. Growth was driven by a domestic demand boom for both consumption and investment, which was fuelled by a rapid financial deepening, high capital inflows and steadily increasing income expectations. This, together with high wage inflation, caused the sharp increase in the current account deficit to 12.3 % of GDP in 2008. In addition, years of pro-cyclical budgetary policies led to a sizeable deterioration in the underlying fiscal position, with the structural deficit (i.e. the cyclically-adjusted balance net of one-off and other temporary measures) rising to 8.5 % of GDP in 2008. The sudden increase in risk aversion during the financial crisis caused markets to become increasingly concerned about these imbalances. Capital inflows plunged and pressures on the exchange rate increased, resulting in a cumulative depreciation by about 30 % of the leu against the euro between August 2007 and January 2009. The drop in capital inflows, the balance-sheet effects of the currency depreciation and a sharp decline in export demand caused a severe recession in late 2008 and the first half of 2009, which was reflected in a 7.1 % decline of GDP in 2009. The National Bank of Romania lowered its key rate by a total 325 basis points to 7.0 % between February 2009 and February 2010. The current account deficit narrowed to around 4.25 % of GDP in 2009.

Council recommendation

After a detailed discussion, and in the light of the recommendation of 16 February 2010 under Article 126(7) TFEU, as well as given the need to ensure sustainable convergence, the Council of the European Union invited Romania to:

(i) rigorously implement the fiscal consolidation measures for 2010 agreed as part of the balance-of-payments support programme and take further corrective action, if needed, to achieve the 2010 target for the general government deficit. The Romanian authorities are also invited to specify, in the context of the Medium-Term Budgetary Framework to be prepared by end May 2010, the fiscal consolidation measures necessary to achieve the programme budgetary targets in 2011 and 2012;

(ii) improve the fiscal framework by adopting and implementing the fiscal responsibility law. In particular, take into account the analysis of the Fiscal Council in the design and conduct of fiscal policy;

(iii) adopt and implement the draft pension law which would contribute to significantly improve the long-term sustainability of public finances.

Convergence reports 2010

For a wider view and comparison between nine EU member states still outside the euro area, you can study the convergence reports published by the European Central Bank and the European Commission:

European Central Bank: Convergence Report May 2010 (273 pages)

European Commission: Convergence Report 2010 (Prepared in accordance with Article 140(1) of the Treaty); Brussels, 12.5.2010 COM(2010) 238 final (30 pages)

Commission staff working document accompanying the Convergence Report 2010; Brussels, 12.5.2010 SEC(2010) 598 final (197 pages)

Ralf Grahn