Romania, the only EU country penalized for the budget deficit. Why fines are not applied to Western states

Currently, Romania is the only state for which the EU has an ongoing excessive deficit procedure. The measure was taken in the spring of 2020, and the Bucharest government has until the end of the current year to reduce the budget deficit. The first corrective recommendations applied under the umbrella of this mechanism came in 2003, against France and Germany. Since then, the European institutions have found no less than 22 times that certain states in the euro zone exceed the imposed threshold, shows an analysis carried out by two Dutch economists in 2019. Another calculation pointed out that, for the 38 procedures opened in total up to 2016, the average duration was four years. At the start of the procedure, the average deficit was 5%, falling below 3% at its end. Conversely, if the public debt was on average 58% at the beginning of the procedures, it reaches 62% at the end.

Since 2017, the only decision of finding a deficit adopted is the one against Romania.

Until the latest changes in the regulations, economic penalties they started with the obligation to make an interest-bearing deposit equal to 0.2% of GDP, in the preventive phase of the mechanism, when the Commission estimated that the deficit risks exceeding the threshold of 3% of GDP. In the correction phase, the sanctioned state would have been obliged to make another deposit, equal to 0.2%, this time one that would not accrue interest. A subsequent failure to implement the regulations would have led to converting this deposit into a fine of up to 0.5% of GDPaccording to the procedure at that time.

The enforcement of sanctions has had problems from the outset. In 2003, the Council refused to open excessive deficit procedures against France and Germany after a vote the Commission labeled as illegitimate, The New York Times wrote at the time. At that time, Paris and Berlin used their political influence effectively and they came out of the Council meeting with exponentially looser deficit reduction recommendations: €1 billion for France and no additional deficit reduction for Germany. As at present, Germany had also been the state which insisted most on clear and severe sanctionsin 1997, upon the introduction of fiscal discipline rules.

The reasons why fines and procedures were not applied in a “technical” manner are varied. Among them are the high fines and the political nature of the process. An analysis published even by the head of the secretariat of the fiscal arm of the European Commission in 2023 emphasized that the composition of the Council is eminently political, and the Commission cannot behave as if the decisions it takes in this sphere are only calculations based on technical reasoning.

Calculations and recommendations

To determine the relevant budget deficit for the application of the correction mechanism, European Union rules require that the ratio between the net borrowing of general government – ​​which includes both central government and local executive authorities and the social security funds controlled by them – be taken into account. GDP.

The great recession that also hit the European continent starting in 2009 was accompanied by tough austerity measures in Romaniawhich translated into cuts in social spending and a drop in living standards. The peak of the deficit for Romania it was in 2009, when net loans represented 9.5% of GDP, falling below 3% in 2013. France, on the other hand, did not have such a large deficit in the period following the start of the crisis. In 2009, France’s budget deficit was 7.4% of GDP and remained above the threshold required by the EU until 2018, when it reached 2.3%.

During the coronavirus pandemic, European rules have been somewhat relaxed; supranational bodies have concluded that the exceptional situation caused by the virus requires more investment and aid from the state. In 2020, Romania’s budget deficit was at a level more than double compared to 2019 – 9.3%, compared to 4.3% in the year immediately before the first severe wave of infections. For France, the ratio of net loans to gross domestic product ended up being almost four times higher – 8.9% in 2020, compared to 2.4% the previous year, Eurostat data shows.

In June 2021, the Council announced that it had adopted the recommendations for Romania, which initially had to reduce the deficit by 2022. This deadline was extended, taking into account the effects of the pandemic. Thus, the institution asked Romania for deficit targets for 2021 (8%), 2022 (6.2%), 2023 (4.4%) and 2024 (2.9%). In the first two of these years, Romania met its targets, running a deficit of 7.2% in 2021 and 6.2% in 2022, but this increased by 0.5% last year. In April, Government sources said that The executive is negotiating new conditions with the European Commission to postpone by three years the moment when the deficit reaches below 3%.

Current economic needs

In anticipation of the June Commission meeting, Poland, Romania and Slovakia appear before the European institutions, saying that the current level of the budget deficit is a consequence of increased spending on the military, after Russia invaded Ukraine in February 2022, the Financial Times points out. New investment can be excluded from the deficit calculation, but not current spending, such as the salaries of members of the armed forces, the quoted source writes.

The renegotiation of the fiscal mechanisms of the European Union in the post-pandemic context was a chance to introduce some changes which would not require so many cuts in public spending, explained two economists in an analysis published earlier this year. Two distinct camps had formed during the negotiations: Austria, Germany and the Netherlands campaigned for a mechanism supporting austerity measureswhile Italy argued that the necessary expenses for the green transition they should not be counted in the calculation, either France had adopted a position similar to that of Poland and Romania. Two of the few relaxations obtained were that the reduction of the public debt could be done over a longer period, between four and seven years, and the removal of the requirement to reduce the public debt by 5% per year, reported Politico.

As the 2003 case of the two major European powers points out, the application of the correction procedure it is not an automatic mechanism, free from the influence of political factors; The Commission must decide whether to start the excessive deficit procedure, after which the Council (which brings together relevant EU ministers) chooses to make recommendations and impose deadlines. In principle, a state has between three and six months to implement the recommendations, and if it does not, the Council can apply sanctions, a 2014 graphic from the Commission showed. The procedure has not changed, with the amendments adopted at the end of April.

Council fines can be as high as 0.05% of the previous year’s GDP – one tenth of the previous ceiling – and can only be applied to states that have adopted the euro currency, the new version of the regulation states. The legislative changes have been published in the Union’s official journal and are in force. Growth-focused experts see these rules, whether in the old or the new form, as a “fiscal straitjacket” as European states have ambitious targets to transition to a less polluting economy, propose digital transformations and must take concrete action to combat the effects of disastrous climate change.