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EUROPEAN COMMISSION Strasbourg, 26.11.2024 COM(2024) 725 final Recommendation for a COUNCIL RECOMMENDATION endorsing the national medium-term fiscal-structural plan of Romania EN EN  Recommendation for a COUNCIL RECOMMENDATION endorsing the national medium-term fiscal-structural plan of Romania THE COUNCIL OF THE EUROPEAN UNION, Having regard to the Treaty on the Functioning of the European Union, and in particular Article 121 thereof, Having regard to Regulation (EU) 2024/1263, and in particular Article 17 thereof, Having regard to the recommendation from the European Commission, Whereas: GENERAL CONSIDERATIONS (1) A reformed EU economic governance framework entered into force on 30 April 2024. Regulation (EU) 2024/1263 of the European Parliament and of the Council on the effective coordination of economic policies and on multilateral budgetary surveillance, 1 together with the amended Regulation (EC) No 1467/97 on the implementation of the excessive deficit procedure, 2 and the amended Council Directive 2011/85/EU on the budgetary frameworks of Member States 3 are the core elements of the reformed EU economic governance framework. The framework aims at ensuring public debt sustainability and sustainable and inclusive growth through reforms and investments. It promotes national ownership and has a medium-term focus, combined with an effective and coherent enforcement of the rules. (2) The national medium-term fiscal-structural plans that Member States submit to the Council and to the Commission, are at the centre of the new economic governance framework. The plans are to deliver on two objectives: i) ensuring that, by the end of the adjustment period, general government debt is on a plausibly downward trajectory, or stays at prudent levels, and that the government deficit is brought and maintained below the reference value of 3% of GDP over the medium term, and ii) ensuring the delivery of reforms and investments responding to the main challenges identified in the context of the European Semester and addressing the common priorities of the EU. To that end, each plan is to present a medium-term commitment 1 Regulation (EU) 2024/1263 of the European Parliament and of the Council of 29 April 2024 on the effective coordination of economic policies and on multilateral budgetary surveillance and repealing Council Regulation (EC) No 1466/97 (OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj). 2 Council Regulation (EU) 2024/1264 of 29 April 2024 amending Regulation (EC) No 1467/97 on speeding up and clarifying the implementation of the excessive deficit procedure (OJ L, 2024/1264, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1264/oj). 3 Council Directive (EU) 2024/1265 of 29 April 2024 amending Directive 2011/85/EU on requirements for budgetary frameworks of the Member States (OJ L, 2024/1265, 30.4.2024, ELI: http://data.europa.eu/eli/dir/2024/1265/oj). EN 1 EN  to a net expenditure 4 path, which effectively establishes a budgetary constraint for the duration of the plan, covering four or five years (depending on the regular term of legislature in a Member State). In addition, the plan is to explain how the Member State will ensure the delivery of reforms and investments responding to the main challenges identified in the context of the European Semester, in particular in the country-specific recommendations (including those pertaining to the macroeconomic imbalances procedure (MIP), if applicable), and how the plan will address the common priorities of the Union. The period for fiscal adjustment covers a period of four years, which may be extended by up to three years if the Member State commits to delivering a set of relevant reforms and investments that satisfies the criteria set out in Regulation (EU) 2024/1263. (3) Following the submission of the plan, the Commission shall assess whether it complies with the requirements of Regulation (EU) 2024/1263 (4) Upon a recommendation from the Commission, the Council is to then adopt a recommendation to set the net expenditure path of the Member State concerned and, where applicable, endorses the set of reform and investment commitments underpinning an extension of the fiscal adjustment period. CONSIDERATIONS CONCERNING THE NATIONAL MEDIUM-TERM FISCAL- STRUCTURAL PLAN OF ROMANIA (5) On 25 October 2024, Romania submitted its national medium-term fiscal-structural plan to the Council and to the Commission. The submission took place following an extension of the deadline set out in Article 36 of Regulation (EU) 2024/1263, as agreed with the Commission. The submission deadline was extended as agreed with the Commission in view of the reasons provided by Romania. Process prior to the submission of the plan (6) On 21 June 2024 the Commission sent, according to Article 9 of Regulation (EU) 2024/1263, the reference trajectory 5 to Romania. The Commission published the reference trajectory on 25 October 6. The reference trajectory is risk-based and ensures that, by the end of the fiscal adjustment period and in the absence of further 4 Net expenditure as defined in Article 2 of Regulation (EU) 2024/1263, namely government expenditure net of (i) interest expenditure, (ii) discretionary revenue measures, (iii) expenditure on Union programmes fully matched by revenue from Union funds, (iv) national expenditure on co-financing of programmes funded by the Union, (v) cyclical elements of unemployment benefit expenditure and (vi) one-offs and other temporary measures. 5 Prior guidance transmitted to the Member States and Economic and Financial Committee includes trajectories without and with an extension of the adjustment period (covering 4 and 7 years, respectively). It also includes the main initial conditions and underlying assumptions used in the Commission’s medium-term government debt projection framework. The reference trajectory was calculated on the basis of the methodology described in the Commission’s Debt Sustainability Monitor 2023 (https://economy-finance.ec.europa.eu/publications/debt-sustainability-monitor-2023_en). It is based on the Commission 2024 spring forecast and its medium-term extension up to 2033, and long- term GDP growth and ageing costs are in line with the joint Commission-Council 2024 Ageing Report (https://economy-finance.ec.europa.eu/publications/2024-ageing-report-economic-and-budgetary- projections-eu-member-states-2022-2070_en). 6 https://economy-finance.ec.europa.eu/economic-and-fiscal-governance/national-medium-term-fiscal- structural-plans_en#romania EN 2 EN  budgetary measures beyond the adjustment period, general government debt is on a plausibly downward trajectory or stays at prudent levels over the medium term, and that the general government deficit is brought below 3% of GDP over the adjustment period and is maintained below that reference value over the medium term. The medium term is defined as the ten-year period after the end of the adjustment period. In accordance with Articles 6 point (d), 7 and 8 of Regulation (EU) 2024/1263, the reference trajectory is also consistent with the deficit benchmark, the debt sustainability safeguard and the deficit resilience safeguard. The reference trajectory of Romania sets out that, based on the Commission’s assumptions and assuming a 7- year adjustment period, net expenditure should not grow by more than the values provided in Table 1. This corresponds to average net expenditure growth of 5.2% over the adjustment period (2025-2031) and of 5.5% over the period 2025-2028. Table 1: Reference trajectory provided by the Commission to Romania on 21 June 2024 Average Average 2025 2026 2027 2028 2029 2030 2031 2025-2028 2025-2031 Maximum net expenditure growth 6.1 5.7 5.3 5.0 4.8 4.7 4.5 5.5 5.2 (annual, %) Source: Commission’s calculations. (7) In line with Article 12 of Regulation (EU) 2024/1263, Romania and the Commission engaged in a technical dialogue between July and October 2024. The dialogue focused on the net expenditure path envisaged by Romania and its underlying assumptions, and on the envisaged set of reform and investment commitments underpinning Romania’s request for an extended adjustment period. Discussions focused on the tax reform, the tax administration reform, the reform of the microenterprises tax regime, and spending reviews. It also touched upon the envisaged delivery of reforms and investments responding to the main challenges identified in the context of the European Semester and the common priorities of the Union regarding a fair and green digital transition, social and economic resilience, energy security and the build-up of defence capabilities. (8) In October 2024, in line with Article 11(3) and 36(1), point (c) of Regulation (EU) 2024/1263, according to the information provided by Romania in its plan, Romania engaged in a consultation process with civil society and social partners. According to the information provided by Romania in its plan, on 16 October 2024, the plan was put into public debate with business representatives and the civil society. Other related processes (9) Romania is currently subject to an excessive deficit procedure 7. On 3 April 2020, the Council, acting upon a recommendation by the Commission, adopted Decision (EU) 7 All documents related to the excessive deficit procedure of Romania can be found at: EN 3 EN  2020/509 under Article 126(6) TFEU on the existence of an excessive deficit situation in Romania due to a planned non-compliance with the deficit criterion of the TFEU, and issued a Recommendation under Article 126(7) TFEU with a view to bringing an end to the situation of an excessive government deficit by 2022 at the latest. In light of the deep contraction in economic activity linked to the COVID-19 pandemic, on 18 June 2021 the Council adopted a revised Recommendation under Article 126(7) TFEU to Romania, extending the deadline for the correction to 2024. On 24 November 2021, the Commission concluded that Romania had taken effective action in response to the Council Recommendation of 18 June 2021 under Article 126(7) TFEU and considered that no additional steps in the excessive deficit procedure were then necessary. However, in 2023 all sub-components of the Council Recommendation addressed to Romania in 2021 were missed by a significant margin. The headline deficit was significantly higher (6.5% of GDP vs 4.4% of GDP in the Council Recommendation), the structural effort was much lower than recommended, and growth in net expenditure much higher than recommended. (10) Therefore, on 26 July 2024, the Council established that no effective action had been taken by Romania in response to the Council Recommendation of 18 June 2021 8. The present Recommendation coincides with the revised Council Recommendation under Article 126(7) TFEU with a view to bringing an end to the situation of an excessive government deficit in Romania 9. The simultaneous adoption of those recommendations, which is tailored to and justified by the transition to the new economic governance framework, ensures consistency between the recommended adjustment paths. (11) On 19 June 2024, the Commission concluded that Romania is experiencing excessive macroeconomic imbalances. In particular, Romania faces vulnerabilities related to external accounts, mainly linked to large and increasing government deficits, while significant price and cost pressures have intensified and policy action has been weak 10. (12) On 21 October 2024, the Council addressed to Romania a series of country-specific recommendations (CSRs) in the context of the European Semester 11. SUMMARY OF THE PLAN AND THE COMMISSION’S ASSESSMENT OF THEREOF (13) In line with Article 16 of Regulation (EU) 2024/1263, the Commission assessed the plan as follows: https://economy-finance.ec.europa.eu/economic-and-fiscal-governance/stability-and-growth- pact/corrective-arm-excessive-deficit-procedure/excessive-deficit-procedures-overview/romania_en. 8 OJ L, 1.8.2024, ELI: https://eur-lex.europa.eu/eli/dec/2024/2130/oj 9 Recommendation for a Council Recommendation with a view to bringing an end to the situation of an excessive deficit in Romania, 26.11.2024, COM(2024)957 final. 10 ‘Communication from the Commission to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank’, COM (2024) 600 final, Appendix 4 11 Council Recommendation on economic, budgetary, employment and structural policies of Romania, not yet published. EN 4 EN  Context: macroeconomic and fiscal situation and outlook (14) Economic activity in Romania grew by 2.4% in 2023, driven by domestic demand. According to the European Commission Autumn 2024 Forecast, the economy is expected to grow by 1.4% in 2024, the deceleration reflecting softer developments in industrial production, residential construction, information technology and transport services. In 2025, real GDP is set to increase by 2.5%, supported by resilient private consumption and an acceleration of private investment, both helped by more accommodative financial conditions. In 2026, real GDP is expected to increase by 2.9% as EU-funded investment in public infrastructure should provide a strong stimulus to growth as the RRF programme enters its final stage. Over the forecast horizon (i.e., 2024-2026), potential GDP growth in Romania is expected to average 2.2%, driven by capital deepening and growth in total factor productivity. The unemployment rate stood at 5.6% in 2023 and is projected by the Commission to amount to 5.5% in 2024, 5.5% in 2025 and 5.4% in 2026. Inflation (GDP deflator) is projected to decrease from 12.8% in 2023 to 9.0% in 2024, and to reach 5.9% in 2025 and 5.3% in 2026. (15) Regarding fiscal developments, in 2023 Romania’s general government deficit amounted to 6.5% of GDP. According to the European Commission Autumn 2024 Forecast, it is set to reach 8.0% of GDP in 2024, 7.9% of GDP in 2025 and, on a no- policy change basis, 7.9% of GDP in 2026. The Commission forecast does not reflect Romania’s draft budget for 2025, which has yet to be designed. General government debt was 48.9% of GDP at end-2023. According to the Commission forecast, the debt ratio is expected to increase to 52.2% of GDP at end-2024. It is projected to increase to 56.1% of GDP at end-2025 and 59.7% at end-2026. The fiscal forecast by the Commission does not consider the policy commitments in the medium-term plans as such