European Commission recommendations for Romania

Romania is experiencing economic imbalances, the European Commission has warned

Leyla Cheamil, 28.02.2019, 13:46

Romania is one
of the ten EU Member States currently facing economic imbalances. This is the
recommendation stemming from the European Commission’s winter report for
Romania which assesses the country’s progress on economic and social
priorities.

In its report
the European Commission highlights the need to promote investment, pursue
responsible fiscal policies and implement well-designed reforms. Challenges
vary significantly across countries and call for appropriate and determined
policy action. As regards Romania, the report shows that no real progress has
been made concerning the fiscal framework, the minimum wage or the governance
of state-owned companies.

The European
Commission believes further efforts are needed in order to obtain tangible
results. In its assessment, the Commission warns that the power of the tax
system to reduce poverty and correct social disparities is limited. Income
inequality remains one of the highest in the EU and a third of Romanians are at
risk of poverty, the highest rates in the EU, the report also reads.

The document
also points to the fact that the tax structure is characterized by low levels
of revenues, with high reliance on consumption taxes. The tax-to-GDP ratio
stood at 24.9 % in 2017, the lowest value since 1996. This represents the
second lowest level in the EU – well below the EU average of 39.2 %.

Moreover, EU experts
repeatedly refer to the Government’s emergency decree no. 114, which brings a
series of fiscal modifications, some criticized both by the opposition and the
business sector. At the end of last year, without impact assessment or
consultation of stakeholders, the government adopted an emergency decree
introducing a new tax for banks (the tax on greed) levied on total
assets exceeding 2% of the interbank interest rate (ROBOR).

The Commission
says the tax is likely to put a strain on financial stability by impacting the
solvency and profitability of banks and by worsening further the situation of
weaker banks. At the same time, the tax could also impact credit activity and
reduce flexibility for monetary policy. The European Commission report shows
that the measures stipulated by decree no. 114 weaken the second pillar of
pensions based on defined contributions.

The measures
have a negative impact on Romanians’ future pensions and will hamper the
development of the capital market and future investment, will increase
uncertainty and make Romanian economy less attractive for both domestic and
foreign investors.