Romania

REFERENCES

Commission Opinion [COM(97) 2003 final - not published in the Official Journal]

Commission Report [COM(98) 702 final - not published in the Official Journal]

Commission Report [COM(1999) 510 final - not published in the Official Journal]

Commission Report [COM(2000) 710 final - not published in the Official Journal]

Commission Report [COM(2001) 700 final - SEC(2001) 1753 - not published in the Official Journal]

Commission Report [COM(2002) 700 final - SEC(2002) 1409 - not published in the Official Journal]

Commission Report [COM(2003) 676 final - SEC(2003) 1211 - not published in the Official Journal]

Commission Report [COM(2004) 657 final - SEC(2004) 1200 - not published in the Official Journal]

Commission Report [COM(2005)534 - SEC(2005)1354 - not published in the Official Journal]

Treaty of Accession to the European Union [Official Journal L 157 of 21.06.05]

SUMMARY

In its July 1997 Opinion, the Commission considered that it was too early to decide on Romania's participation in the euro area immediately upon its accession. It affirmed that Romania's participation in the third stage of economic and monetary union (EMU) while not being a member of the euro area would continue to pose a problem. Romania was therefore requested to make its legislation on the central bank fully compatible with Community requirements and to show how effective its monetary and exchange-rate policies were. As for the free movement of capital, the liberalisation measures introduced by Romania were felt to be too limited though generally consistent with the relevant Europe Agreement.

The November 1998 Report noted that Romania had made some progress in its preparations for joining EMU, but these efforts needed to be sustained, notably to reinforce the financial sector.

The 1999 and 2000 Reports emphasised that significant progress was necessary in order to implement the acquis in this area.

In its November 2001 Report, the Commission noted that no major development had taken place regarding alignment on the EMU acquis.

The October 2002 Report noted that Romania had made only limited progress in adopting the EMU acquis.

In its November 2003 Report the Commission noted that Romania had made no progress in adopting the EMU acquis since the previous regular report.

In its October 2004 Report the Commission welcomes the major progress achieved by Romania in aligning its legislation on the EMU acquis. However, it calls on the Romanian authorities to continue their efforts on this front, particularly with regard to the implementation of institutional and legal reform, and the prohibiting of privileged public sector access to financial institutions and public sector financing by the central bank.

In its October 2005 Report the Commission notes that Romania is meeting its commitments and that it complies with the requirements arising from accession talks in the field of EMU. Some further adjustments of legislation are still required.

The Treaty of Accession was signed on 25 April 2005 and accession took place on 1 January 2007.

COMMUNITY ACQUIS

The third stage of EMU began on 1 January 1999. This date entailed far-reaching changes for all Member States, even those not taking part in the euro area from the outset.

In the economic sphere, the keystone is the coordination of national policies (national convergence programmes, general economic guidelines, multilateral surveillance and excessive-deficit procedure). All countries are required to comply with the Stability and Growth Pact, to refrain from direct financing of the government deficit by the central bank, to prohibit privileged access by public authorities to financial institutions and to have liberalised capital movements.

Member States not in the euro area conduct an independent monetary policy and participate in the European System of Central Banks (ESCB) under certain conditions. Central banks must be independent and must have price stability as their primary objective. Lastly, exchange-rate policy is regarded as a matter of common concern by all Member States, which must be in a position to participate in the new exchange-rate mechanism.

Even though accession entails acceptance of the objective of EMU, compliance with the convergence criteria is not a precondition. However, since those criteria are indicative of a macroeconomic policy geared to achieving stability, all Member States must, in due course, comply with them on a permanent basis.

EVALUATION

Following the fall of the Ceaucescu regime, Romania became engulfed in a deep economic and social crisis. The Romanian authorities failed to show sufficient political will to carry out reforms. It was only after the November 1996 legislative and presidential elections that the new government began to implement a radical programme of macroeconomic stabilisation and structural reforms. The 1998 report noted that Romania had made little headway in establishing a market economy and its ability to withstand competitive pressures and market forces had deteriorated. A year later, the country was still suffering from the absence of a well-defined economic strategy. The economic outlook did not fundamentally improve in 2000. The 2002 report noted that Romania had not made any headway as regards real convergence with the European Union (EU) in terms of per capita income. Gross domestic product (GDP) per capita, expressed in purchasing power parity, was equivalent to only 25% of the EU average in 2001. The 2003 report deplored that once again, despite strong economic growth, Romania had failed to make any headway on this front. Despite a mixed macroeconomic performance the 2004 report registered increases in stabilisation contributing to sustained economic recovery and a decline in inflation. GDP per capita reached 30% of the EU average in 2003 but regional differences are deepening, with per capita income in Bucharest almost double the national average. In 2004, GDP per capita expressed in purchasing power parity reached 31.3% of the EU-25 average. The 2005 report states that Romania is a viable market economy. Growth in real GDP was 8.3% in 2004 but fell back to 4.9% during the first half of 2005 as a result of floods and a drop in exports.

As regards economic activity, the economy has gradually recovered from the 1997-99 recession. In 1997 GDP fell by 6.1%. In 1998 real GDP again contracted by 4.8% in 1998 and by 1.2% the following year, mainly owing to the sharp reduction in domestic demand. However, economic activity rose by 1.8% in 2000, bringing to an end the recession that had resulted in an aggregate decline of 13% in GDP since 1997. After staging this modest recovery in 2000, GDP rose by as much as 5.3% in 2001 and by 3.1% in the first quarter of 2002. Between 2001 and 2003 it rose by around 5% annually, mostly as a result of a substantial increase in household consumption (7.1% in 2003), investment (9.2% in 2003) and exports.

The 2003 report noted that the Romanian economy had expanded by 4.9% in 2002 and that 2004 would be the fifth consecutive year of growth at an average rate of 0.8%. However, since mid-2003 growth has been showing signs of imbalance. Economic activity nonetheless remains buoyant and GDP continues to grow (6.6% in the first half of 2004). Growth in real GDP was 8.3% in 2004 but fell back to 4.9% in early 2005 as a result of floods and a drop in exports. According to the 2005 report, the Romanian economy is characterised by strong economic growth, a deficit in current transactions and a slowdown in inflation.

As regards public finances, the introduction of budgetary discipline in the public sector in 1997 was a notable success. The deficit contracted to 3.7% of GDP in 1997 instead of the 4.9% forecast. The trend continued with a deficit of 3.3% in 1998. In 1999 the government tightened its budget policy, leading to a fall in the consolidated budget deficit to 3.8% of GDP. After several years of sustained budget consolidation, the deficit stabilised, falling from 4.5% of GDP in 2000 to 3.4% in 2001. Moreover, after shooting up sharply, the debt-to-GDP ratio levelled off in 2000 and was gradually cut back to 23.3% in 2001 and then to 21.8% by the end of 2003.

The 2004 report shows that the budget deficit remains high and the primary deficit has reappeared. The spending policy adopted by the Romanian authorities continued to undermine budgetary recovery in 2003 and budgetary discipline has slackened somewhat. However, the consolidated budget deficit has been contained at around 0.6% of GDP in the first half of 2004 with the deficit forecast for the full year estimated at 1.6%. The 2004 budget makes provision for a substantial primary deficit (1.4% of GDP) but the Romanian authorities are attempting to limit it to 0.1% of GDP. Revenue now stands at 30% of GDP and spending remains stable, at 32.3% of GDP.

The 2005 report notes that Romanian public finances are vulnerable to a slowdown in growth: while growth remains vigorous, budgetary consolidation has been very modest. The public finance deficit fell to 1.4% of GDP in 2004, while the debt was reduced to 18.5% of GDP

The policy of the Romanian National Bank has been geared to combating inflation by tightly controlling the monetary base. It has partly achieved its objective: the year-on-year rate of increase in consumer prices plummeted from 177.5% in June 1997 to 50.8% in September 1998. At the end of 1998 inflation was below the official target. In 1999 the increase in prices was 45.8%, lower than in 1998. Annual inflation, which still stood at 45.7% in 2000, fell to 34.5% in 2001. Year-on-year inflation also declined sharply to 23.0% in July 2002. The gradual reduction in the inflation rate continued. At 17.8% in December 2002, compared with the official target of 22%, the inflation rate calculated on a year-on-year basis declined even further to 14.2% in August 2003. The trend continued with the 2003 year-end rate at 14.1%. During the first half of 2004 prices were up on average 12.8% compared to the previous year, in line with the year-end inflation target of 9%. However, real wage growth (8.9% in the first six months of 2004) could result in an overheating in demand, jeopardising the slowdown of inflation.

The Commission notes in its 2005 report that monetary policy continues to support the disinflation process. The target of 9% inflation in 2004 was met. An upward adjustment in administered prices, a large increase in salaries and vigorous domestic demand combined to slow down disinflation in 2005. As a result, the central bank was obliged to raise the inflation target from 6 to 7.5% for 2005.

Although the exchange rate is officially floating freely, the National Bank has intervened in the market on several occasions to curb the depreciation of the national currency, which came under increasingly strong pressure, thereby stabilising the exchange market and avoiding a major financial crisis. In 1998, towards the end of the summer, the serious deterioration in the current-account deficit led the National Bank to abandon its policy of seeking a real appreciation in the exchange rate which had helped to hold down inflation. Between the end of October 1998 and the end of June 1999 the Romanian currency lost more than two thirds of its nominal value. The exchange rate fell by a third against the US dollar between October 1999 and August 2000 but by only 13% against the euro. Under the managed floating regime adopted in 1999, the exchange rate is the main instrument used to curb inflation, provided this does not threaten external equilibrium. Owing to the recovery in the external situation, the improvement in productivity and more favourable wage developments, the real exchange rate gained almost 17% against the euro between 1999 and 2001. It rose by 2.4% against the dollar/euro basket in 2002. This monetary policy stance has contributed to both gradual disinflation and a real exchange rate development compatible with a sustainable current account position. The process of re-monetising the economy continued in 2004, reflecting rising confidence in the banking sector and in the Romanian economy in general. Broad money stood at 24.4% of GDP at the end of 2003 and continued to grow in 2004. The tighter monetary policy has led to a spectacular increase in deposit rates, leu deposits and credit to companies and households. In response, the central bank raised its reference interest rate on several occasions and implemented prudential measures as of 1 February 2004 aimed at slowing credit growth. Minimum reserve ratios for foreign currency deposits were also raised.

In November 2004, the central bank made the exchange rate more flexible, as a result of which the currency appreciated by about 12% with respect to the euro. This limited inflationary pressures to some extent.

The current-account balance for 1997 showed a larger-than-forecast deficit. The rapid growth in the deficit in the first few months of 1998 gave rise to major concern. In the first half of 1999 it narrowed remarkably, by around one third compared with the same period in 1998. It fell from over 5.5% of GDP in 2000 to 3.7%, deteriorating again to 5.9% of GDP in 2001. The 2003 report noted that the current-account deficit narrowed sharply in 2002 but unfortunately began to deteriorate once again in the second half of 2003 to reach the equivalent of 2.9% of estimated GDP. Having reached an estimated 5.8% at the end of 2003, it remained high during the first half of 2004. Over the reporting period as a whole the current-account deficit has fluctuated around an average of 5.2% of GDP. However, the 2004 report noted that financing the external deficit had become easier as a result of improving borrowing conditions and a steady inflow of foreign direct investment (2.9% of GDP over the period in question). The international reserves of the central bank began to swell in 2004 and amounted to 9.7 billion by the end of July. And lastly, the total foreign debt-to-GDP ratio remains low at around 34% of GDP and the risk premium on Romanian sovereign debt has diminished significantly. Exports rose by 14.1% in 2004 but fell to 5.9% in the first half of 2005.

In 1997 major structural reforms were carried out: the customs tariff was lowered significantly, most prices were liberalised, the exchange market was opened up and the pace of privatisation was stepped up. Towards the end of 1998 the authorities relaunched the structural reforms and large-scale privatisations in order to forestall a mounting crisis and to restore access to official financing. Although progress was made, particularly in restructuring the financial and agricultural sectors, it remained generally insufficient. The 2000 report noted that the private sector accounted for some 60% of GDP, while the figure for the informal economy was 30-40%. The Commission also established that the legal framework for a market economy was in place for the most part but that the institutions needed for it to operate effectively were either deficient or still non-existent.

In its 2002 report the Commission noted that the structure of the economy still reflected the incomplete nature of the transition process. In its view Romania had continued to make progress towards becoming a functioning market economy and the prospects for this had improved.

The 2003 report noted that privatisation had accelerated but that the timetable set by the authorities was still not being met, especially in the energy sector. The Commission took the view that Romania could be considered as a functioning market economy if the good progress made continued decisively.

The 2004 report noted that privatisation had accelerated considerably and the private sector had continued to grow, accounting for 69.1% of GDP in 2003. By mid-2003 the share of private capital represented 56.4% of total capital and private sector employment amounted to 76.3%. The number of companies in state ownership also fell; it was down to 1 187 in mid-2004.

The new tax code entered into force in January 2004 and a system to speed up VAT recovery was developed. In the banking sector there has been a gradual rise in total assets, reaching 32% of GDP at the end of 2003. In the non-banking financial sector equity markets remain small, with total capitalisation amounting to only 12.2% of GDP at the end of 2003. However, since mid-2003 there has been a sizeable increase in both turnover and capitalisation. According to the 2005 report, the Romanian government has continued to pursue structural reforms, but the Commission notes that the privatisation process has slowed down, that financial discipline is inadequate and that the workings of the judicial system still hamper commerce. Romania is making progress towards the Lisbon strategy targets, but progress in the different areas concerned is uneven. Romania still needs to step up its efforts to improve the operation of the product and labour markets if it is to move closer to the EU-25 average.

As regards the independence of the National Bank (NBR), the 1998 report noted that it had been relieved of its obligation to grant special loans to companies and agricultural enterprises and that its independence had been strengthened as a result. A new statute setting price stability as the main objective entered into force on 30 June 1998. Although the NBR is no longer authorised to finance the budget deficit, given the fact that financial markets have not developed sufficiently, it may issue 180-day loans on market terms in order to meet the temporary imbalances between Treasury revenue and payments.

The 1999 report noted that existing legislation still allowed the government to draw on the overdraft facility with the NBR. In the 2001 report the Commission noted that Romanian legislation already guaranteed a very high degree of independence for the NBR. In the 2002 report it commented that Romania still had to amend the legal provisions governing the operation of the deposit guarantee fund in the financial system and make progress in transposing the acquis relating to central bank independence. The 2003 report noted no legislative headway in this field. A new law amending the statute of the NBR was adopted in June 2004. Designed to strengthen the Bank's independence and maintain price stability, it also ends the public sector's privileged access to financial institutions and bars the NBR from purchasing government bonds on the primary market. It also makes provision for extending the scope of the assets that can be used to guarantee loans granted by the NBR and for removing the obligation to provide government securities. A second law, also adopted in June 2004 law, on the establishment and operation of the Bank Deposit Guarantee Fund repeals the provisions under which the Fund was able to borrow from the NBR to supplement or meet large claims on its resources.

In its 2005 report, the Commission notes that the NBR's statute is fully compatible with the acquis. However, there is a need to clarify Romanian law on public debt, which includes provisions authorising the government to contract loans to support the balance of payments and the state's hard currency reserves. The law requires clarification for reasons of possible incompatibility with the National Bank's exclusive powers in the holding and management of foreign currency reserves.

As regards the negotiations on EMU, Romania declared that it accepted the acquis spelt out in Title VII of the EC Treaty and that it would comply with it in full. It also stated that it would put in place the structures necessary for implementing and complying with it. Romania will take part in EMU on its accession since it enjoys the status of a Member State with a derogation, as provided for in Article 122 of the EC Treaty. The negotiations on this chapter were provisionally concluded in June 2002. No transitional provisions have been requested. Romania must make the necessary changes to its institutional and legal framework by no later than the date of its accession. Despite this the 2004 report generally took the view that Romania was complying with its commitments and that preparations for enlargement were on track. The 2005 report confirms that Romania is meeting its commitments and complying with the requirements arising from the accession negotiations in the EMU field. It will be able to apply the acquis from the moment of accession, despite the amendments to legislation required.

Last updated: 22.12.2005