On 12 February 2008, the Council examined the updated convergence programme of Romania, which covers the period 2007 to 2010. Romania has experienced strong economic growth averaging 6,5 % annually between 2003 and 2006. However, the strongly performing economy is showing clear signs of overheating with a high and growing external account deficit (projected at close to 13 % of GDP in 2007) with a smaller coverage of FDI financing-despite sustained non-privatization related investment in 2007 — but still mitigated by a larger share of medium and long term capital inflows based on so far available 2007 data.

The update confirms the previous programme's main objective to achieve the medium-term objective (MTO) for the budgetary position, a structural deficit (i.e. a deficit in cyclically-adjusted terms net of one-off and other temporary measures) of 0,9 % of GDP, by 2011 (i.e. beyond the programme period). The programme targets a stabilisation of the headline deficit at 2,9 % of GDP over the period 2007-2009 and a reduction to 2,4 % of GDP in 2010. The primary balance follows a similar path.

In view of this risk assessment, the budgetary stance in the programme is insufficient to ensure that the MTO is achieved by 2011, as envisaged by the programme. A safety margin against breaching the 3 % of GDP deficit reference value (estimated at 1,75 % of GDP) would not be provided by the end of the programme period and thus there is a serious risk that the reference value will be breached in the near term.

Overal conclusions
The overall conclusion is that the budgetary strategy outlined in the programme is not in line with a prudent fiscal policy, necessary to contain the growing external deficit and inflationary pressures which put at risk macroeconomic and financial stability and the convergence process. The programme does not envisage a reduction of the deficits, entailing a risk of an excessive deficit. Progress towards the MTO is insufficient and fully back-loaded despite strong growth prospects. In view of the risks to the budgetary targets and the significant adjustment that would be necessary after the programme period, the MTO is unlikely to be achieved by 2011 as planned.

Romania is invited to:

1. Significantly strengthen the pace of adjustment towards the MTO by aiming for substantially more demanding budgetary targets in 2008 and subsequent years in order to contain the risk of an excessive deficit, foster macroeconomic stability and rein in widening external imbalances and address the risks to the long-term sustainability of public finances;
2. Restrain the envisaged high increase in public spending, improve its expenditure composition so as to enhance the economy's growth potential and improve the planning and execution of expenditure within a binding medium-term framework;
3. Pursue policies to contain inflationary pressures, complementing the recommended tighter fiscal stance, with appropriate public wage policy and further structural reforms.