Updated convergence programme of Romania, 2007-2010 - Main contents

EN

Official Journal of the European Union

C 49/39

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.

Growing labour shortages, strong wage growth hampering competitiveness and rapid increases in household borrowing are other signs of overheating. A sudden increase in inflation, after a long period of successful disinflation, was triggered primarily by supply-side shocks due to the weather-related poor performance of the agricultural sector in 2007. This was underpinned by the effects on aggregate demand of income and credit growth, non-restrictive fiscal and public wage policies and the depreciation of the Leu since August 2007 (following the appreciation in recent years). For Romania to maintain its fast convergence track towards the average EU-27 per capita GDP, it will be crucial to address the growing external imbalances. In this context, fiscal policy has an important role by cooling down internal demand, while also improving the quality of public finance, in particular through a shift towards growth-enhancing investment.

The macroeconomic scenario underlying the programme envisages real GDP growth to accelerate from 6,1 % in 2007 to 6,5 % in 2008 and to ease towards 5,8 % in 2010. Assessed against currently available information (2), projected growth in 2008 and 2009 is on the high side. In particular, it is unclear how the reduction of the negative contribution of net exports to growth will be achieved in a context of rising unit labour costs and strong demand pressures, exacerbated by a non-restrictive fiscal policy. The size and the fast deterioration of the external imbalances is a reason for concern as witnessed by the depreciation trend of the Leu since mid-2007, against the background of a general risk-repricing in international financial markets. The programme's projections for inflation also appear to be on the very low side. The strong inflationary pressures from wage developments (including public wages), rapid increases in international food and commodity prices and the weaker exchange rate (after a long period of appreciation), suggest a more pronounced slow-down of the rapid disinflation process. The inflation (HICP) differential with the EU-27 is thus expected to stabilize or to narrow only slightly over the forecast period. Overall, the mix of policies in the programme might not lead to progress towards nominal convergence.

According to the updated programme, the projected 2007 general government deficit is 2,9 % of GDP, 0,2 percentage point higher than the Commission services' autumn forecast and the target of the previous programme. The positive base effect from the lower than expected deficit in 2006 was offset by...