4.1.2 The European Union

A paper, issued by the European Union, on structural challenges for the candidate countries (European Commission 2004) recommended improvements of the business environment, mainly by increasing the quality of public administration and services in Romania. The budget of Romania should be restructured in favor of the enhancement of human capital, administrative capacity and infrastructure. The revenue side should be improved by broadening the tax base and improved tax collection further facilitated by more flexibility on the Romanian labor market and a reduction of the high social contributions (cf. ibid: 6).

Further assessments, such as the assessment of the first (European Commission 2007 d) or second (European Commission 2008 a, b) Romanian convergence program criticize a pro-cyclical loosening and the back loaded attempts to deficit adjustments (European Commission 2007 d: 6). In particular, shifts from investments to current spending in the past were criticized (ibid: 30f.). This for, the effectiveness of the high allocation of expenditures to the pension system (ibid: 38), infrastructure and human capital (ibid: 42) were doubted. On the other hand, Romania was invited to reduce the high pay-roll taxes to stimulate further decrease of the informal sector (ibid: 4).

Academic Research paper and Study of the Economy of Romania and Romanian Business

Overall, rather a deficit reduction is recommended. In the same manner, the commission (European Commission 2008 b) recommended based on European Commission 2008 a to “exploit the good times … for more demanding budgetary targets” (European Commission 2008 b: 3) and to “control the envisaged high increase in public spending and review its composition so as to enhance the growth potential” (ibid.). Suggestions of how to enhance the growth potential were not really given, though. On the one hand, the assessment and the commission recommend focusing on administrative capacity, public finances and macroeconomic stability, the business environment, labor markets, education, R&D, infrastructure and other fields whereas, on the other hand, the planned increase just for these purposes were criticized as unrealistic.

Ways how to solve this conflict of objectives were not discussed. Just recently, the European Commission adopted a new recommendation, which advised Romania to return to the medium term objective of a structural deficit of 0.9 %, warned from an overheating of the economy and to stick to a credible and predictable budget execution (cf. Business Standard 2008 c)