Weekly Fiscal & Political Report (March 1-8, 2024)

Prepared by Ana-Maria Anghel & Cezar Petrescu

Political Updates

Internal Affairs

PPE CONGRESS IN BUCHAREST. The European People's Party (EPP), the biggest European political family, gathered these days in Bucharest, where its congress for the European elections was hosted. The National Liberal Party (PNL) was the organizer of this congress, with its president Nicolae Ciuc? opened the event saying: “we are preparing the battle for the future of Europe, which, together, I am convinced we will win on June 9”. On this subject, Manfred Weber, EPP President, drew attention to the challenges faced by all EU Member States in the European elections from June 9 – the extremism and Russia’s actions are threatening Europe’s stability. Thus, Manfred Weber encouraged Romanian citizens to vote for competent people in these elections and not to send extremist parties to the European Parliament. We would have expected EPP President to show himself disturbed by the candidacy of liberals (PLN) and social democrats (PSD) on joint lists for the European Parliament, but Nicolae Ciuc? stated that EPP leaders understood the reason behind the Governing Coalition’s decision. On this matter, during the congress, PNL leader let EPP know that despite different political ideas of the two parties (PNL and PSD), “the respect and good communication will help us find ways to govern in a difficult period”.

THE OPPOSITION ATTACKS THE LAW ON EARLY PRESIDENTIAL ELECTIONS. This week, the Parliament has adopted, by the final vote of the deputies, the Law proposed by the Democratic Alliance of Hungarians in Romania (UDMR), which enables the organization of this election 3 months before the end of the current President’s term. We remind you that this is the plan of the Governing Coalition – to organize the presidential elections on September 15 and 22 (two rounds), even though the term of the current President of Romania ends in December. Only one day after the adoption of this Law, the deputies from USR and Force of the Right notified the Constitutional Court (CCR), claiming that the provisions changing the rules just a few months before the elections are not only unconstitutional but also against former CCR decisions and against the recommendations of the Venice Commission. The MPs consider that the Coalition, with the help of UDMR, is changing the rules in order to help President Klaus Iohannis run for a European position (president of the Council or commissioner). We shall expect the Decision of the Court, which shall be issued on March 20.

External Affairs

NEHAMMER, STILL AGAINST SCHENGEN ENLARGEMENT. Received these days at Cotroceni and Victoria Palaces, on the occasion of the EPP Congress, Austrian Prime Minister Karl Nehammer reiterated his opposition to the enlargement of the Schengen Area. "The Schengen system does not work, therefore it cannot be extended", Austrian PM emphasized. The news of Austria’s continuous opposition came several hours after the Austrian political leaders voted for EPP’s Manifesto, during the congress, a document that calls for an immediate accession of Romania and Bulgaria in the Schengen Area. Thus, Romania will not be able to enter the European free movement space in the near future, as this decision must be taken unanimously in the JAI Council. Even so, Karl Nehammer appreciated the strong economic relations between Romania and Austria, claiming that Romanians play an important role on the labour market in Austria. Instead, Romanian PM Marcel Ciolacu declared that his official meeting with his Austrian counterpart was rather “constructive”, as they talked about the path ahead that should build “a stronger cooperation, in particular on security & border management”. Additionally, President Klaus Iohannis also had a meeting with Karl Nehammer, at the end of which he commented that they both agreed to continue the process for Romania’s full accession until the final desired result is reached.

URSULA VON DER LEYEN, EPP CANDIDATE FOR THE COMMISSION. Apart from the strategy for the European elections, the EPP leaders also chose their candidate for the next presidency of their European Commission. Thus, during yesterday’s meeting, the current president of the European Commission, Ursula von der Leyen, was officially elected EEP’s candidate for another term in this position, for the next 5 years. According to Romanian MEP Siegfried Mure?an (PNL, EEP), the adoption of the European Recovery and Resilience Mechanism, the reduction of energy dependence on the Russian Federation, and the decision to start accession negotiations with the Republic of Moldova and Ukraine were the main reasons behind EPP’s support for Ursula von der Leyen. Additionally, political sources claim that other important positions were negotiated during this congress, such as the future position in Europe of President Klaus Iohannis (who would want to run for the president of the European Council or deputy president of the European Commission). On this subject, we don’t have any official news so we shall wait and see whether one of these two hypotheses really takes shape.

Fiscal and Economic Updates

Overview

ARGUMENTS FOR FLAT-RATE TAXATION. The debate on single vs. progressive taxation has been touched again by Finance Minister Marcel Bolo?, who declares himself a supporter of the single rate: "the single rate is the best choice for Romania!". Although there have been suggestions from international financial organizations, such as the IMF and the World Bank, to move to a progressive tax system, Minister Bolos believes that maintaining the flat rate keeps Romania fiscally competitive internationally in its efforts to attract investors. He also believes that there is no reason to adopt a progressive tax system, as the single rate system "has proven its immense usefulness for the economy and the population (...) it helps Romanians to keep more money in their pockets." At the same time, Prime Minister Marcel Ciolacu said that next year there will be no progressive tax on salaries but stressed that a progressive tax on capital is fair and tax reform is necessary. However, Ciolacu believes that a change in taxation cannot be discussed until the NAFA digitalization is implemented.

E-INVOICE FOR SMALL BUSINESSES. This Wednesday, the Ministry of Finance launched a simplified version of the e-Invoice app, which will mainly target small businesses in Romania. The ministry says the new application is functional in a simplified format and responds to requests from small businesses. In addition, the ministry also announced that the extended version of the application is now available in English for non-resident taxpayers registered for VAT purposes who are required to report invoices issued for supplies or services in Romania. On the same subject, the Minister of Finance stated that he is considering an extension of the grace period for which no penalties are applied to those who do not comply with the deadline for sending invoices to the e-Invoice system until June 2024. It should be recalled that the initial period for which penalties were not applied was January the 1st to March 31st.

FITCH AFFIRMS ROMANIA AT BBB-. At the end of last week, Fitch Ratings confirmed Romania's long-term foreign currency debt rating at "BBB-" with a stable outlook. On this occasion, Finance Minister Marcel Bolos stressed that Fitch Ratings' decision reflected an international confirmation of the fiscal changes that Ciuc? and Ciolacu's Governments adopted in recent years, as well as an encouragement to continue reforming the fiscal framework. Thus, Fitch Ratings expects the introduction of the fiscal rules set out in the NRRP to bring significant fiscal consolidation in the medium term, which, combined with a sustained reduction in the budget deficit, could lead to an improvement in Romania's sovereign rating. At the same time, there is also a risk that "the current uncertainties about post-election fiscal plans and recent fiscal slippages" could further undermine confidence in the Government's policies, thus contributing to a downgrade of Romania's sovereign rating.

On the Recovery Plan

NEW LAW OF PENSIONS - NORMS. The Government decision approving the Norms for the application of the new law on pensions was published this week in the Official Gazette and entered into force. This normative act provides regulations regarding the detailing of the conditions for granting, establishing, recalculating pensions, respectively the old-age pension, the early pension, the disability pension, the survivor's pension, the determination of the contributory contribution period, the detailing of the conditions for granting social insurance benefits, respectively the death benefit.