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Short version

Less than two months ago, the socialists took power in Romania (simple majority in Parliament, both Chambers) and they have started applying their program.

However, many analysts think that it is not sustainable from the budgetary perspective and that "we are going after Greece". They refer to the fact that public annual deficit will go beyond the EU imposed limit (currently 3.0% of GDP) which will lead the way to an immense government debt.

In the past, Greece and Italy managed to trick EU through manipulated debt and deficit statistics.

Question: is it possible nowadays for an EU country to use similar tricks to go beyond the allowed budgetary deficit? Or this area is much better regulated?

Long version (more context)

Maastricht Treaty clearly states that countries should aim for "sound fiscal policies, with debt limited to 60% of GDP and annual deficits no greater than 3% of GDP". This was confirmed by Stability and Growth pact.

The Government proposed a budget that seems unsustainable in the current economical context:

  • significant reduction of some taxes, including VAT
  • pensions increase
  • social assistance expenditures increase
  • an estimated economical growth of more than 5%, which is more than 1% more than any other estimation (EU, World Bank etc.)
  • a planned budgetary deficit of 2.99% of GDP

The good news is that Romania is currently doing much better than PIIGS countries in terms of government debt (less than 40% GDP as opposed to more than 90%, also indicated here).

Romania managed to have budgetary deficit below the 3.0% threshold in the last years, but current budget plan is based on unrealistic figures.

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    I think France does this all the time. – K Dog Jan 28 '17 at 12:28
  • I am not sure falsifying statistics would be as bad as just showing to the EU institutions the real data. As you can see, you would not be the only ones. – user5751924 Jan 28 '17 at 12:39
  • @KDog - yes, they had some 3.5% last year. Also, the government debt is about 100%. But France is among the big shots of EU, so they can afford :). – Alexei Jan 28 '17 at 12:49
  • @user5751924 - Romanians are among the most sympathetic Europeans towards EU and politicians seem to be quite sensible to EU directives and recommendations. Otherwise, I cannot explain how the thresholds were so sacredly obeyed for several years. – Alexei Jan 28 '17 at 12:51
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It is possible, but would mean reporting a fake budget to national parliaments by governments at the national level.


Current budget rules

With Maastricht (1992) and European Fiscal Compact (2012) treaties, national budgets have to be strictly checked by the EU before being approved, since all national economies are linked and if one loses money/makes mistakes then all of them have serious problems (see Greece).

So, how does it work?

The economic and financial season of national governments starts with the annual approval of the budget. In this document the government writes the economic/financial program for the year to come (or other time period it's taken into consideration), together with statistics and data. When this is approved, the government has to send it to the European Union institutions.
Cheating here would be cheating on the same budget the government presented at its national level. So it would be a huge problem, because it's something illegal firstly at the national level.
After the EU examined it, they send their recommendations back to the national government/parliament. Every country now has to approve it taking into consideration the corrections, and the flexibility given by the EU.

What is flexibility?

I noticed a lot of people in comments/replies misunderstood cheating and flexibility, so it's better to explain it at least simply.
The European Union set some rules, as we said, to limit bad budgets, to limit deficit. A country cannot go below that level otherwise it will break EU's rules and will be sanctioned. This level is not fixed though: the EU could set a lower/higher limit to the country, giving respectively more or less flexibility, as it is called. The limit depends on the reliability of the economy, but also on the reforms status of the country, on national emergencies, and other parameters (for example Italy, as other countries, got more flexibility because of its immigration expenses).
Of course national governments often try to ask for more flexibility, especially governments which have budget issues or are doing bad at reforms.
But this is not cheating, it's just politics, and it's not related at all with budget data. Budget data and deficit level have to be legit, otherwise it's a big big problem.

Sources

  • Maastricht and European Fiscal Compact treaties on Wikipedia
  • My university studies in Political science
  • My general culture about Economics and Politics from news, analysis, ...
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    "Flexibility is not cheating" is a politically sensitive statement. You'll find a rather sharp North-South divide in Europe; your average German would consider "flexibility" as a euphemism for institutional corruption. – MSalters Jan 30 '17 at 9:19
  • @MSalters You're right. I was reading it from an Italian perspective, trying to be as European as possible. But you're right it depends on the interpretation. – G. Sarrocco Jan 30 '17 at 11:25
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Is it possible for an EU country to incorrectly report annual deficit in order to obey Maastricht Treaty threshold?

It is not a possibility but a reality. The greeks did it for example.

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    I know that Greece and Italy did it, but the question is basically about if it much harder today to do the same tricks? I expect that EU has learnt from these highly unpleasant events. – Alexei Jan 28 '17 at 12:53
  • I haven't seen any. Some countries (UK and Germany notably) partly justified their hard stance on Greece (and before that Iceland and Cyprus) on making the punishments so hard to dis-incentivize others from doing against what Greek did. I think they have a point and maybe that's working as an effective deterrence. – dannyf Jan 28 '17 at 13:01
  • @Alexei: They haven't. The Greek government is still chasing Mr. Andreas Georgiou for his role in exposing the Greek fraud. By failing to protect whistleblowers, the EU continues to encourage such fraud. – MSalters Jan 30 '17 at 9:25

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