FISCAL IMPLICATIONS OF INTERNATIONAL TRANSACTIONS TO THE EUROPEAN UNION MEMBER

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1 FISCAL IMPLICATIONS OF INTERNATIONAL TRANSACTIONS TO THE EUROPEAN UNION MEMBER Assoc. Prof. Constantin Enea Ph.D, Constantin Brancusi University of Targu-Jiu, Faculty of International Relations, Law and Administrative Sciences Targu-Jiu, Romania Assoc. Prof. Constanţa Enea Ph.D, Constantin Brancusi University of Targu-Jiu, Faculty of Economics and Business Administration Targu-Jiu, Romania Gheorghe Grigorescu Ph.D student, Constantin Brancusi University of Targu-Jiu, Faculty of Economics and Business Administration Targu-Jiu, Romania Abstract: Moving to global standards are the adoption of a common language by cross-border companies and multinationals. All market players need financial reports transparent, consistent, comparable and complete information to make sound economic decisions. Current economic and financial crisis triggered a major shift in how they are implemented economic policies both nationally and internationally. Euro area Member States have pledged to implement policies that promote fiscal consolidation amid the sovereign debt crisis. Fiscal sustainability of public finances has become a major priority. A tighter fiscal integration of the euro area as a step forward. This highlights an important distinction between countries which are members of the euro area and the EU are only. Euro area Member States have a common currency, so creating a central fiscal authorities in the euro area is perfectly logical. JEL classification: G01, G23, G32 Key words: financial crisis, global standards, economic policies, fiscal consolidation 1. INTRODUCTION Economic developments that have marked the time that has elapsed since the signing of the Association Agreement and by date revealed a number of factors that limited integration into the European Union. Francois Mitterrand, former French president says that "the EU enlargement process is the most beautiful adventure of this century. The European Union, Europe is back at home in its history and geography from the beginning" 1. 1 E. Dobrescu - Economic Integration, second edition, All Beck Publishing House, Bucharest, 2001, page 224

2 To eliminate technical barriers to integration into the European Union is necessary harmonization of national rules with those of the community. Harmonization with EU legislation requires the adoption of normative acts to secure the essential requirements imposed by the European Union fiscal consolidation. Fiscal consolidation (fiscal consolidation) is a situation where persistent fiscal deficits governments decide to reduce their budgetary positions acceptable level, usually by handling expenses. Fiscal consolidation includes the reduction of government deficits and establish regulations to limit future budget deficits. In years when governments faced with large budget deficits and high debt due loans made had negative effects, private investment, reduced public spending on health, education and infrastructure despite interest payments on loans, and industry became ineffective 2. In Europe, fiscal consolidation continues, reaching the Euro area average budget deficits of 3% of GDP compared to 7% as it was in U.S. special also turned a budget surplus since 1999 with 20 years of deficit. Canada, from fiscal austerity budget surplus achieved in If globalization are few chances given domestic monetary and fiscal policy to stabilize the economies of each country. Only policies at supranational, regional or managed by different groups of countries may have sufficient weight to influence the global cycle. Eurozone example is that monetary policy can counteract or influence regional average global economy. Romania's economic compatibility with OECD criteria is at 6 major directions 4 : - Financial Stability; - raising the standard of living; - control unemployment; - development of market economy institutions; - opening outwards; - political stability in a pluralist. 2. OBJECTIVES Convergence criteria for European Union structures that Romania has to make decisions on behalf of the Government of the Member States affected include: 3% of GDP budget deficit, public debt 60% of GDP, the average inflation rate over a period of one year may not exceed the 1.5 percent average of the three best performing Member States, long-term interest rate not to exceed two percent average of the three best performing EU Member States, exchange rates to fluctuate within the normal range for the last two years, plus mandatory low unemployment, labor productivity and GDP per capita higher. Fiscal policy in the euro area is governed by the Growth and Stability Pact. Originally Treaty of Maastricht in 1992 require potential eurozone members to reduce the budget deficit to 3% of GDP. So Member States shall presume fiscal balance even above and below the ceiling of 3% of GDP, the economy being in demand and potential GDP in structural balance. 2 Lipsey Richard, Chrystal Alec, Principles of economies, Economics Publishing House 3 Daniel Daianu, Radu Vranceanu - Romania and the European Union Polirom 2002 pag Nicolae Suta, European Economic Integration Ed.Ec pag.295

3 These restrictions fiscal and monetary policy coordination unit avoids misapplication of policies by Member States "If you do not know better do nothing" - Robert Solow - Nobel laureate 5. It is not without interest to call into question that how to track the impact of inflation and unemployment on the development takes place through banks. In the euro area, inflation or deflation loops follow the European Central Bank through your entire euro area as a whole and not on individual countries, the entire area was designed as a single country. In this way, monetary policy will be a key tool for controlling demand across the Eurozone agreed. Instead, monetary policy is powerless to correct the imbalances if a member country is in recession and another launch. Gaps from one country to another country will limit the effects through fiscal policies. Although the Treaty requires Member Community Stability meet the convergence criteria, many of which can not adapt to the demands and exceed the treaty. Even French Finance Minister Nicolas Sarokzy criticized in a paper published in the daily "Les Echos", in November 2005, fiscal policies practiced by countries that joined the European Union on the grounds that they give big business tax cuts and also the beneficiary State aid. The Minister has proposed to the European Commission to stop providing funding for states in which taxes are below average community member. These clarifications were necessary because some countries such as Germany and France, countries with high taxation, act to implement a uniform tax system in the European Union in order to prevent migration to other Member States of companies with tax breaks. European Commissioner for Economic and Monetary Affairs Jaaquin Almunia stated in an interview with the newspaper "Le Figaro" in January 2005 that are not within the budget deficits covered by the Stability Pact France, Germany and Italy. "The weakness of our growth is linked to policies to reduce deficits, but structural problems such as population aging," the Commissioner stated in the same interview. Stability and Growth Pact is a program that attempts to limit budget deficits as the convergence criteria to contain budget deficits and for inflation. It is not used the words "European tax" as it can be said that there is the term "European currency" in this way the EU can not use in development policies consistent mix of monetary and fiscal policies, while the taxes and management budgetary authority upon Member States and European monetary policy is. It also requires further action acquis on taxation of savings income in the form of interest payments, the common system of taxation applicable to interest and royalty payments 6, effectuate between associated companies of different Member States 7, and harmonization with the Community framework for the taxation of electricity and energy products ANALYSES Compared to the play, we appreciate that a functioning market economy the state should intervene only when necessary and in proportion minimized. Also, in our opinion, 5 Nicolae Suta, European Economic Integration Ed.Ec pag European Union Directive no. 48/ European Union Directive no. 49/ European Union Directive no. 96/2003

4 the state will intervene through fiscal policy measures of economic and social development and ensure the implementation of regional development policies in the desired sense of decentralization, local autonomy and European integration and leaving organizations free professional unions with employers. All this leads to expansion of bureaucracy, causing difficulties in establishing, monitoring and collection of taxes and generate irrational expenditure management. A reshaping of the tax system in Romania should consider: - reclaiming tax evasion and the black economy, an action that will improve the current fiscal quite poor, prompting a translation from peyers taxation of taxes on honest taxpayers, thereby increasing the tax burden on the taxpayers of ago; - minimizing the frequent legislative changes, instability creates problems especially foreign investors; - Technical simplification of tax and levies required management information system by introducing an appropriate and competitive minimize administration costs and taxes; - strict monitoring and control of individual taxpayers income and wealth; failing to discriminate between taxpayers tax relief. Is good or not adopting the Euro Plus Pact Romanian finance? But the euro in "For Romania, maintaining independence on monetary and fiscal policy could prove to be a better choice over the medium term. Do not want to say that should be followed an expansionary fiscal policy but rather a path of fiscal consolidation. Given the cost large loans and increased uncertainty in global financial markets, it would be extremely risky to follow any other policy. would be great if we could maintain a degree of independence in fiscal policy. If Romania would fully adapt to it ( the Euro Plus Pact), competitiveness would be adversely affected, "says the study" Adopting the Euro Plus Pact implications for Romania" 9. Current economic and financial crisis triggered a major shift in how they are implemented economic policies both nationally and internationally. Euro area Member States have pledged to implement policies that promote fiscal consolidation amid the sovereign debt crisis. Fiscal sustainability of public finances has become a major priority. A tighter fiscal integration of the euro area as a step forward. This highlights an important distinction between countries which are members of the euro area and the EU are only. Euro area Member States have a common currency, so creating a central fiscal authorities in the euro area is perfectly logical. As the analysis shows, Romania went through a process of catching up and during 2000 to This process was supported by large capital inflows after 2004 and was characterized by wage increases and productivity and effective real exchange appreciation. However, this increase was largely based on non-tradable sector growth and massive foreign loans, which explains the economic implosion with the crisis. Remuneration wage and productivity gap of Romania (compared to the average of Germany, France and Italy) was higher than in non-tradable marketable in Prior to 2008, the recovery process can be observed at both cross-sector, and across sectors. By the end of 2008, the remuneration gap was equalized in the two sectors, and in the non-tradable sector remuneration gap equaled productivity gap. Remuneration in marketable lower than the average of Germany, France and Italy. 9 The authors are Professor Daniel Daianu material, Laurian Lungu and Ella Kallai

5 However, in tradable productivity gap remains substantial, productivity is 13 times lower than the average of Germany, France and Italy. Romania came in from the new Member States (except Bulgaria) only with respect to remuneration in marketable approached regarding remuneration and productivity in the tradable and remained far behind in terms of productivity in tradable. The gap in productivity and wage remuneration suggest that monetary and fiscal policy adjustment could generate better results in terms of growth potential. As simulations report shows public debt / GDP, while current risks to the sustainability of public sector remains relatively low, a deterioration of external circumstances could quickly worsen prospects for refinancing and could increase the cost of public sector borrowing. A relatively small adverse shock on interest rates, exchange rates or economic growth over the next two to three years could increase the ratio public debt / GDP by several percentage points. While the overall level of public debt would still be below the limit of 60% set by the Maastricht criteria, the authority to fund such efforts become increasingly larger, because a high percentage of government spending is required. Consequently, implementing policies to increase the revenue tax / GDP and improve the absorption rate of EU funds should have a role in formulating tax policy process / budget. In recent years, fiscal policy in Romania has neglected economic implications of policy changes. They were only implemented in order to achieve agreed objectives. Although short-term such an approach can be beneficial because it meets a stated aim - and avoid a sudden increase budgetary costs - the medium and long term has a negative effect on growth as human and physical capital depreciation accelerates beyond replacement rates. Accumulation of knowledge in the public sector decision makers who are responsible for formulating and implementing policy would probably change this situation. This would allow building a strong human capital base that would provide more professionalism fiscal policy-making process and at the same time, would allow changes in fiscal policy to be more predictable. Is a need for a much larger public sector in Romania acute needs it. It is well known that strengthened fiscal institutions can play a key role in supporting fiscal consolidation. Romania needs to improve their formulation and implementation of the fiscal framework, fiscal monitoring and reporting, with the explicit expression budgetary practices and improve the management of government assets and liabilities. Simulations made attempts to provide insight into the possible trajectories of the evolution of the state pension deficit can register during It remains to be seen whether future size of state pensions deficit could impose high costs on the budget deficit and could hinder efforts to bring the budget deficit below 3% consistently. Considering two types of scenarios in which variations in total number of taxpayers and the CAS quotas are performed simultaneously. Variations in terms of the number of contributors: - Reference scenario (G_B) implies that the number of taxpayers will increases progressively in 2015 due to higher rates of employment, reaching level before crisis. Between 2016 and 2020, the rate payers will drop to 2.5% per annum and thereafter by 1%, according to demographic estimates. - Scenario G_1 is an evolution of the number of taxpayers by 2015 G_B similar scenario, is growing at a rate of 0.5% per year until 2020 (as the economy continues to

recover, and immigration rate increases) and then a decrease of 0.3% per year, as demographic trends exert more influence. - Scenario G_2 follows demographic trends, simulating an annual fall of 0.

6 recover, and immigration rate increases) and then a decrease of 0.3% per year, as demographic trends exert more influence. - Scenario G_2 follows demographic trends, simulating an annual fall of 0.05% of the total number of taxpayers from 2013 to Besides the actual taxpayers, there are some categories that receive state pension but who are legally exempted from paying contributions for a limited period of time. In these categories between women on maternity leave, soldiers enrolled in the military or who are university students. Although these categories do not pay, they accumulate pension rights for those periods and must be taken into account. In 2010, the total number of persons exempt was estimated at just under half a million. The other variable is the share CAS counted. This decreases the 2% that (since 2011) is directed towards private pension fund. It is assumed, therefore, that the actual percentage that goes to the state pension is 29.3% (in 2011). Reference scenario (CAS_B) implies that this share remains unchanged (ie, 31.3% of which 29.3% goes to the state pension) for the entire period. Source: Daniel Daianu material, Laurian Lungu and Ella Kallai Figure no. 1 Simulations made attempts to provide insight into the possible trajectories of the evolution of the state pension deficit can register during Alternative scenario CAS CAS_1 estimated rate will be reduced by a total of 8 percentage points (pp) as follows: 1 pp in 2012 and 2013, and 1.5 percentage points in 2014 and 2015 (which requires annual progressive increase of 0 5% of contributions to private pensions sector) and an increase of 0.5 percentage points over the next six years, which means that the percentage followed by 6% for contributions to private pensions will be reached in 2021.The alternative scenario is similar to scenario CAS_1 CAS_2 until CAS follows a declining share totaling 4 pp, 1 pp per year between 2019 and Additional general assumptions:

will increase by the same rate as nominal GDP, reaching maximum rate of 6.7% in 2015, registering then a gradual decrease to 5.5% in 2019, which is stabilized by 2030.

7 Source: Daniel Daianu material, Laurian Lungu and Ella Kallai Figure no. 2 Simulations made attempts to provide insight into the possible trajectories of the evolution of the state pension deficit can register during Nominal average annual gross remuneration will increase by the same rate as nominal GDP, reaching maximum rate of 6.7% in 2015, registering then a gradual decrease to 5.5% in 2019, which is stabilized by Source: Source: Daniel Daianu material, Laurian Lungu and Ella Kallai Figure no. 3 Simulations made attempts to provide insight into the possible trajectories of the evolution of the state pension deficit can register during Estimates of the deficit in the state pension system can be quite significant over a long period of time. In an optimistic scenario deficit could fall below 1.5% only after CONCLUSIONS Remaining series of simulations follow the same trend, although it is possible that the balance of the state pension system to lean favorably even after As expected, the number of taxpayers will significantly impact the income for social security contributions. Increasing the number of taxpayers in the economy would be a challenge if the economy will grow at a rapid pace and marginal tax salary will not be reduced. Some conclusions 10 : - Repatriation of part of the labor force that now operates abroad would be beneficial for the Romanian economy. 10 Simulations made attempts to provide insight into the possible trajectories of the evolution of the state pension deficit can register during

8 - Increase incentives for those working illegally could be another approach to increasing the number of taxpayers. - The CAS plays an extremely important role in the estimation results. According to them, reducing social security contributions would be a difficult step because it will lead to worsening structural deficit in the state pension system. - Currently earlier plans for a progressive increase of 0.5% per year for contributions that were to go into private sector pensions have been postponed. About Euro adoption: "Admitting that monetary union will resist to adhere to it, an economy must be ready to face competition, extinction correction tools imbalances. Romanian economy needs substantial real convergence before entering the euro area. There are voices advocating for entry as soon as possible in UM invoking transaction costs and currency risks, they seem to ignore the current construction defects and mechanism Union and surface use arguments. Euro-zone started with a suboptimal composition, which has increased in the decade of operation, it sees the asynchrony between dynamic "southern group" accumulated deficits of the euro was introduced as "northern group" of accumulated surpluses. You have increases in export, import runs faster but if the situation becomes unsustainable, especially when on duty. In addition, increases in export operations such as Nokia in Romania (completing import over 80%) are misleading. Without productivity gains to support salary increases, a country's economy is choking sooner or later. Constant productivity gains involves systematic productive investment with technology transfer. The existence of strong domestic business groups, which are capable of making and strategic investments, local banks to finance development matters also more. Maastricht conditions are controversial years. This crisis proved their failure. Euro-zone crisis is a painful lesson for all, beyond the implications of the financial crisis in the industrialized world. When the euro was introduced in the political primacy of the economic damage and the latter takes revenge now. It is hard to believe that they'll be sacrificing economic criteria, they will become more severe and include aspects of real convergence. To draw lessons from the current crisis. We need a national public debate on serious and thorough study euro-zone. This discussion should consider the implications of the Euro Plus Pact, the Pact Fiscal and external deficits relating to, general economic policy coordination. These agreements are far from implying a viable monetary union. REFERENCES 1 Cristea, H, Pirtea M Finance company. Case Studies, Ed Mirton, Timişoara, Dăianu, D, Romania and the European Union. Inflation, balance of payments, Vranceanu, R. economic growth, Ed Polirom Iasi, Dobrescu, E,M Economic Integration, Second Edition, Publishing All Back, Bucharest, 2001; 4 Lipsey, R Alec, C. Principles of economies, Economics Publishing House 5 Percent, N. European Economic Integration, Economic Publishing House, Bucharest, Suta, N European Economic Integration Ed.Ec pag.310

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