BLACK SEA BLOG: Romania will burn if politicians fiddle after elections

By bne IntelliNews December 3, 2008

Bogdan Preda in Bucharest -

After four years of half-arsed reforms dragged through by a minority government, Romania faces another troubled period as the latest elections produced no clear winner and negotiations for a new government look more complicated than ever. Too much time politicking without producing a working government could mean throwing the country into a severe economic crisis, especially given today's global financial conditions.

The legislative elections held on November 30 - almost 18 years since the country toppled its communist government - were unprecedented in four ways. These elections marked the first time Romanians voted for individual party candidates rather than for political parties. It was also the first time that legislative elections didn't coincide with the presidential one, which will be held in May or June next year. This year's elections also produced the lowest turnout ever recorded in Romania since 1990 - about 39%. And it was also the first time the ultra-nationalist Greater Romania Party failed to meet the 5% threshold needed to enter parliament.

With 99.6% of votes counted, none of the three main parties had a majority of seats in the two-chamber parliament. All parties saw votes divided almost proportionally among the Senate and the Chamber of Deputies. The alliance of the Social Democratic Party - the former ruling party that's also the biggest opposition party - and the Conservative Party got a bit more than one-third of the total vote, while the Democrat-Liberal Party, which supports President Traian Basescu, received 32.9%. Prime Minister Calin Tariceanu's National Liberal Party came third, with about 18.6% of votes, while the ethnic Hungarians' Democratic Union party received 6.3%.

Votes for the Greater Romania Party and the New Generation Party, both of which failed to meet the 5% threshold, will be redistributed proportionally among the four parties that made it into parliament.

Where the problem lies

The main stumbling block in rapidly forming a majority government to handle the country's many unsolved problems is that none of the three main winners get along well with any of the other two.

Four years ago, the Liberals ran together with the Democrats against the Social Democrats, winning the elections, though short of a majority in parliament, and forming Tariceanu's first government. In the same elections in 2004, Basescu beat the Social Democrats' then premier Adrian Nastase in the presidential vote.

At that time, Basescu's plan for the alliance between his Democrats and the Liberals was to introduce measures to boost its popularity among Romanians, including a lower 16% flat tax on both corporate and personal income. The plan then called for Tariceanu to resign as premier twice to allow Basescu to call early elections, secure a majority of votes and thus establish a majority government.

On July 7, 2005, Tariceanu announced his "irrevocable" decision to resign as premier, yet just a few days later he changed his mind, reportedly influenced by his business friends including billionaire Dinu Patriciu, a Basescu foe. His decision, a betrayal of the original plan, marked a deep rift with Basescu, whose supporting Democratic Party left the government and later formed the Democrat-Liberal Party, which grew to include disgruntled leading members of Tariceanu's National Liberal Party.

When the first results of these latest elections emerged, the Democrat-Liberals emphasized that centre-right parties like their own and Tariceanu's Liberals had won most of votes if considered together and so should form a government. However, the Social Democrats, who mumbled during the campaign about possibly revoking the Liberals' flat tax if they won elections, claimed that they should be entitled to get first crack at forming a new government since they got the most votes. To do so, though, the Social Democrats would need an alliance with one of the other two parties plus President Basescu's blessing. The least likely alliance to form a majority government is that between the Democrat-Liberals and the Social Democrats, who claim they cannot get along with President Basescu, the founder of the Democratic Party.

One consequence of the highly predictable results of the elections is that it ironically puts most of the negotiating strength in the hands of the party that only came third: PM Tariceanu's National Liberal Party. That's because neither the Social Democrats nor the Democrat-Liberals could form a majority government without it. Assuming the Hungarians would go for one or another of the two parties, their votes are too few to create a majority government.

Storm clouds gathering

Whatever the architecture of a new government, Romania certainly can't afford to spend time forming governments only to dismantle them repeatedly over the next four years.

The country's level of absorption of EU funds is extremely low and it already risks losing trust from the European Commission - and perhaps even facing legal action - over several accession fronts such as telecommunications, justice and agriculture.

A new government's top priority should be making sure as many jobs as possible will be preserved, President Basescu said following the elections. Romania, which currently enjoys one of the highest growth rate of any EU member state, also needs to do its utmost to avoid recession. That's going to be hard given that any new government must keep a lid on inflation even as the economy's main growth driver over the past four years has been rising consumption rather than production and exports.

Romania, whose current account deficit has been widening each year for more than half a decade, must also ensure it continues to receive foreign direct investments to finance the deficit, especially as remittances from its citizens working abroad are expected to fall considerably due to the global economic crisis. And that's not the only enemy of more investments: rating agencies Standard & Poor's and Fitch downgraded Romania's foreign debt rating in November, citing lawmakers' splurge on civil service wage hikes as high as 50% ahead of the elections.

But will a new government be able to attract more FDI if it's considering increasing income taxes? After all, raising taxes is the only way to pay state workers higher wages - trade unions are threatening to stage nationwide strikes if they don't get more money - while at the same time keep the budget deficit in check.

Last, but not least, the new government also has to tackle the issue of the pensions' deficit, which Tariceanu's government sparked by also increasing state pensions ahead of the elections.

With no sound and efficient government in place, Romania faces the risk of simply not being able to produce the amount of income it needs to balance its budget to keep deficits within the limits of a decent healthy economy. If it fails to do so, it would have to redefine its economic goals within the EU, including its goal of adopting the euro by 2014.

The biggest irony is that Romania hasn't been as hard hit by the global crisis as other countries, but faces the risk of ending up in an even worse state if its politicians waste time squabbling amongst themselves over the next few of months instead of getting down to some real work before it's too late.

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BLACK SEA BLOG: Romania will burn if politicians fiddle after elections

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