BLACK SEA BLOG: What Romania could do now to avoid economic collapse

By bne IntelliNews April 15, 2009

Bogdan Preda in Bucharest -

More than ever before, Romania needs a government that knows what it's doing with the economy to prevent total economic collapse, while at the same time preserving its citizens' hopes for better living standards. The problem is that this EU member state has neither the political wisdom nor such a dream-team government.

Although this government has the strongest support in parliament in at least eight years, the ministers of the country's two biggest parties, the Democratic Liberals and the Social Democrats, appear unable to pull together a workable plan. Previously foes, the two parties turned into governing allies against all the odds by the wish of voters, who gave them the most of votes in legislative elections last year. At most, their governing act is a beauty contest between two different teams, each trying to use the governing act to pave the way for their candidates in November's upcoming presidential elections: the Democrat-Liberals support current President Traian Basescu, while the Social Democrats back Head of Senate Mircea Geoana.

Although they abstain from fiercely criticizing one another in public for now, each of the two teams in the government spend more time planning their political future by trying to persuade voters how much of a better job they'd do if they were ruling alone instead of facing the bigger problem on their desks: that Romania is being buffeted by the global crisis, money is harder to find, and social problems are about to become more acute as jobs become scarce.

Probably the easiest way to illustrate how inefficient Romania's governments have been and still are is to point to the fact that Romania finds it easier to borrow money and pay interest rather than properly prepare the groundwork for much-needed projects that would be funded for free by the EU. In March, the government agreed to borrow almost €20bn from a collection of multilateral lenders led by the International Monetary Fund (IMF). By contrast, since it joined the EU in January 2007, the country has absorbed no more than several hundred million euros of EU non-reimbursable accession funds out of the roughly €5.5bn that it's entitled to get between 2007 and 2009 (of a total of about €30bn it can draw through 2013.) And this is happening because of inadequacies at the relevant government agencies.

What the latest figures say

The latest statistics show demand for Romanian exports in the EU are falling despite a stronger euro, mainly as businesses in most European countries tighten their belts in the wake of the global crisis. Romania's exports fell by almost 28% in February from the same month of 2008, according to the National Statistics Institute. Until the global crisis eases considerably in Europe, Romania will continue to see its exports fall, especially due to its lower labour productivity compared with other EU members. On the other hand, a weaker currency means Romanians must pay more for imports, thus causing consumer prices to increase.

And Romanians face a serious rise in unemployment; the jobless rate recently rose to a three-year high of 5.6%, or 513,621 out of work. At the end of 2008, the IMF forecast that Romania would likely have close to 800,000 unemployed. That's a probable scenario if one considers there will be hundreds of thousands returning after having lost their jobs abroad, only to discover there's little or no money to make at home, thus burdening the cash-strapped government even more with demands for unemployment payments.

As income for the state budget falls, leading to a higher-than-forecast deficit, the government is trying to find emergency financing rather than come up with concrete solutions to generate more cash.

Finance Minister Gheorghe Pogea, a Democrat Liberal, has persuaded his colleagues in the government to introduce a new tax on turnover for companies that post losses. The tax is aimed at collecting money from thousands of small companies that avoid paying income tax by posting losses via accounting schemes, Pogea said, adding that the 16% flat tax on income would remain unchanged. Analysts have criticized the new tax, which would cost companies between several hundred and several thousands euros a year, as well as other fiscal measures aimed at squeezing more money from companies, arguing they simply prove the government's inability to implement policies to counteract tax evasion.

Prime Minister Emil Boc, head of the Democrat Liberals and seen as a Basescu puppet, said one of his government's priorities is large infrastructure projects financed with money from both the budget and EU to keep the economy ticking over and create jobs. However, no clear projects have so far been revealed, and a former finance minister, Sebastian Vladescu, a Liberal now in opposition, has claimed that starting such large projects now would only show positive effects by mid-2010 at the earliest.

Instead, Vladescu says the government should mastermind a €1bn scheme to guarantee mortgages to unblock the housing loan market by taking some of the risk away from commercial banks, thus encouraging them to resume lending. The worst that could happen would be that the state would end up as owner of 50,000 apartments, which "after all isn't that bad considering the real need for social homes," Vladescu reasons.

What he doesn't say, however, is that the current government is far too divided to take such daring measures.

Immediate measures possible

Divided as it is, the government could still take certain measures that would please both parties while also keeping the economy from collapsing. Such measures wouldn't be as daring as Vladescu's proposal, but would still require total honesty among the leaders of the two parties. In other words, they'd have to agree to share the credit for moneymaking projects in the long run, so that neither of them would lose if they leave the government earlier than 2012. Failure to do so would harm the Romanian people, because the current economic situation in the country won't allow for any more postponements of the crucial reforms needed.

For a start, the government has to take solid measures to improve the country's image among foreign investors, including in terms of corporate governance, to persuade them that Romania has learnt its lessons and is a place to put money in even during times of crisis. To achieve that, both parties would have to agree on a plan to introduce new incentive packages for fresh investments, such as lowering income tax for those companies that employ more workers. Government and lawmakers alike should crack down harder on corruption by bureaucrats and local authorities that keeps investors away, rather than just criticise each other on TV shows or in the courts as a way to tarnish each other's public image. For instance, the government could establish a proper bonus system for the employees of the special bodies that handle projects applying for EU funds, based on the amounts drawn, thus stimulating the absorption of money in the economy.

Also, since dozens of foreign companies are willing to compete to implement renewable energy projects in Romania, the government should also spend several hundred millions euros on boosting the capacity on the power lines of Transelectrica, the power grid company, in order to make room for and encourage more wind and hydropower energy projects. The EU would gladly co-subsidize such projects, thus multiplying the government's initial investments at Transelectrica. For now, only a bunch of such projects are being implemented at a very slow pace due to a lack of transparency at the level of governmental agencies, whose managers act as sole owners of the investment plans and approvals, as well as due to a lack of legislation to guarantee fair returns on such investments.

The government should also take swift measures to encourage its farmers and boost Romania's agricultural output by properly using the billions of euros that Romania can get from the EU with the right projects in place. As a result, imports would drop and farming produce prices would fall, helping keep consumer prices in check.

With about €3.5bn of financing already obtained from the European Investment Bank European Bank for Reconstruction and Development, the European Commission, and the International Bank for Reconstruction and Development, although never used, plus another €5.5bn it's entitled to absorb from the EU for 2007-2009, Romania has up to €9bn it could put to work just this year. Even drawing €1bn of that amount would make a huge difference and help avoid major economic trouble, on condition that the two teams that form the government sit down and work together for a month or two. Or is even that too much to ask for?

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