No confidence in Romania

By bne IntelliNews October 19, 2010

Justin Vela in Sofia -

Romania's opposition parties signed a motion of no-confidence against the government on October 18 following massive street protests against cuts agreed to by Prime Minister Emil Boc as part of the country's multibillion-euro bailout package with the International Monetary Fund (IMF). The opposition want changes to the austerity measures before agreeing to extend the IMF programme in 2011, yet the chances of them succeeding with the vote appear slim so far.

Romania's current government is deeply unpopular, but maintains a majority, albeit slim, in parliament. And the opposition has not succeeded in winning over the additional parliamentarians necessary to win the vote. "Right now, [the government has] a majority and is losing parliamentarians, but it is not so dramatic. It will not be so rough or so quick," argues Iulian Chifu of the Conflict Prevention and Early Warning Center in Bucharest.

Romania is currently embroiled in its worst economic crisis since the fall of communism. The economy contracted 7% last year and, despite slight second-quarter growth, is expected to contract further by the end of the year. The depth of the government's unpopularity was illustrated at the end of September when Bucharest was hit by a series of protests over the austerity measures dictated by the terms of a €20bn loan provided by the IMF, EU and World Bank. "The background of those protests are represented by those poor economic conditions and the economic situation," says Calin Veghes of the Bucharest Academy of Economic Studies.

More protests are expected as the austerity measures have seen VAT raised from 19% to 24%, public wages slashed by 25%, and the retirement age raised to 65. With Romanians facing little chance of a quick reversal from rising unemployment, collapsed property prices and a lack foreign investment, the IMF measures are aimed at reducing the country's budget deficit from 7.4% of GDP in 2009 to 4.4% in 2011.

The strict measures are reviled by the majority of the population. "[At] the moment, [the austerity measures are] a strategy of someone who wants to resolve some quick problems, especially budgetary problems of balance and spending, but is not oriented towards income," says Professor Szentesi Silviu of the University of Arad. "The measures promoted by the government are shrinking the local market. This is effecting consumer purchasing power and the capacity to buy goods and services."

On September 27, following a demonstration of about 6,000 policemen that he had described as illegal, Interior Minister Vasile Blaga resigned, highlighting the pressure the government is currently facing. The police officers were demanding the resignation of PM Boc. Both Boc and President Traian Basescu have since dismissed their police protection, instead relying on security paid for by the presidential budget. "The clear anger among police at cuts to their own pay means that the risk of wider unrest associated with the protests is concomitantly higher," says Lilit Gevorgyan of IHS Global Insight.

No easy way out

In the unlikely event that the no confidence vote succeeds, the country's opposition, composed mainly of the Social Democratic Party (PSD) and National Liberal Party (PNL), say that they will immediately return VAT to 19% for food. By January, all industries will return to 19% VAT and taxes for the rich will be raised. The current IMF programme will continue until it expires in early 2011. However, a second loan requested by PM Boc to cover budget gaps will only be requested if the IMF agrees to some changes in the austerity measures. Boc believes that the country needs the second loan because international financial markets will not lend to Romania due to "structural weaknesses."

International and domestic markets should be concerned about the chances of an opposition win, because while it may at least briefly stabilise the political situation, the policies of the opposition parties hold little weight even with economists who oppose the breadth of the current austerity measures. In a move that both PM Boc and National Bank Governor Mugur Isarescu describe as "populist," the opposition say that they will do away with the country's flat profit and income tax in favour of progressive rates.

"The progressive taxation programme is not good for the Romanian economy," says Veghes. "The country cannot grow with progressive taxation, it is an improper measure."

Instead, Veghes advocates cutting taxes, which are higher in Romania than in surrounding countries in a bid to attract foreign investment. "At 16%, Romania is losing some competitiveness in the international market," says Veghes. "10-12% would be better."

The reduction in taxes should be accompanied by cutting jobs from the public sector, which is overstaffed, say others.

The no-confidence vote could cause the leu to fall to its lowest level in more than three months, though the central bank is expected to step in if the currency came under significant pressure, according to analysts interviewed by Bloomberg.

While in many ways Romania seems to be fresh out of ideas for spurring economic recovery, no matter how difficult the belt-tightening is it may be preferable to the economic free fall an abrupt change in government could bring. Not to mention the rift between the EU's second poorest country and the top international lenders.

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