Romania protests cuts and labels

By bne IntelliNews May 24, 2010

Phil Cain in Bucharest -

The sight of 40,000 banner-waving protesters taking to the streets of Bucharest on May 19 to vent their anger at government austerity measures has predictably spooked investors wary of Greek "contagion." But Romanians moan that they are always being put in the wrong the club: where once they belonged to Eastern Europe, now they find themselves lumped in with Southern Europe.

"If the people are dying of hunger, they have the right to eat their leader," union boss Bogdan Hossu told the crowd, in answer to President Traian Basescu who said earlier in May that, "The state sector is like a fat man sitting on the back of the thin man who is the real economy." From June, Basescu has decreed government salaries should be slimmed-down by 25% and state pensions and benefits by 15%.

Despite its leader's gory turn of phrase, the anti-austerity protest was a peaceful affair, like the more low-key protests which have taken place daily outside the president's palace and government buildings over the last few weeks. Nevertheless, by May 21 the BET stock index had fallen 4.4% from its close on Tuesday evening, the day before the protest.

Around 10m people are employed by the state or depend on welfare, yet there are just 4.3m private sector workers. The number of state employees in particular has ballooned over the past five years, growing by around 400,000 to 1.4m, a trend in hiring fuelled by political instability. "The parties handed out government sinecures among their own people. There are people working in the civil service who do nothing and know nothing," says political analyst Cristian Parvulescu.

Romania has had unwelcome links draw between it and Greece even before the protest, however. Foreign analysts listed it alongside Portugal, Italy and Spain as high risk, with their fears centring largely on the fact that Greek banks control upwards of 15% of Romania's banking sector.

However, many locals aren't so concerned. "Thankfully, the Greek banks are well capitalised," says Florin Pogonaru, an economist who chairs Romania's business association.

Daniel Daianu, a former finance minister, also thinks the risk of a Greek bank collapse is negligible. "They are not going to be demolished by this. The real question is: are they going to resume lending?" They, like Austrian banks, the dominant players in the country, are reluctant to expose themselves further, he says.

Difficult days

Romania had already recognised it faced economic difficulties as a result of the credit crunch last year and secured a €20bn loan facility from the International Monetary Fund (IMF). Before this, on the back of a borrowing boom, it had seen growth rates averaging almost 7% a year for five years, only for the economy to shrink by that same amount last year. During that same year, the value of the leu had at times fallen by 25% against the euro, causing severe hardship or insolvency for many with euro-denominated loans.

The only thing that the government could have been done to check the overheated credit market would have been to increase bank capital requirements, says Daianu, although he says this would have been regarded as "primitive" by those in the banking industry.

While a shortage of credit presents a serious obstacle to Romania's recovery, it still has a key advantages over Greece, Portugal, Italy and Spain in dealing with economic shocks, argues Daianu. "The inability of these Eurozone countries to use the exchange rate as an adjustment tool plays a huge role. This is why they think only of cutting, downsizing nominal wages and pensions because there is no other way to adjust."

Beyond the bloated public sector and credit shortage there are other problems standing in the way of establishing healthy public finances. A system designed to tackle corruption in public tenders has caused administrative chaos by allowing 90% of them to be contested, says Pogonaru. Also an unwelcome innovation is a "one-stop shop" created at the insistence of the EU allowing people to register a company in a day, which has resulted in a country of 21m people with a million registered companies, mostly of them there as a means to dodge taxes.

The size of the shadow economy more generally remains a problem, representing around a fifth of GDP. The main culprit is agriculture, says Pogonaru, "Land is not taxed so no one pays any tax for agriculture. We are advocating to introduce tax on land and on agriculture, although politically we recognise it is extremely difficult. It is a case of the rich hiding behind the poor." The cost of paying someone legitimately should be reduced too, Pogonaru says, with social services and other payments on top of the flat tax of 16% making the cost of paying someone €100 on the books €180.

Romania's financial affairs have, unlike Greece's, long been under strict EU supervision and, latterly, that of the IMF. So being lumped together with at-risk countries of Southern Europe is understandably irksome, "We used to be in Eastern Europe, now we are in Southern Europe. Somehow we always end up being put in the wrong club," Pogonaru says.

Related Articles

Macedonia kept on hold as Balkans edges towards EU goal

Clare Nuttall in Bucharest -   Macedonia’s EU accession progress remains stalled amid the country’s worst political crisis in 14 years, while most countries in the Southeast Europe region have ... more

Romania’s Dacia changes gear

Clare Nuttall in Bucharest - Automaker Dacia has been highly successful in exporting to markets across Europe and the Mediterranean area since its takeover by Renault in 1999, but the small ... more

INTERVIEW: Romania’s Fortech prepares for next growth stage

Clare Nuttall in Bucharest - In the last 12 years, Fortech has grown into one of Romania’s largest IT outsourcing companies – a home-grown contender in a market increasingly populated by ... more

Notice: Undefined index: subject_id in /var/www/html/application/controllers/IndexController.php on line 335