The political crisis that has engulfed Romania in recent weeks appears to be waning, after the government backed down on plans to water down anti-corruption legislation under pressure from mass protests.

However, even with the legislation off the table for now, the crisis is set to have longer-term consequences, with trust in the government shattered, an acrimonious cohabitation set up between the Social Democratic Party (PSD) led coalition and President Klaus Iohannis, and investor confidence shaken.

At the heart of the crisis was an emergency decree quietly adopted by the government at a late night session on January 31. The decree partly decriminalised abuse of office, making it a criminal offence only in cases resulting in damages of RON200,000 (€45,000).

This sparked outrage within Romania. Daily mass protests outside the government’s offices in Bucharest’s Victory Square and in other cities started on January 31, culminating on February 6 with over half a million people turning out to demonstrate across the country.

Revoke, resign… reconcile?

Prime Minister Sorin Grindeanu’s government had already acceded to protesters’ demands to revoke the decree earlier in the day. However, at the time it seemed that the government was still planning to have the legislation adopted via the parliament, where the ruling PSD and its coalition partner the Alliance of Liberals and Democrats (Alde) have a majority in both houses.

In confusing developments on February 7, the justice ministry initially put out a statement saying it was going to submit a bill, apparently with the same or very similar provisions, to the parliament. But later the same day the ministry said it had dropped plans for the bill.

This meets protesters’ demands for the legislation - which they point out would have allowed officials to steal up to RON200,000 from the state without repercussions - to be scrapped. However, the crisis is not over yet. Protesters, albeit in smaller numbers, were back in Victory Square on the evening of February 7.

They say they don’t trust the government and plan to keep up the pressure to ensure officials don't make another attempt to weaken the anti-corruption fight by the back door. They also say the cabinet has shown itself to be a government of thieves - “Hotii” (thieves) is one of their most common chants - and as such is no longer legitimate and needs to be replaced.

One protester showed his disgust with the government on February 6 with a sign that read “I have seen smarter cabinets at Ikea”.

Further mass demonstrations, especially if the government tries to revive the legislation or takes other moves that seem self-serving, cannot be ruled out. A general strike has reportedly also been discussed in Romania.

“The lack of straightforwardness/loss of credibility by the government creates suspiciousness in all their moves and makes an ‘agreement’ between the government and the streets unlikely for the time being,” says Stephan Csaba, bond market/currency research analyst at Raiffeisen.

“This underlines our take that the coalition will push its limits and underscores our expectations of ongoing protests. Social media also point to the continuation of the protests. For the near term, however, the number of protesters is expected to decline somewhat in the next few days.”

Csaba believes the only move that would fully satisfy the protesters would be a resignation of the government en masse. The government has so far refused to consider resigning, though at least a partial reshuffle - almost certainly involving the sacking of Justice Minister Florin Iordache - is expected.

Larger scale dismissals are unlikely given the parliamentary majority enjoyed by the PSD and Alde since the general election less than two months ago, and it is expected to survive a no-confidence vote on February 8. Grindeanu has said he has no intention of resigning.

PSD in trouble

However, the government’s credibility is severely dented and despite its majority in parliament, its fragile support from urban voters became evident in recent days. A counter demonstration on February 6 attracted only around 1,500 people, mainly pensioners. Even the most generous estimates put it at less than one 200th of the size of the anti-corruption protests. An opinion poll carried out in Iasi county in northeastern Romania after the start of the crisis shows a 23% slump in support for the PSD in the area, according to stiripesurse.ro.

There are also reports that the party is in internal disarray, including a rumoured split between Grindeanu and PSD leader Liviu Dragnea. Dragnea would have been one of the first beneficiaries of the controversial decree as he is currently on trial for abuse of office. Since he already has a suspended sentence for voter manipulation, if found guilty he would be sent to prison.

The relationship between the PSD and Iohannis, who hails from its main rival the centre-right National Liberal Party (PNL), was troubled even before the December election, but now it has all but broken down.  Iohannis has blocked the PSD’s first choice for prime minister, and has played an important role in the last two weeks, initially thwarting the government’s plans to adopt the decree at its session on January 19 and later becoming an outspoken supporter of the protesters. He also called a referendum on the original decree.

In an address to the parliament on February 7, Iohannis blamed the PSD for adopting “a strange kamikaze strategy” that put them in “full collision with a significant part of the Romanian society”.

“The Romanian people’s prosperity was not your first concern. Your first concern was to solve the records of the corrupt politicians. And Romanians are outraged,” Iohannis told MPs. He also stated that it was up to the PSD  to find a solution to bring the divided country back together.

“In the longer term, this crisis has cemented the poor relationship between government and President Iohannis which is a concern for policymaking and broader stability,” points out Stina Hartikainen, associate analyst Europe at Control Risks.

Bridging the gulf between the government and much of the population will likely be an even more insurmountable challenge. To opponents the government’s actions are seen as threatening Romania’s status as a modern European nation, by trying to bring it back to the bad old days when corruption was allowed to run rampant. Had the decree entered force, it would have undone a lot of the work of the National Anticorruption Directorate (DNA) in recent years.

As one Bucharest-based entrepreneur pointed out, these are just the type of factors that have led millions of Romanians to move abroad in search of a better life, resulting in a demographic crisis in the country.

A similar point was made by Andrei Tarnea, director of the Bucharest branch of US-based NGO Aspen Institute, in an interview with bne IntelliNews before the current crisis erupted. He pointed out that while many Romanians plan to go abroad short-term to earn extra money, “they discover a better governed society with functional administrations. Specifically, they find they don’t have to bribe somebody to get a hospital bed, their children are well taken care of in school, trains and buses run on time… this makes it more difficult for them to return.” There had been hopes that as Romania pushes back against corruption, it would be easier to persuade young ambitious Romanians to stay in the country.

With its back against the wall, the government also raised concerns by lashing out at international institutions and businesses. Those targets included the EU, which was accused of discriminating against Romania by Alde leader Calin Popescu Tariceanu, and Steven van Groningen, the CEO of Raiffeisen Bank Romania, who attended the protests and wrote about it on his blog.

Investors rattled

“There have been some quite concerning statements on multinational companies and foreign organisations, which if stepped up could impact how investors view Romania,” says Hartikainen.

She reports that some investors have been taking a wait and see approach. “The speed and short timeframe at which this situation developed is concerning,” she says. “One of the greatest concerns for investors is that regulatory and political stability is likely to become more uncertain because the government has shown it is willing to govern in this method, passing legislation overnight without consultation.”

Meanwhile, in a February 1 statement the EU Romanian Business Society warned that “Romania’s enormous potential can only be fulfilled under circumstances where the rule of law is clear and fully respected”.

“The longer the protests (including potential strike), the more short-term damage can be expected to overall business sentiment,” says Raiffeisen’s Csaba, though he adds that, “At the same time, should the protests become successful and calm down, including the related consequences for the coalition, Romania could even come out stronger from this crisis.”

He also notes that following initial losses and a higher risk premium requested in the latest government bond auction, local financial market investors “remain quite relaxed for the time being”.

While the immediate cause of the protesters’ grievance has been removed, millions of Romanians remain angry and distrustful of the government and its intentions. If the ruling coalition is to reunite the country and restore its legitimacy in the eyes of the population, it will have to make some big concessions. It’s not clear whether it has the will to do this.