Romania's great survivor

By bne IntelliNews July 30, 2012

Phil Cain in Graz, Austria -

The referendum on July 29 to impeach suspended President Traian Basescu failed, but the manner in which he survived will almost certainly mean there's no end in sight to the vicious power struggle that has destabilised the country for months.

With his popularity at a low point, Basescu had little chance of victory in the referendum. With most votes counted, 87.55% voted to dismiss him, and 11.12% voted to keep him in office. But most importantly for Basescu's survival was that the turnout did not reach the 50% threshold needed to validate the result; Basescu's thinly-veiled call on his dwindling support to boycott paid off, as the turnout was just 46.13%.

Prime Minister Victor Ponta, whose Social Democratic party leads the governing coalition, took a line that will probably be maintained in the post-referendum battle, claiming the poll represented a moral victory if not a legal one. "If Basescu thinks he can just ignore the will of almost 9m Romanian voters, he's completely detached from reality," Ponta said, suggesting that the coalition could organise another referendum after the "great result."

A low leu

There seems little chance the final result will relieve the political turmoil which has weighed heavily on the economy for months. Basescu seems set to remains in office but severely weakened, while his Liberal Democratic Party can expect little joy in the next parliamentary elections in November.

Since the latest episode of the long-running political soap opera started in late April, the leu has fallen 6%, touching historic lows against the euro. "The adverse political events are the main forces behind the current leu weakness," according to a report by Austrian bank Raiffeisen, which says there is a "low probability" that the currency can reverse these recent losses.

The level of the leu is more than just a matter of pride, because most public and private debt is euro denominated. A falling leu raises default rates and potentially destabilises the banking sector. "That is the last thing Romania needs right now," says Martin Prochazka, a independent analyst. Some €2bn left the country in May, according to a report published by the Romanian Academic Society (SAR).

PM Ponta's coalition government suspended Basescu on July 6 for, it claims, acting unconstitutionally during his presidency. During his eight years in office, Basescu has made a habit of second-guessing ministries by taking the chair of presidential policy formulation committees. This presidential meddling in the running of government reached boiling point when a fresh round of defections from Basescu's unpopular Liberal Democrats saw Ponta's Social Democrats take power in a coalition with the centre-right National Liberals in early May. Ponta's government moved swiftly to prise Basescu's fingers from the government's business by suspending him and calling the referendum. The action prompted something close to outrage in Brussels.

Ponta also used his emergency powers to scrap a law lowering the bar for removing the president to a simple majority of those who vote. However, the Constitutional Court struck that down, bringing back the threshold which states that at least 50% of the electorate plus one voter was needed to take part to make the referendum valid - something which appears to have saved Basescu.

There were other barriers to Basescu's impeachment, according to the SAR report. The electoral register may be far larger than the actual voting population, meaning that it is actually more than 50%. The electoral register currently reflects the census done in 2002, which put the Romanian population at 21.7m, nearly 3m more than counted in a census last year.

Cakewalk

The Social Democrats had always looked likely to walk the parliamentary elections in November, having won a little over 50% of the vote in local elections. Now after the impeachment vote, they look even more of a shoo-in. But if Basescu is able to keep dodging impeachment bullets, the power struggle could go on until his term expires in 2014.

This scenario would do little to reassure currency and bond traders, or investors. Raiffeisen does not, however, "attach a high probability" to Romania failing to stick to IMF/EU bailout before the parliamentary elections in November. Nevertheless, it said, the "risk increased" because a budget in May "showed signs of weakness" and the reform agenda is running late.

Romania is failing on other fronts. The European Commission earlier in July chose to extend its period of post-accession monitoring to make sure Romania meets benchmarks that were set up when it joined the EU in 2007. This monitoring was to have ended this summer, but the Commission cited specifically the recent events, which "have shaken our trust," said Commission President Jose Manuel Barroso.

"Challenging judicial decisions, undermining the constitutional court, overturning established procedures and removing key checks and balances have called into question the government's commitment to respect the rule of law. Party political strife cannot justify overriding core democratic principles," Barroso said.

Romania's bid to join the passport-free Schengen zone is also in the balance.

The already poisonous political atmosphere seems set to become more poisonous still, heightening a sense of nervousness among investors about the country's economic trajectory. The referendum and its aftermath are only likely to jangle more nerves.

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