The following contribution was sent to EurActiv by Cristian Ghinea, director of the Romanian Center for European Policies, an EU affairs think-tank based in Bucharest, Romania (www.crpe.ro).
"Several months ago Romania was generating gloomy financial news. That was the short-lived media hysteria about the collapse of the east, with Hungary, Romania, Latvia and Ukraine taking the shots. There were not Eastern collapses but the media attention turned from the periphery to the centre – the euro zone and its PIGS. As for Romania, the latest attention received from outside media concerns the fantastic piece of news that Bucharest mistakenly sent humanitarian and military aid to Tahiti instead of Haiti.
The story was really enjoyed by foreign journalists, with the Italians and Russians particularly eager to prove the stupidity of Romanians, of course for quite different historical reasons. The only problem: it was just a prank made by an 'almost news' website (similar to The Onion in the US), a glamorous example of Romanian self-depreciatory humour. Since President Basescu participated in the European Council due to decide upon the Greek situation, some journalists decided to debate whether we should help the Greeks or not. This was not a prank.
The truth is that the financial situation of Romania is more relaxed now. Internal politics provide the explanation. When the financial crisis hit Romania, a new government had just been created, a 'big coalition' between the Popular Party (PDL) and the Social Democrats. An agreement with the IMF, the European Commission and the World Bank was signed in order to assure financial stability and recover the trust of the international markets. But this coalition collapsed several months before the presidential elections, scheduled for December.
Incumbent President Basescu is the informal head of the PDL party, affiliated to the European Peoples' Party, while his main challenger Mircea Geoana runs the Social Democrat Party. While they blamed each other for the new political crises, they were both also content to avoid running an electoral campaign as partners in government.
A PDL caretaker government remained in place and the political energies in parliament were consumed in rejecting two governments proposed by Basescu, while the largely powerless ministers were trying to implement the IMF conditionalities. The main tasks were: a new pension law to address the huge imbalances of the state pension fund (two billion euro deficit), a new law to create a unitary waging system for state employees and a so-called 'fiscal responsibility' law to limit populist increases in public spending. Of course, the usual reduction of budget deficit was also included.
The government made an effort to satisfy these conditionalities and the law for public employees was passed despite fierce protests from the trade unions. A pension law was drafted but was not discussed in parliament due to the political crises and the caretaker government was not legally able to send a budget law for 2010 to parliament. This created problems with IMF, but it showed a surprisingly benevolent attitude towards Bucharest.
Basescu defeated Geoana in December in a dramatic run-off. The social democrat contested the elections, but the Constitutional Court rejected his complaint. The old president had a new legitimacy while the large coalition formed against him was demoralised after the failure. Formally speaking, the opposition still held a majority in parliament. The Popular Party found an innovative strategy: it created a new group within the legislature of so-called 'independents' from Social Democrats and liberal MPs attracted by a combination of persuasion, threats and pork barrels – over 25 MPs.
The fact was the presidential victory created a new majority in parliament and a new government was voted in comprising PDL, the Hungarian Party and the new-style independents. It is led by old prime-minister Emil Boc, who is promoting a reformist although rather incoherent political message.
Since the third installment of the IMF loan was delayed because of the political crises, a new mission from the Fund assessed the situation in January and gave the green light for merging the third and fourth instalments (2.3 billion euro), with money supposedly arriving in Romania this February. A further one billion is expected from the European Commission.
This is the last instalment to finance the budget deficit – half of this money will go to the Finance Ministry, an unusual measure accepted by IMF since the economic downfall in 2009 was worse than expected. The next instalments will go exclusively to the Central Bank as support for its monetary policies.
The new government enjoys stability in parliament and the dominance of pro-Basescu weird coalition is sound since both major opposition parties are jammed in internal disputes, with their leaders trying to maintain positions after the electoral failure. Thereafter the main challenges are coming from the economic front. The budget deficit target for 2010 is 5.9%, from 7.3% that was in 2009. The 2010 budget was smoothly voted in the parliament. A new draft of the financial responsibility law is being discussed in the legislature, introducing the multi-annual budgeting principles. It is good news although it was the lack of political will and populism that created the current situation and not the absence of a law. One may find over-optimistic the idea that responsibility is created by law, but at least it may increase the political costs of future populist measures.
A more serious challenge is the pension law. As a result of its painful transition and misguided policies, Romania has more pensioners than employees. Various parties competed before the crises in promising and applying pension increases and thus created a deficit in the public pension fund of around 1.5% of GDP.
This will go up to 4.5% of GDP in 2025 (IFM estimates) without serious measures to address the imbalances. But pensions constitute a hot potato for government, with a populist media also engaged in creating new ways to present any reformist idea as a personal catastrophe for each pensioner, a very disciplined electorate.
The prime minister tried to sell the reform by focusing on what he calls the 'shameless pensions' – the special systems enjoyed by former magistrates, diplomats, the military and MPs that do not receive pensions according to their lifelong contribution but as a percentage of their last salary (we have pensioners in Romania who receive 7-8,000 euros monthly). Although outrageous compared with the average pension, the 27,000 such cases only constitute 0.001% of the state budget. This is a popular measure but it also creates new veto actors for the reform: for instance, MPs are expected (or not) to vote against their own future pensions.
Another hot potato is the lay-offs from the budget sectors. Although both the IMF and the government avoided announcing concrete numbers, most probably 10% of the state employees would be fired. An alternative would be cuts in their wages, but this is even more costly politically. One may have thought it would be simple, because before the crises the sector irrationally expanded.
Only 4.8% of GDP was consumed in 2004 by state wages, but this has almost doubled in the meantime (to 9.2% now). Public wages increased by 15% each year from 2004. The government should decrease this spending to only 0.6% of GDP (700 million euros). But this is difficult since the trade unions dominate the state sector and an appropriate analysis should be carried out before the cuts. For instance, our think-tank just published a paper showing that more people are desperately needed in the agencies in charge of attracting EU funds, but the managers are not able to hire them since this is forbidden by a government ordinance.
Despite all these challenges, the overall news is good from Romania, at least compared with the latest news heard from here. Tahiti excluded. The government expects small economic growth this year, and the worst moments of crisis seem to be behind us.
Rating agencies have increased the country's assessment to stable and the finance minister recently declared that Bucharest could opt for a precautionary agreement with the IMF after ending the current standby deal. This would imply that the government would not need IMF money any more, but still apply its conditionalities in order to preserve trust in its finances. The political situation is stable for the first time in many years, and it is likely to stay so at least this year. Unless the always surprising President Basescu gets new ideas."
