Outlook for 2009-10
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Aprilie 2009 |
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JOAN HOEY - Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT |
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JOAN HOEY
Senior Analyst, Central and Eastern Europe
THE ECONOMIST INTELLIGENCE UNIT
Political outlook
Domestic politics
A coalition government comprising the Democratic Liberal Party (DLP) and the alliance of the Social Democratic Party (SDP) and the Conservative Party (CP), and headed by Emil Boc of the DLP as prime minister, was formally inaugurated on December 22nd 2008, following an election on November 30th. The new government has a strong working majority of 324 to 115 across the two parliamentary chambers and, unlike the outgoing administration, will be supported by the president, Traian Basescu (formerly leader of the Democratic Party; DP). Mr Basescu is continuing to play a high-profile role in day-to-day policy and, although the perpetual bickering between the president and prime minister that bedevilled policy formation over the past four years should be avoided, there are already indications of major disagreements over economic policy between Mr Basescu and the leader of the SDP, Mircea Geoana. The contest for the presidency, for which an election is due in late 2009, will pit the two government parties against one another and will strain relations.
The government’s majority ought to mean that policies that are agreed in the cabinet should pass through Parliament. The major threats to political stability over the next two years are disagreements within the government, over economic policy, reform of the judicial system and the prosecution of corruption; a major split within one of the coalition parties; and a rapprochement between a member of the coalition and the opposition parties. The need to take unpopular measures to deal with the economic crisis makes it more likely that the government will suffer from bouts of instability. It will preside over slowing growth, rising unemployment and falling incomes in 2009. This could make it extremely unpopular with voters very quickly and the risk of social and labour unrest is high. The possibility of new elections within two years cannot be ruled out.
In focus
Political stability and the economic crisis
The delay in formulating a budget for 2009 raises doubts about the ability of the government to cope with the impact of the global financial crisis and the recession in the euro zone.
Doubts about the ability of the political elite to recognise the impact of the global economic crisis on the Romanian economy, let alone bury their political differences to develop a strategy to counteract the crisis, was probably the main reason why Romania’s debt was downgraded to “junk” status by the international ratings agencies in the autumn of 2008. The delay in formulating and passing a new budget following the November 2008 parliamentary election has served only to confirm pre-existing, negative external perceptions of Romania’s commitment to address domestic macroeconomic weaknesses such as its large external deficit.
A failure to act
The European Commission (EC) also argued in its report on the implementation of the Lisbon Strategy Reforms in member states, published on January 28th, that the Romanian authorities could have drawn up a short-term action plan to limit the impact of the global crisis on the Romanian economy as long ago as August 2008. Instead the government increased public spending during the run-up to the November election and all parties made unrealistic promises to increase spending on wages and pensions if they were elected. As a result, the consolidated budget deficit is estimated to have ballooned to 5.2% of GDP in 2008 (ESA methodology) against an already excessive, planned deficit of 2.3% of GDP.
Under these circumstances it was always going to be difficult to formulate a budget that met demands for social justice in a country that has widespread regional disparities in income and is among the poorest in the EU, and that would also be sufficiently prudent to attract external investment to finance the current-account deficit and prevent a major contraction in output and an over-rapid depreciation of the leu. Against this background, major disagreements have arisen between the two parties that constitute the governing coalition. The Democratic Liberal Party (DLP), with the active support of the president, Traian Basescu, has proposed a relatively prudent fiscal policy (aiming at a budget deficit of 2% of GDP), a six-month freeze on public sector wages and pensions, and substantial cuts in the state bureaucracy. These measures, aimed at restoring external confidence, have been actively opposed by the leader of the Social Democratic Party (SDP), Mircea Geoana. He argues that proposals to increase public-sector wages and pensions agreed before the elections should be implemented to provide a fiscal stimulus. Leaders of the unions have attacked the government’s proposals, criticised the intervention of the president in government negotiations and have threatened widespread strikes unless their demands are met.
The delay in agreeing a budget reflects fundamental differences between the two parties. Some DLP leaders have suggested that the coalition will not last more than a year and leading figures in both parties do not hide their dissatisfaction with the existing political arrangement. However, as long as the Romanian electoral system retains The delay in agreeing a budget reflects fundamental differences between the two parties. Some DLP leaders have suggested that the coalition will not last more than a year and leading figures in both parties do not hide their dissatisfaction with the existing political arrangement. However, as long as the Romanian electoral system retains
