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June 30, 2022

A government of sacrifice

It is all too early to talk about who the next prime minister of Romania will be. Presidential elections have hardly concluded and Traian Basescu’s victory is uncertain yet. The post-election euphoria – for those Romanians who see their choice for president at Cotroceni Palace – the time has come for this country to be run by a full-fledged government. The Emil Boc interim government lapsed its mandate already. Romania does not have a government as we speak, agreements with the International Monetary Fund (IMF), the World Bank (WB) and the European Union (EU) are in ‘stand-by’ and financial needs are stringent. The 2010 budget is yet to be adopted, a pivotal requirement for meeting the pledges agreed with the IMF.

No matter who will be in charge of the next government, he will face up to some huge problems. The political factor aside – Romania is going back now to the situation before the electoral campaign, when Parliament rejected the premiers designated by President Basescu. Nothing has changed really and the odds for the legislative body to approve a PM nominated by the president and backed only by Democrat-Liberals, who only hold but one-third of the parliamentary seats are just as slim as before. Yet, even supposing a new cabinet would pass, it is hardly then that the real challenges will begin.

On one hand, Romania needs financing badly, the most pressing problem being tied to the payment of salaries for public employees and state pensions. On the other, public spending needs to be cut drastically in order for government to stay within the IMF accord provisions aimed at cutting the budget deficit. This will translate into layoffs and higher taxes. Trade unions postponed their protest action until after elections, but social pressure and discontentment are simmering. Given the context, the next government can only take the back door exit provided it takes the measures thought to make economic sense, which the former Boc government delayed exactly from electoral reasons. Social pressure is mounting, as it became obvious prior to the electoral campaign. Unkempt promises, a lower purchasing power, salary cuts by means of unpaid holidays are just a few reasons for the discontent vented by unionists. Everybody wants more money for the fields in which they work, and higher salaries at the same time. Given money is not enough even for paying salaries, the conflict is but unavoidable. Moreover, IMF demanded that the budget deficit needs to be cut down by no less than EUR 2.5 bln. In order to stay within this range, the next government will have to take some dramatic measures. It will have to choose between laying off roughly 20 per cent of the public servants and a substantial rise in taxes. Talks have also been held in the past few months over the rise in the Value Added Tax (VAT) and the flat tax rate. Both President Traian Basescu and Finance Minister Gheorghe Pogea vehemently denied speculations by the media on VAT going to be raised from 19 per cent to 22 per cent in order to increase budget revenues. Yet, this would not be the first and the last time officials fail to keep their promise… Should we remind that in 2008 teachers were promised salary raises of 50 per cent? On the other hand, neither the domestic nor the international circumstances allow for any economic break. Unlike politics, where the verb and the diatribe may prove a winner, economy is ruled by fair figures and decisions, while their opposites would only bring it into collapse. The electoral imperative led the Boc government to only mimic reform, leaving up to the next cabinet the not at all fortunate task of passing tough measures. Meanwhile, state arrears to companies have been on the rise, and the paying timeframe (including the VAT), doubled, which raises the specter of the VAT going up, along with taxes, among which the property tax. We should not forget that energy and gas tariffs are also to increase as from January 1 along with excises levied on fuel, alcohol and cigarettes, which in turn will trigger a chain reaction of price rises. Meat producers also warned about impending rises of about 20 per cent. How the unions, and not only, will react to the laying off of hundreds of thousands of civil servants accompanied by foreseeable price increases?

If the next government implements the tough measures demanded by the economy, it will confront itself with a dramatic fall in popularity. The odds of overcoming this critical period are minimal, as most of the analysts outline. If the next cabinet yields to higher salary demands, would not engage in layoffs or not raise taxes (in order to cut budgetary spending) will have to take note of the accords with the IMF, the World Bank and the European Commission no longer being in effect. International credit rating agencies are on stand-by and warn a protracted political crisis will lead to the country’s rating being downgraded. This in turn will lead to the state becoming unable to pay its debts to companies and to economic deadlock, the more so as 2010 is also the year that marks the start of IMF loan payments. Finally, lack of funding could delay salary and pension payments or the negative economic effects taking their toll on prices, which would bring us back to the high inflation and great economic volatility of the 1990s. This in turn would drive foreign investors away and throw a large portion of the population into poverty. A worst case scenario we should better discount.

As the former Boc government took no anti-crisis measure actually, one may be under the impression things could stay as they are. A wrong assumption, as the economic measures are much belated and the risks of skidding grow by the day.

We should nonetheless keep in mind that there is yet another alternative called snap elections, provided Parliament keeps rejecting the president’s choices for premier. The head of state can dissolve the legislative body and call early elections. What will happen thenceforth is difficult to tell, though many are those who see this alternative as quite likely… For the time being however, let’s wait for the Liberals’ decision on governing cooperation.

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