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February 9, 2023

Useless scenarios

This year began with hopes that effects of the economic crisis would be fading, but the optimism displayed by officials is far from washing away the discomfort – to use a kind word – felt by the average citizen. Year 2010 will pay for 2009’s mistakes Last year’s economic decline by more than 7 pc must be now quickly compensated , so we can fit the parameters agreed with the IMF in view of continuing the stand-by agreement, but also in order to keep economy alive. And the harsh, unpopular measures, most of them regarding labour and wages become obvious by the day.

Earlier this week, authorities announced the number of jobless has reached a new record of 762,000 accounted for officially, equivalent to an unemployment rate of 8.3 pc (a year ago, it stood at 5.3 pc). Out of these, more than 650,000 come from private economy. (!) And things go even further.

Massive layoffs have started in the railway system, with no less than 10,000 people due to lose jobs in the upcoming months. For them, things are really complicate. As a former CFR (railways) worker said on TV, their activity sector is very specific and the chance of finding a job in the near future is slim. Meanwhile, the idea of job retraining is still a dream in Romania. Next come civil servants and the personnel of the education sector. By autumn this year, no less than 15,000 non-titular teachers will be made redundant. Thus, the figure announced by an IMF official, of one million unemployed in 2010, no longer seems impossible to reach.

The optimist signals launched by authorities, about economic recovery, look like weather forecast that promises nice days will come. The better the news, the more unlikely to be real. Waiting for spring to come, we can see winter is back. Waiting for economic recovery and a GDP increase by 1.3 pc, we are preached about “being more efficient” – which translates into fresh layoffs to nobody’s advantage. Not even the state will benefit, as the new jobless no longer pay social insurances and cut to minimum their expenses, amplifying contraction of the local market.

This volatile context is a good reason for scenarios, which might be categorized into four possible evolutions, three of them far from being optimistic.

1) the government will soon reach its limits. Domestic resources are insufficient, and the loans from the IMF, WB, EC can only bring momentary relief. When the ministers of Finance and Labour (Sebastian Vladescu and Mihai Seitan, respectively) “gave away” ideas like setting a tax on those pensions lower than RON 1,000, and paying child allowances only to poor families, they actually hinted that things are getting worse. The trade unions from many activity sectors are waiting for spring, so they can take their salary and job demands to the streets. Only bad weather still (apparently) keeps social unrest from exploding. The unions of Metrorex subway operator already brace for a strike, and the tension must be raising among the CFR personnel. Add to this the employees of the health sector, the civil servants and the Justice employees (whose wishes have been granted, for now, but who are always discontent with the “recognition of their merits”).

Faced with protest on a large scale, which escalate to general strike in certain activity sectors, the Boc government (whose firmness has not been tested yet over major issues) must choose between yielding to demands and reigniting inflation.

2) social unrest keeps low. But, as economy gives no sign of recovery, the executive will have to take supplementary measures. Besides layoffs, it will also freeze, even delay salaries and pensions. Public investments (already very low) will contract even further, depriving the economy of a driver most needed for recovery. This leads to a vicious circle, which results in the increase of state deficits. The unpopular, but necessary solution is raising the VAT or the lump tax, or even enforcing extra taxes. The poverty level will thus increase exponentially.

3) A new loan taken from the IMF or other international financial institutions (if there is still anyone willing to grant it) or contracted on international capital markets, at huge costs. President Traian Basescu last week warned about the devastating effects of ‘invented’ premiums and bonuses upon budget expenses. At that moment, he said: “Let’s imagine the Government is unable to impose reasonable expenses for the functioning of the state, which include the expenses with invented bonuses – for smile in the local administration, for wearing decent clothes at work, or I don’t know what other premiums, for having antennas above one’s district. We went too far with the joyful and happy spending, without having the responsibility to wonder about financing sources,” Traian Basescu stated at a MoD meeting last week.

Most analysts agree: the solution is catastrophic, as Romania’s debt has already soared by massive amounts these years. We could reach the situation when new loans only serve paying instalments and interests of the old ones, and Romanians will take no benefit in them. The recent experience of Greece is scary enough to avoid getting over-indebted, at all cost.

4) Finally, a scenario plausible only for authorities: a substantial economic recovery that would provide for creating new jobs, boosting investments and increasing incomes. The growth forecast of 1.3 pc is far from setting the due prerequisites. In spite of all these, BNR Governor Mugur Isarescu recently voiced his optimism about the economy. Unfortunately, he has displayed the same optimism in 2009 too, and the annual results have contradicted him.

But devising scenarios is useless. A recent EBRD conclusion – that the IMF loan was useless – only proves how serious the situation is, with an executive unable to conceive measures against the crisis. According to EBRD, the “stimuli” included in the program with funds worth EUR 13 bln announced by the Romanian government in February 2009 in support of the economy were rather imaginary than real, because only few projects have been started.

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