A matter of trust

Convinced of the Boc Government’s little willingness to implement painful yet necessary measures to balance the budget, the IMF mission was no longer up for chats on good intentions and remote prospects. The current government has already reached its limits when it comes to taking measures that have been previously agreed on with the financial organisation and political resistance to change is quite obvious. Options presented during talks were evidently turned down. It seems that increasing VAT and the flat tax (from 19 to 24 per cent and from 16 to 20 per cent respectively) and the measure President Traian Basescu announced on Thursday – wage and pension cuts – were the two options left for debate.

The choice – as IMF officials are always keen on reminding us – is with Romanian authorities, who chose the second option. The option of ‘trust’, of credibility, as the head of state was saying. A commentator was saying the other day that it was the option that would make the Fund confident that the Romanian government would implement the measures only if the Executive signed the letter of intent. Only in that way can the Boc Cabinet become credible to the IMF.

Effects on the individual will unquestionably be extremely tough. Some call them ‘devastating’ and some opposition politicians describe the measure of cutting public workers’ wages by 25 per cent, pensions and unemployment benefits by 15 per cent as ‘genocide’. The torments of those who are directly involved are easily understandable and the fact that the measures will only remain in force up until the end of the year is hard to believe.

Two essential matters emerge in the context: one is the probability of the actual implementation of the announced measures and the second their capacity of yielding the expected results.

Social tension is expected to experience dramatic hikes. Trade unions will be convinced with difficulty that already subsistence wages (of about 70 per cent of public service employees) can be cut by 25 per cent. The situation of retired people is no more fortunate either. As a representative of pensioners’ union was saying, similar cuts are being operated in Greece, only there the pensions are at about EUR 600. A 15 per cent cut applied to Romanian pensions some of which are of EUR 80-100 would be unacceptable. Protests may go as far as general strike in selected sectors or to general strike in the entire economy, which will deteriorate the already frail domestic situation. One union leader was threatening with a new revolution last Saturday.

One can assume unions will take government to court over failure to enforce existing legislation or own orders. Labour law specialists are anyway pointing out that anti-crisis measures are difficult to implement from a legal point of view. The chance of success is quite big. Do not forget that judges will receive the same treatment, losing 25 per cent of their salaries. Magistrates and prosecutors’ associations have already written to the premier, urging the law be repealed.

On the other hand, the normative act to include pay cuts will have to go through parliament where spirits will surely get inflamed. It’s hard to say who will be in favour of the measures and willing to take the election risk coming with such decision. In addition, debates may extend over a long period and endanger the implementation deadline of June 1. Once the law has been amended with ‘soft’ measures, all agreements with the IMF will become non-existent and economic risks will be escalating.

2. Many analysts have been lately reserved as to considering announced measures as sure to fulfil their purpose. The reason is that, on the one hand, pay cuts restrict the taxation base which leads to less revenue collected by the state. Reducing the salary fund could also mean layoffs or retirements, neither able to help narrow down the deficit. Unemployment is an extra burden on the same budget and more pensions add tension on an already overstretched system.

Secondly, the dropping purchasing power of a major share of the population would lead to a fall in sales, hence a reduced economic activity. The market would be contracting, which would also affect private companies. What we would get is a vicious circle. If we add the state’s huge outstanding debts to private companies preventing economic recovery, doubts on the success of the measures will grow.

The impact on the banking sector is not to be neglected either. The number of defaults will grow and so will the number of prospective bank customers who will not qualify for a loan.

There is therefore a risk that such tough measures may not be the last ones to be taken. The same commentators mention the risk of tax hikes according to initial rumours, after operating the announced pay cuts. In a critical international context, Romania cannot count on further external financing. If the budget balancing plan misses its target, the following measures may be even more dramatic.

We cannot understand why the pay cut news had to be broken by President Basescu, as long as executive measures are the competence of the government. Leaving the ‘detail’ behind, we cannot help noting that, whilst the head of state had total faith in the current cabinet, the reality of the street points otherwise.

The government unrealistically counted on budget collections of 37 per cent of the GDP, although the best rates achieved in the previous 20 years had been 32.2-32.3 per cent. Even BNR Governor Mugur Isarescu intervened to call government forecast excessive, term the media interpreted as ‘misleading’. A less academic term describing a painful reality. In addition, the current government, like many of those preceding it, such as the one led by Calin Popescu Tariceanu in 2005-2008, has been a poor manager and an unmatched spender. Even now, pensions and salaries are being cut but public procurements are not. Why? Someone had an explanation for it the other day: money leakages from procurements to political clientele. Confidence in the government is dramatically dropping, whether or not some want to ascertain it. It may gain IMF’s credibility, but the trust of Romanians has been lost for good. This is why the confidence that the measures will be actually implemented is also low. At the end of the day, it is all a matter of trust.

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