Thursday, October 9, 2008

ROMANIA: Populism will backfire if economy worsens

Oxford Analytica
Wednesday, October 8 2008

EVENT: About 7,000 workers and trade unionists demonstrated in Bucharest yesterday demanding better working conditions and higher wages.
SIGNIFICANCE: The minority Liberal government headed by Calin Tariceanu has been forced to try to cancel large pay rises for public sector workers in the light of the deepening economic crisis.
ANALYSIS: With parliamentary elections due on November 30, the minority government led by the National Liberal Party (PNL) has been showering benefits on key social groups. It is competing for electoral support with the opposition Social Democrats (PSD):

  • Prime Minister Calin Tariceanu announced last week that a 20% rise in pensions was being brought forward to October 1. The PSD had initiated the move, which could see pensions double over the next year.
  • Both parties have collaborated closely to impede EU-backed efforts to weaken the hold of the political class over the judiciary and reduce high-level corruption.
  • However, as elections approach, rivalry between them has grown and both have been engaged in increasingly frantic efforts to reward mainly lower-income socioeconomic groups who have generally lost out in the transition from communism to capitalism.

PNL identity change. Ever since Tariceanu, a millionaire businessman, established his grip over the PNL, the party has lost its liberal identity, and many of its leaders and activists. It is dominated by other wealthy figures, some of whom have flourished from privatisation, and the membership now comprises mainly recent recruits, who have benefited from state patronage.

In opinion polls, the PNL is currently in third place with less than 15% of support and Tariceanu worries that it will lose this clientele unless it is strong enough to influence post-electoral bargaining. The party's future could be at risk if it leaves government, especially given the string of corruption scandals that have dogged its four years in office.

Precarious spending. However, the pre-election spending wave has coincided with worsening global financial turbulence from which Romania is not immune:

  • Dangerous precedent. On October 3, when parliament voted to double the salaries of teachers, all parties, including many PNL deputies, supported the rise. It immediately triggered a wave of rival pay demands across the rest of the public sector, with strikes and demonstrations throughout this week.
  • Economic uncertainty. Until last week, Tariceanu had insisted that the economy was strong enough to absorb such pay rises. The economy is to expand this year by 9%, but an extended period of expansion rests on shaky foundations. Much of the growth has been in the property sector, which is experiencing a severe downturn in Romania. Inflation is high, and for several years international financial institutions have been warning that a double-digit current account deficit would be unsustainable for such an exposed economy. Foreign investors have been increasingly nervous about the economy's prospects and unhappy about the lack of a coherent government strategy for improving the country's still backward infrastructure (see ROMANIA: Risks accompany drive for catch-up growth - September 1, 2008). If the pay rises go through, Finance Minister Varjun Vosganian warned that the fiscal deficit would grow to 7% of GDP and it would be hard to avoid runaway inflation.
  • Government U-turn. Within hours of the October 3 vote, in a dramatic U-turn, Tariceanu demanded parliamentarians form a united front to suspend the teachers' pay rise. The Constitutional Court was approached to see if it could overturn the vote and the president of the Chamber of Deputies, Bogan Olteanu (Tariceanu's god-son) threatened to suspend the lower house indefinitely unless it cooperated. Previously, whenever the Tariceanu government was criticised for shielding corrupt former ministers or for delaying the launch of an agency to audit the private wealth of senior politicians, civil servants and judges, it had insisted that parliament was sovereign and its decisions could not be overridden. Indeed, the heads of both chambers recently complained to the European Commission for criticising the legislature' s role in impeding the clean-up of public life.
  • EU pressure. Yesterday, Tariceanu sacked his education minister, who had backed the salary rises. The prime minister had already had an embarrassing meeting in Brussels on September 30. European Commission President Jose Manuel Barroso expressed his unhappiness with Bucharest's failure to meet commitments made to enable Romania to become a full EU member in 2007, when there were misgivings in many quarters over the country's readiness to shoulder the responsibilities of membership (see BULGARIA/ROMANIA/ EU: Report may soft-pedal sanctions - July 21, 2008).

Bargaining positions. Tariceanu has limited room for manoeuvre:

  • Prime minister advantage? The Democratic Liberal Party (PD-L) also voted for the teachers' pay rise. The PD-L owes allegiance to President Traian Basescu, whose fierce rivalry with Tariceanu and his backers has overshadowed politics for the last two years and led to the Democrats' departure from government in 2007. The prime minister is trying to portray himself as a resolute fireman dowsing economic flames ignited by a negligent parliament absorbed with electoral struggles.
  • Unfavourable record. However, he is weighed down by a poor government record. His four-year administration is widely viewed as inefficient and absorbed with using the state to widen opportunities to distribute patronage. The benefits of economic growth have been distributed very unevenly. Most of the EU funding due Romania remains frozen because of the inability of a low-grade civil service to devise projects that win the approval of Brussels.
  • President advantage? Unless parliament decides to annul the October 3 vote, Tariceanu will need to turn to Basescu, who has the power to reject the bill. However, the president may not acquiesce unless the prime minister makes a concession. This could be in the domain of justice reform, such as prolonging the mandate of Daniel Morar, the prosecutor investigating high-level corruption who is respected in Brussels but despised by much of the political class.

Outlook. Tariceanu's Liberals are on the defensive, but it is unlikely that the looming elections will result in a fresh start:

  • Favourable electoral system. The proportional electoral system has been replaced by a variant of the alternative vote. The constituency boundaries have been drawn to assist the PNL and PSD. Unless a very high turnout occurs, it is likely that they will win many seats even in constituencies where the PD-L emerges on top in the first round.
  • Favourable media. PNL and PSD views dominate much of the print and electronic media (see ROMANIA: Disgraced PSD stages strong comeback - June 6, 2008). Moreover, a now greatly weakened civil society is incapable of providing the independent oversight of the political process seen in past elections.
  • Dissatisfied voters. . Many voters are aware that the pay rises are unlikely to benefit the groups they are intended for, thanks to worsening economic conditions. However, there is a deep-seated feeling of resignation about whether politics can be cleaned up and new social forces can help create a more representative form of politics. Unaccountable groups, who sometimes migrate across parties, rule on behalf of well-placed Romanians who have benefited disproportionately from the key economic changes since communism ended in 1989, many having been prominent in the old system. Growing dissatisfaction with the elite may result in a low voter turnout in November.
CONCLUSION: The electorate's deep-seated discontent with the political elite -- largely composed of well-off Romanians who have benefited disproportionately from the transition process -- may prompt them to abstain in the November elections, benefiting the incumbents. However, if the economy takes a dramatic turn for the worse in the coming weeks, voter intentions may change.

Keywords: EUR, Romania, EU, economy, politics, constitution, corruption, election, government, growth, legislation, opposition, party, prices, reform, unions, wages, social, education

Word Count (approx): 1230

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