Friday, March 18, 2011

FT: Romania’s Boc: another narrow escape

by Neil Buckley

Emil Boc has proved himself to be one of central Europe’s great escape artists. The Romanian prime minister on Wednesday night survived a fifth no-confidence vote in parliament in under a year.

With the motion only attracting 212 votes – 24 less than needed to pass – parliament has now approved labour law changes that were the final requirement to meet the terms of its €20bn bailout in 2009 from the International Monetary Fund and European Union.

In reality, the vote never looked likely to pass. Even a union protest against the labour reforms outside the parliament attracted only 8,000 people, rather than the 50,000 the organisers expected.

The labour changes follow last year’s severe austerity package, the passing of a cost-cutting 2011 budget, and new laws on pensions and public sector wages. Romania now plans to obtain a new €5bn precautionary facility from the IMF in April.

Analysts suggested this week’s vote means the current governing coalition of centrists, an ethnic Hungarian party, and independents, could soldier on until parliamentary elections late next year, providing important political stability.

But Romania’s economy may find it more difficult to escape from the vicious recession into which it sank as a result of the global financial crisis. It was one of the few European Union states to suffer two consecutive years of shrinking output.

The economy is forecast to have grown in the first quarter of this year, but some economists think even official forecasts of 1.5 per cent full-year growth look optimistic.

Export-led growth could be complicated by the appreciation of the leu in recent years – though that has helped with repaying foreign-currency debt. Domestic demand, meanwhile, is expected to remain subdued after last year’s painful austerity measures – which included slashing public sector wages by a quarter, state benefits by 15 per cent, and cranking up value added tax from 19 to 24 per cent.

The VAT increase has fuelled inflation which, coupled with worldwide food and fuel price increases, hit 7.6 per cent in February – highest in the EU, and a particular burden for Romania’s depressed consumers. That has probably blown out of the water Romania’s chances of hitting its 3 per cent inflation target for the year. ING last week raised its full-year inflation forecast to 5.7 per cent from 5 per cent.

All this has, not surprisingly, seen the popularity of the governing coalition nosedive. Romanian president Traian Basescu has spoken of the need for an “economic relaunch”, and reportedly discussed with party leaders the possibility of replacing Boc with a “technocrat” economist as prime minister. The government, he said, should find “another governing style”.

Some Romanian media have cited unidentified sources as suggesting the prime minister might resign after the parliamentary vote to pave the way for a new government. If so, Boc’s political escape could yet prove short-lived.

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