Monday, January 30, 2012

Romania: Boc snowed under

January 27, 2012 5:41 pm
by Stefan Wagstyl
The Financial Times

Wherever it turns, the Romanian government seems to run into trouble. On Friday, it was the constitutional court rejecting plans to delay local elections by a few months and hold them on the same day as parliamentary polls due in November.

Prime minister Emil Boc hoped postponing the local elections might win a bit more time for the benefits of his tough IMF-backed austerity programme to come through, and recent public protests to lose momentum.

But the judges said no. So Boc’s only relief is the distraction generated by the snowstorms that have this week swept Romania, taking the edge off the anti-government demonstrations. But the snows will melt – the anti-government sentiment probably won’t.

These are the stormiest protests in Romania for more than a decade, inviting comparison with the violent demonstrations that repeatedly hit Bucharest after the overthrow of the communist dictator Nicolae Ceausescu.

In place of the tens of thousands that marched in the 1990s, this year’s demonstrators are generally numbered in the thousands. They do not – yet – threaten to overturn the government or force it to change tack on economic policy.

Boc’s government remains committed to its policies, including a VAT hike and swingeing public spending cuts that have brought cuts in the state payroll, pay levels and pensions.

But the demonstrations show that central and eastern Europe (CEE) isn’t immune to the anti-austerity protests that have been seen in the older members of the European Union, including Greece, Spain and Italy. Even though Romanians went through an even more serious economic crisis after 1989, the current slow down is bad enough to make them angry.

Catalina Molnar, a Bucharest-based economist with RBS, told beyondbrics that educated people accepted that the government had little alternative but to stick to its programme but other people did not.

Like other people in Europe we have to face the crisis as well as possible. Romanian people can see that everybody else is in a mess too.

Investors have taken note. The Romanian leu is up this year by less than 1 per cent aginast the euro, compared with much bigger gains in other emerging market currencies, including, in CEE, the Polish zloty (+7 per cent) and the Hungarian forint (+7 per cent).

Boc’s difficulties were triggered by the 2008-9 crisis which plunged Romania deep into recession and forced it to promise fiscal reforms in return for a €20bn rescue loan from the IMF/EU.

This month’s demonstrations were triggered by a public row between Raed Arafat, a popular health official, and president Trajan Basescu, Boc’s close ally, over plans to privatise a medical emergency service.

Arafat quit after he was publicly criticised by Basescu, but reinstated a few days later in response to public protests. However, with the wind in their sails the demonstrators widened their campaign, and won increasing support from the opposition USL, the leftist alliance.

Boc’s efforts at conciliation were stymied this week by comments from foreign minister Teodor Baconschi, who called the protesters “inept and violent slum-dwellers”.

Baconschi was sacked on Monday and replaced by Cristian Diaconescu, an experienced ex-minister. But the episode did nothing to dispel the impression that the government is struggling to stay in control.

A lot will now depend on the economy. The European Bank for Reconstruction and Development this week cut its forecasts for the region and did not spare Romania, reducing its 2012 GDP number from 1.8 per cent to 1.5 per cent.

That’s in line with its 1.7 per cent forecast for south east Europe. But Romania is coming out of the deepest recession in the region – and Romanians had been hoping for a faster recovery.

The EBRD said:

Until recently, Romania’s economy was on track to record robust growth in 2012, after a modest recovery in 2011. However, the slowdown in the eurozone is already having a significant dampening effect on Romania’s exports, and further weakening is likely in the coming months. The Greek crisis has a dampening effect mainly through crossborder banking relationships. Continued IMF support provides an important buffer.

Worse, as the EBRD warned, a new eurozone shock could wipe 4 percentage points off CEE growth, which would plunge Romania (and many other states) back into recession.

The government is doing what it can, keeping the economy stable by signing a new precautionary IMF deal for €5bn. But its 2012 budget plan depends on 2 per cent GDP growth.

The central bank is helping to stimulate growth. Having cut interest rates by a total of 50 basis points at the last two monetary policy meetings (in November and January), the National Bank of Romania could cut the key rate by another 25 basis points at its next meeting on February 2.

But there are limits to what can be done in Bucharest. A fragile economy on the edge of the European Union faces some very cold winds blowing from the west. They could do far more damage than this week’s snowstorms.

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