Friday, July 13, 2012

WSJ: Romania Heads Down Risky Political Road

By ANDREW PEAPLE

Romania has chosen a poor time to gain a reputation for political instability. Its prime minister, Victor Ponta, was summoned to Brussels Thursday after a series of attacks on the country's constitution, culminating in impeachment proceedings against President Traian Basescu. Investors have already got the jitters: the leu has fallen 2% against the euro this month. That might prove the tip of the iceberg if Mr. Ponta persists with his risky strategy.

The big danger Romania could face is losing its €5 billion ($6.1 billion) precautionary credit line set up last year by the European Union and the International Monetary Fund. The government could tap those funds if Romania's banking system freezes up due to any deepening of the euro-zone crisis. That might happen if foreign banks cut credit lines to their Romanian subsidiaries, which account for over 80% of the country's banking sector, in turn restricting their ability to lend. Greek banks alone contribute nearly 20% of foreign bank lending in Romania, according to Royal Bank of Scotland.

So far Romania has kept its economic side of the bargain. Spending cuts and tax rises have reduced its government deficit to 5.2% of GDP last year, from 9% in 2009; economic growth hit 2.5% in 2011 after two years of contraction.

But staying on the right path isn't a given. The current row might look mostly political in nature: the leftist Mr. Ponta has been trying to restrict the powers of Romania's independent constitutional court. But he is winning popular support for impeaching the right-leaning Mr. Basescu by tying him to unpopular austerity measures since 2009. Sure, Mr. Ponta is trying to have it both ways, publicly committing his government to the EU/IMF program. But with parliamentary elections due in November, the temptation to back track on fiscal tightening will be strong.

Moreover, Romania doesn't just risk losing its credit line from the EU and IMF. Pressuring independent courts sends a bad signal to foreign investors about threats to the rule of law in Romania: already German Chancellor Angela Merkel and European Commission President José Manuel Barroso have expressed concern about the risks to Romanian democracy. With the European economy still teetering, testing its leaders' patience is a reckless route for Romania.

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