WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

by Gabor Hunya
photo: agerpress

• A new minority government has the unpopular task of solving the problem of soaring fiscal deficits, while the economy is slowing down.
• The prime minister and president are from the same party, but they have limited power: there is a need for early elections.
• The fight against corruption has received increased backing.

Of late, Romania has been experiencing some political turbulence, coinciding with an economic slowdown. On 10 October, following a vote of no confidence, the governing coalition led by the Social Democratic Party (PSD) collapsed, when its junior partner, the Alliance of Liberals and Democrats (ALDE), called time on the collaboration. A minority National Liberal Party (PNL) government won a vote of confidence and was installed on 4 November. Then, barely three weeks later, on 24 November, the incumbent President Klaus Iohannis – also of the PNL – was duly elected for a further five-year term.

The end of the period of cohabitation between a populist-leftist government and a centre-right president should make for smoother public governance. And yet the government enjoys a limited mandate, and elections to the legislature are due in only a year from now, in November 2020. An early election would be reasonable, but that is only possible if Parliament dissolves itself – and for that to happen, a two-thirds majority is needed. So far, this has never happened in Romania, as MPs cling on to their seats for fear of rejection at the ballot box.

Overheating has characterised the Romanian economy for three years now. During that time, the country has attained one of the highest GDP growth rates in Europe, at the same time as amassing twin deficits: the budget deficit is set to expand beyond 3% of GDP and the current account deficit is to surpass 5% of GDP this year. Fiscal expansion and booming household consumption have been the main drivers of economic growth, while investments have behaved rather erratically. The long-expected economic slowdown came in the middle of 2019: GDP growth in the third quarter was a mere 3% against the same quarter of 2018, following growth rates of over 4% in the previous three quarters. The pressing question now is how to carry through the necessary fiscal corrections amid the political instability, and in what sequence.

Budget revenues are falling short of the plan, with the deficit hitting 2.8% of GDP at the end of October –equal to the rate planned for the whole year. The new finance minister, Florin Cîțu is targeting a budget deficit of 3% of GDP this year, which means some cuts in expenditure will be necessary. In fact, the lower-than-expected nominal GDP means that the deficit could well climb to 3.5% of GDP, even if urgent measures are taken. Public borrowing will grow rapidly towards the end of the year. Romania’s ten-year government bond yield is the highest in the EU-CEE, hitting 4.5% in mid-November; this could become a lasting burden in the future.

The government will need to adopt an austerity budget for 2020. In order to achieve a soft landing, there will need to be consolidation, which will apply further brakes to economic growth. The government will likely curtail wage growth in the public sector and exercise caution over raising the minimum wage. The second stage of the pension reform (which got under way in September 2019) would add 2% of GDP to the budgetary expenditure in 2020, and may therefore be postponed. In an ideal scenario, public investments would not be cut and steps would be taken to draw more on EU funds. External demand is also likely to place limits on economic growth in 2020, which is expected to slow to 3.3%, after about 4% this year. This will probably be enough, however, to keep the unemployment rate at below 4%.

The connection between the economic slowdown and the change of government is none too obvious. The PSD lost public support due to its attacks on democracy; and the coalition with ALDE disintegrated because of a row over a joint presidential candidate, rather than on account of economic issues. But it could be that the PSD cynically provoked the fall of its own administration when it saw that its economic policy was running into a dead end. It may be that it has purposely left the unpopular task of implementing austerity measures to the PNL. The backlash against the new government could pave the way for the PSD to return to power in next year’s elections. In view of this, we expect the president and government to push for early elections in the next few months.

Another important question is whether the new leadership will effectively curtail corruption and improve the rule of law. The European Commission stated in its latest report under the Cooperation and Verification Mechanism that Romania has actually gone backwards in reforming the justice system and in its fight against corruption. In spring 2019, the PSD government repeatedly attempted to revise the penal code, in order to reduce the penalties for corruption and impose stronger political controls on the judiciary. After its poor showing in the European elections and in the wake of pressure from the EU, Romanian civil society and the president, the PSD government abandoned its attempt to extend control over the judiciary. But the functioning of public institutions has not improved. Negligence and incompetence have led to repeated tragedies, which have served to galvanise civil society and bring the people out onto the streets.

So will the centre-right conservative PNL government be any more active in fighting corruption? The PNL has historically been part of the corrupt political system, and several of its former leaders have faced prosecution. It is encouraging, though, that Prime Minister Orban has promised to assume responsibility for making the justice system independent and for placing it above interference from politicians or other institutions – by which he probably means primarily the Romanian Intelligence Service (SRI). The SRI is highly organised and has infiltrated all parties and government bodies, as well as the press, thus gaining influence over decision making and public opinion. It has steered the work of the National Anti-corruption Directorate, providing telephone intercepts, making its investigation dossiers available and even suggesting who should be investigated. There is a need to rein in the influence of the SRI and to strengthen the independence of the judiciary.

Initiatives could be forthcoming from two new parties that voted for the PNL government: the Save Romania Union (USR), formed in 2016 by civic activists, and the Freedom, Unity and Solidarity Party (PLUS), set up in October 2018 by Dacian Cioloș, currently president of the Renew Europe group in the European Parliament. The USR-PLUS alliance is the third-strongest political force in Romania; it runs on a clear anti-corruption ticket and enjoys urban support. In coalition with the PNL, it could form a strong pro-European government after the next election – provided it can win over at least part of the rural population, which has traditionally voted for the post-communist PSD. It would be helpful if President Iohannis were more assiduous in promoting liberal and humanitarian values and in his support for civil society’s efforts to reach out into the provinces.