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22nd Jun 2018

Political battles 'taking a toll' on Romanian economy

  • Graffiti in Bucharest: Politicians are portrayed as corrupt, greedy and incompetent. (Photo: Valentina Pop)

Political infighting risks wrecking urgently needed reform of the Romanian economy, according to a progress report released on Tuesday (14 August) by the European Commission, the International Monetary Fund (IMF) and the World Bank.

While maintaining that the country's economic reforms were "broadly on track," the trio expressed concerns about the impact of the drawn-out political crisis on the Romanian economy.

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"The recent political turmoil is taking a toll on the economy and has dented confidence," it said.

It added that "a prolonged political crisis could hamper effective economic policy making, increase risk premiums and financing costs, further depreciate the exchange rate, and depress investment."

The document is the latest report warning the Romanian government about the wider impact of battles between the governing Social-Liberal union and the opposition Democratic Liberal party, which culminated in a July referendum on whether to impeach the country’s President Traian Basescu.

Last Friday (10 August), commission President Jose Manuel Barroso called on Prime Minister Victor Ponta to respect the independence of Romania's Constitutional court, which is expected to rule on the validity of the referendum on 21 August.

In mid-July, the commission publicly questioned whether the Romanian government has the "understanding of the meaning of the rule of law in a pluralist democratic system."

Romania is three years into a reform program, including sizeable spending cuts, required under the terms of a €20 billion rescue package agreed with the IMF, the EU and the World Bank in May 2009.

In 2011 the support package was expanded to include a Stand-By Arrangement from the IMF of an additional €3.5 billion, alongside Balance of Payment Support from the EU of €1.4 billion and loans from the World Bank.

The Balkan country, which joined the EU in 2007 but is not part of the eurozone, emerged from two years of recession in 2011, posting annual growth of 2.5 percent.

However, in the past few months the IMF revised its growth estimate for 2012 down to 0.9 percent from 1.5 percent. The country also saw its budget deficit rise to 5.2 percent in 2011 and is expected to make further spending cuts to bring its budget in line with the 3 percent deficit limit.

The report emphasised the need for Romania to improve its absorption of EU structural funds, saying "a much higher use of these free resources is critical to boost infrastructure investment and economic growth, and would also help to strengthen international reserves."

Romania currently has - at just 7.4 percent - the lowest rate of absorption of EU funds in the 27-nation bloc.

The commission withheld payments to the country in February after a series of irregularities regarding funds worth €3.5 billion were uncovered in the management of its human resources programme.

The country has been wrecked by partisan battles throughout 2012, with the ruling Social-Liberal union attempting to force President Basescu out of office over allegations of abuse of power.

The referendum saw a large majority voting to impeach Basescu but only on a 46 percent turn-out, below the required 50 percent threshold.

Fresh parliamentary elections are expected to take place in November.

Analysis

Something is rotten in the state of Romania

The view of ruling politicians that public institutions - be they cultural institutes, media, or, more worryingly, the judiciary - need to obey the ruling party has never been completely eradicated since Communism fell.

EU commission still 'very worried' about Romanian democracy

EU justice commissioner Viviane Reding on Wednesday said she remains "very much worried" about the state of democracy in Romania. Meanwhile, there is intense political infighting in Romania ahead of Sunday's impeachment referendum.

Greek bailout exit takes shape

At a meeting next week, eurozone finance ministers and the IMF are expected to agree on new cash, debt relief measures, and a monitoring mechanism to ensure that Greece can live without international aid for the first time since 2010.

Opinion

The risks behind the 'green bond' boom

The EU should not overuse the financial system in order to achieve environmental goals, or it risks the emergence of a green bond bubble which would be detrimental to the financial sector and hinder the achievement of climate targets.

Opinion

Eurozone needs institutional reform

Both the examples of Greece and Italy test the limits of a system with inherent weaknesses that feeds internal gaps, strengthens deficits and debts in the European South, and surpluses in the European North respectively.

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