Political battles 'taking a toll' on Romanian economy

"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.