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Romania: Its Economic House of Cards

 5 min read / 

Once again, Romanians are taking to the streets to protest the government’s plans to undermine the justice system. A raft of new laws currently being rammed through parliament would decriminalise high-level corruption and weaken the country’s checks and balances in an obvious attempt to shield the political class from prosecution.

The authority of Romania’s Anti-Corruption Directorate (DNA) would be severely curtailed and the judicial inspection body overseeing the work of judges would be brought under the auspices of the Justice Ministry. These actions, which have drawn the ire of the U.S. State Department as well as of the European Commission, risk upping the temperature of Romania’s already heated economy.

Economic Growth

Growing at 8.8% year on year in the third quarter of 2017, Romania’s GDP expansion has outpaced China’s for the first time in a decade. The tech and automotive industries are thriving, owing to the fact that Romania’s education system has an excellent reputation for producing a labour-force well-versed in STEM subjects. This has proved attractive for global IT firms such as Microsoft, Oracle and IBM, which have established major hubs in the country.

Strong economic growth has also led to the lowest unemployment rate in eight years, which stood at 5.6% in October. However, economic accomplishments notwithstanding, Romania’s economic success is running on borrowed time – suspicions that will only grow if the policies that brought about the growth are considered.

The government, led by Prime Minister Mihai Tudose, has aimed to make Romania an attractive place to invest, both to fuel the economy and to let the citizens partake in the resulting spoils. To this end, wages were increased across the board in order to stimulate consumption – with the result that consumption has been the main driver. Large-scale tax cuts, including to value-added and income tax, further boosted private spending.

Is It Unsustainable?

However, economic observers warn that this type of growth is hardly sustainable. The government’s wage hike in the public sector means that public debt has surged simultaneously. Latest available data place the country’s debt at 37.6% to GDP, a ratio more than double than that in 2008. Though the debt is relatively low in global comparison, Romania’s economists are rightfully alarmed: when the next inevitable crisis hits, the country could well be pushed to the brink of Greece-style debt default.

Exacerbating the situation is the fact that Bucharest has financed the wage increases by cutting investment in infrastructure and other public works, both of which are key for future economic performance. In the light of these conditions, the government stands accused of having launched the economic reforms for the sake of popular short-term benefits, but without a clear strategy for the long-term.

It is no surprise that officials fiercely refute this, yet the assessments of international observers are crystal clear. Following an analysis of public debt growth, Moody’s downgraded the country’s outlook, believing that Romania’s growth is built on shaky foundations and that the integrity of the public finances is in jeopardy.

Still, this is not the only thing that is making investors wary. Bucharest sought to attract FDI to fuel the economy, and launched an anti-corruption campaign to instil confidence in investors. Ironically, the campaign achieved the opposite, as it exposed the degree to which corruption is part and parcel of the political system.

In 2014, Romania’s National Anticorruption Directorate was lauded by the European Commission for its positive impact on reducing graft and prosecuting lawbreakers, even in the upper echelons of the political elite. In November, Liviu Dragnea, President of the ruling Social Democrats, was charged by the DNA with abusing public office and embezzling EU funds following an investigation by the European Anti-Fraud Office (OLAF). The DNA subsequently froze in excess of €27.4m worth of Dragnea’s assets.

Dragnea is already under a two-year suspended prison sentence for electoral fraud in a 2016 referendum, but staunchly maintains his innocence. His alleged involvement in corruption is the primary driver for the government’s current attempt to alter the law in his favour, including a curtailment of the DNA’s powers.

DNA Under Attack

It does not help that – besides Dragnea – the DNA is under attack from another high-profile figure. Businessman Alexander Adamescu is wanted by the DNA for bribing judges under a European Arrest Warrant, which would allow his repatriation from his London exile. The repatriation is fiercely resisted by Adamescu’s lawyers, who have started a smear campaign to undermine the DNA’s credibility. With the help of some British MPs and leading Brexiteers, they have portrayed the DNA’s pursuit of their client as politically and anti-semitically motivated, while breezing over the facts of the case.

None of these efforts improve Romania’s image and are holding up further EU-integration in certain areas, such as the country’s bid to join the EU Schengen area or adopting the common currency. In fact, the attempts to sabotage the DNA’s work are indicative of a pervasive lack of political will to tame official corruption, and investors are, unsurprisingly, scared off by the resulting uncertainty. Consequently, FDI has been on a downward spiral, declining by roughly 40% between 2011 and 2016. In the first quarter of 2017 alone, FDI was 22% lower compared to the previous year.

Conclusion

All things considered, existing conditions do not bode well for Romania’s future economic performance. Bucharest promised to spread the spoils of economic success evenly, but reliance on purely consumption-driven growth has its inevitable limits. And with the anti-corruption campaign reduced to a farce, the government’s credibility is increasingly undermined. Unless consumption is reduced and investments into infrastructure stepped up, it is only a matter of time until the economic house of cards collapses.

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