How high will next year’s economic growth be, how will the budget be built starting from this figure, what will happen in the EU, how will Romania be affected by the recapitalization of banks in Europe and last but not least, what steps will be taken to improve absorption of EU funds? These are the problems, these are the challenges. How will the administration deal with them?
A tendency has been visible for a while when looking at the administration: the tendency to blame a potential failure of Romania on the international situation, a suggestion President Traian Basescu actually made at the end of last week. Of course, Romania largely depends on the developments in the EU but it is the duty of its authorities to find solutions.
What will they be? Prime Minister Emil Boc on Tuesday announced he would submit to the Parliament a prudent 2012 budget draft to keep Romania shielded from more risks in case things do not improve in Europe. He said that he was not considering any public sector wage cut or pension taxation scenario.
Boc added that investments, European funds and jobs are the priority of the state budget for 2012. These priorities, however, have been repeatedly stated over the years.
Faced with an economic slowdown, the government might find itself forced to cut spending. How will it do it? The prime minister reassures investments will not be cut. The only remaining solution is curbing spending on goods and services, the more so since the president suggested if not even demanded from the Government to keep a budget deficit of less than 3% because of the high cost of financing it.
The prime minister admits Romania is not entangled in the sovereign debt crisis but there is the danger of an increase in debt, if the government does not continue to apply a prudent policy.
Anyway, by November 7, when the IMF’s assessment mission ends, its economic growth forecast will become known and details of the budget may surface.
Scenarios may change from one day to another depending on what happens outside Romania. The EU leaders are supposed to agree on the euro zone bailout plans. If they reach an agreement and the market takes the steps announced well, then things may calm down somewhat. If not, Romania has to expect the worst. Above all, there is the decline forecast for all Europe’s economies, not just Romania’s. This will hurt Romanian exports and a solution must be found to stimulate domestic consumer spending. How will the government do it? One way would be to keep investment spending up, but experience has shown that when revenue goes down, the first thing the government cuts is capital spending.
Another problem likely to make a serious impact on Romania is the capitalization of European banks.
Speeding up absorption of European funds would be a breath of fresh air for the economy.
On the other hand, Romania is not completely adrift and has some anchors of its own, too. To avoid catching the eye of the investors on the lookout for vulnerable countries, it needs to maintain its macroeconomic stability and not revert to the unsustainable budget deficit and current account levels that it had at the onset of the crisis in 2008.
It has a number of buffers that can protect it from international turmoil. The flexible exchange rate puts Romania on a better position towards the crisis and then there is the advantage of high foreign currency reserves.
At the same time, the continuation of the program with the IMF and European Commission could prevent potential fiscal slippages in the 2012 election year. In addition, Romania may draw some of the about EUR5 billion the two international institutions set aside for it, under exceptional circumstances.
Romania also managed to adjust its budget gap and will continue to do so, and the share of public debt in the gross domestic product is quite low, much lower than the 60% of GDP set Europe-wide.
(English version by Loredana Fratila-Cristescu)