Key findings:

 

  • Romania has dropped into the “election year spending trap”, as seen in Hungary in 2002 and 2006.

 

  • Romania, which recently has enjoyed economic boom, may set back as a result of the motion and face long term scal, competitiveness and growth problems.

 

  • Romania is entering the era of populism, when the hunt for votes by political parties will set about the spiral of spending promises as happened in Hungary after 2000.

 

  • The ongoing controversy can lead to a significant loss in the popularity of the ruling liberal party.

 


The “Hungarian disease”

  • As Election Day is getting closer, Romanian parties and the government are intensifying their efforts to target their voters with nancial „incentives”. For example, pensions and state-subsidized heating allowance have recently been raised by 20%. After a short debate in Parliament a bill was passed offering a huge salary rise for teachers (74% for university professors and 54% for public education teachers), which amounts to1% (!) of the current Romanian GDP. Another bill, passed the same day, permits that freshly retired teachers are entitled to receive a one-time allowance (an amount equivalent to seven months' salary).
  • All parties, including ruling ministers voted in favour of the measure – and against the government’s will. As President Traian Basescu declared he is willing to sign the bill, but the Constitutional Court can block it, so the future of the initiative is uncertain.

The PSD (Social Democratic Party of Romania ), who initiated the salary-hike bill seems to follow the bad Hungarian example. Hungarian socialists (MSZP) won the general election in 2002 having promised a 50% general salary rise for all public employees, including doctors and teachers in the “100 day-program”. The plan, which was implemented after the MSZP came to power, increased the budget decit and put the Hungarian fiscal policy on the long track until 2007. The ongoing overspending led to a situation where, in 2006, the socialist-led government had to introduce severe austerity measures. Romanian PM Calin Popescu-Tariceanu has already revealed this parallelism when saying that “Romania should not step on the Hungarian road”.

 

 

 

 

A well-performing economy at peril

 

The Romanian economy has performed well in recent years. However, according to experts it seems to be overheated with fast growth and accelerating ination. Analysts have recently warned of the possibility of a hard landing. In the context of the subprime crisis, accelerating salary rises and other types of income outflow can seriously damage the defensive capacities of the Romanian economy.

  • The political compromise on economic growth may be annuled. Until this autumn, there was an unwritten consent in Romanian political elite that the conditions of sustainable economic growth should be maintained. Aggressive wage hikes can break this compromise, and may induce exaggerated expectations from voters.
  • If this spiral of promises gains further terrain, the Romanian economy may suffer from direct losses of funds for state infrastructural investments.
  • Romanian consumption is becoming more and more import-based, and the trade balance has significantly deteriorated in the last months. If the import-based consumption continues to strengthen at this rate, the country's trade accounts will suer from an even stronger imbalance. In recent years, consumption has increased strongly, as salaries grew three times as fast as the economy.
  • As growth in household income is driven by intensifying public spending, economic growth is expected to slow down, and inflation risks increase. Inflation is already high in Romania, and according to the central bank's governor, it is impossible to reach a one-digit inflation target with aggressive salary rises (the basic interest rate is also high: 10.25%).
  • If the Tariceanu government loses the next election to the PSD, paternalistic and interventionist economic policies may take place in Romania. However, a complete U-turn is not expected in taxation. The PSD is ambiguous and has not said that it would abolish the at tax, which implies that the party is actually in favor of the current system. If the income side stays unchanged, the spending side of the budget may suffer from income outfow and overspending.

A general election in Romania is scheduled
to take place on 30th November 2008.



Campaign context – political signicance

 

Although almost all deputies and factions were in favor of the salary hike bill, it has caused a nationwide debate, as the central bank and the government, even if some government-side MP’s voted yes, have opposed the decision.

 

  • The government turned to the constitutional court saying that the bill has to be abolished
    because it did not name the source of the salary hikes. Therefore the debate is supposed to
    continue and dominate the campaign. This is obviously advantageous to the PSD, even if the bill
    is ultimately abolished.
  • Opposition parties (PSD, PD-L, PRM) have asked the government to resign. That has no real impact as Election Day is already close. However, such attacks may isolate the Tariceanu government and deteriorate its positions.
  • The government can lose its support among pedagogues. Teachers' unions will protest against the government and the PM, some of them arriving to prosecute the PM and the Finance Minister because of their opinion on the hike-affair. However, teachers’ salaries, over the last for years, have increased 93% according to Mugur Isarescu, the governor of the National Bank.
  • The bill generates further social tensions because more and more public employee groups (doctors, ministerial employees, etc.) have asked also for a pay rise (while denouncing discrimination and striking for a short time). From 16th October, a general strike is expected.
  • The big loser of the affair is the government, the ruling liberal party and Taricaneu himself, in spite of the fact that the liberals voted in favor of the law. Inner conflicts (for example, the Education Minister, politician of PNL was dismissed by Tariceanu after the vote) can paralyze the government side in the finish of the campaign. As a result, Political Capital projects that the ruling liberal party will suer a notable loss of popularity.