By Marc Champion
Romania is never boring.
A few days before I drove into the country on a journey from Turkey to the U.K, a former prime minister, Adrian Nastase, shot himself rather than be taken to jail for corruption. He missed. Wounded in the neck, he was carried away with a Burberry scarf wrapped around the injury.
Bucharest, meanwhile, was abuzz with the revelation that current Prime Minister Victor Ponta plagiarized 85 pages of his doctoral dissertation on the International Criminal Court. That's a sin that also triggered the resignation of Hungary's president in April and a German defense minister last year. After an educational board confirmed Ponta's copy-and-paste job, he began dismantling the board to make its rulings toothless. Then he revoked the constitutional court's powers over parliament.
With the judiciary out of the way, parliament has since suspended Ponta's nemesis, President Traian Basescu, and called a July 29 referendum on whether to reinstate or dismiss him from the presidency, on grounds that he overreached his powers in cutting the budget. Parliament also changed the rules on referenda to extend voting times, in an effort to meet a challenging turnout requirement in mid-summer. If his opponents can get a majority of the electorate to vote, Basescu will likely be deposed -- his austerity measures have made him unpopular.
Other European leaders have decried such blatant manipulations of the rule of law. Romania's stock markets have tanked. Ponta hasn't blinked.
Politics in Romania have always been whacky and cut-throat by most standards: think of Nicolae and Elena Ceausescu, the most bizarre leading couple of former communist Europe, and how they died in front of a firing squad on Christmas Day 1989. (Nicolae sang the Internationale as he prepared to die.) Nastase believes President Basescu engineered the corruption charges against him. Ponta is convinced the president planted the plagiarism story. Basescu's supporters see Nastase's conviction as evidence that, for the first time, the country has functioning independent courts.
Amid all this political noise, it was hard to figure out the government's stance on the financial crisis. Ponta and Nastase come from derivatives of the old Communist party. The previous, center-right government -- led by Emil Boc -- had to step down when its austerity measures sparked nationwide protests.
The first meeting between Ponta's new government and international officials this past April was tough, and the International Monetary Fund delegation was ready to go home. When talks resumed, the tone changed. Ponta's officials said they'd commit fully to Romania's IMF requirements. As Hungary's Prime Minister Viktor Orban has found, populism can be financially punishing for a country at the mercy of global markets.
Romania was hit hard by the crisis. Economic growth fell from a roaring 7 percent in 2008 to minus-7 percent the following year. In an effort to put a floor under the deficit, the government imposed 25 percent cuts to public sector wages, some of the deepest in all of Europe. Boc also cut pensions and raised the value added tax by 5 percentage points.
The country offers an interesting case study in why the IMF and its client governments can seem more like butchers than surgeons in wielding their austerity knives. Most economists agree that the best way to reduce deficits is not by raising taxes, which damages growth. Nor is it by blindly cutting salaries, workforces and budgets across-the-board, which tends to distribute the pain unfairly, reduce demand and can undermine the effectiveness of institutions as key staff and programs are randomly cut.
But combing through government budgets to decide where fat can be trimmed usefully, and where you'd be slicing into lean meat, takes time. That's especially true in countries such as Romania and Greece, which have been bad at testing the cost-effectiveness of government programs, or even at keeping basic records.
Take privatization. Romania has about 1,000 state controlled companies that between them owe about 5 percent of GDP in unpaid arrears to suppliers. That's a significant drag on the economy. The government has agreed to privatize them, but until recently it didn't have a full register of state-controlled companies and who ran them. So what to sell and how? A lot of work has to be done first.
In the meantime, the budget deficit had to be cut fast. Public sector salaries were reduced in 2010 -- a drag on consumption at the wrong time -- but 15 percentage points of the cut were returned the following year. That was possible because simultaneous no-hiring policies reduced the workforce and therefore the salary bill. All the salary cuts are expected to be returned by next January. Romanian public sector wages had risen rapidly in recent years, leading Basescu to say in 2010: "The state sector is like a fat man of 200 kg sitting on the back of a 50 kg little man who is the real economy."
Now the government says it hopes to be able to vault out of the crisis by turning Romania's failure to enact the structural reforms that made Poland such a star performer over the past decade. "Poland used up its bullets. Now we are where Poland was seven years ago," said Romania's Business Environment Minister Lucian Isar, when I visited him in central Bucharest. "We're a pro-business government."
Businessmen I spoke to in the capital were sceptical Ponta would deliver on that -- but the idea is right, they said. If the government can keep politics out of the way, simplify the tax system and implement all the structural reforms needed to move the country up from its present 72nd ranking in the World Bank's ease of doing business index, then Romania can become a new regional powerhouse.
Amid all the political mud-wrestling, that's a very big if.
(Marc Champion is a member of the Bloomberg View editorial board. This is the third in a series of posts chronicling his trip across Europe, from Istanbul to London. Read his previous posts on Greece and Bulgaria. Follow him on Twitter.)-0- Jul/19/2012 19:49 GMT