How does the economy explain the political changes in Romania?

The depletion of social democrat’s model for growth through higher income and consumption and the fears for fall in demand in Germany and the EU came together with the National Liberal Party’s taking over of power

Vladimir Mitev

This article was published on 14 February 2020 on page 23 of the issue N7 of the newspaper “The Bulgarian Army”. 

Orban fell. Long live Orban!

This is the shortest way of telling what happened in the beginning of February in Romania. Ludovic Orban lost the confidence vote on 5 February 2020, after the oppositional social democrats together with the party of the ethnic Hungarians took down the Orban government. The Romanian Orban however continues to be alive politically, not only because he still governs as caretaker prime minister. He also received from the president and party comrade Klaus Iohannis mandate for formation of a new government. Orban proposed the same minister at the same positions, copy-pasting the cabinet, with which he governed for three months.

It might look like political humor. As if the leader of the National Liberal Party (which is part of the family of the European People’s Party) wants to test whether he will receive no confidence for a second and a third time, after this governing team has already been taken out of the political game once. But perhaps this is exactly what Orban’s goal is.

The Romanian daily “Adevarul” writes that most likely in the country a scenario takes place, which will lead to snap elections in June 2020. In these elections the two biggest parties, which are officially merciless opponents, but in reality have understanding against the smaller political forces, will occupy the first two places, while a lot of the smaller formations, led by “strong” leaders, will not enter the parliament. In order for snap elections to come true, the carrier of the mandate must fail at receiving the parliamentary majority’s twice. And Orban gives the best he can.

An opinion poll gives his party 47% approval, while the social democrats have around 20% support. The Save Romania Union – the party of the young in Romanian politics, which is allied to the party “Plus” of the former prime minister and former European commissioner Dacian Ciolos, moves together with Plus at around 15% support. This means that the snap elections probably will give advantage to the two big parties.

At the same time the oppositional social democrats have managed to keep the mayoral elections to be in one round. That is how they will have better results at the local elections in June, because they will avoid the alliance of the right-wing parties against their candidates at a second round…

The international media attention towards Romania is often too focused on purely political developments, on the protests, on the political fights in the style of “Game of Thrones” and fails to notice the really important changes that take place in the economy. The fall of the social democratic government in October 2019 most likely means that a new age in Romanian politics has begun, when the Romanian right is in a dominant position. This leads to change in the government philosophy in the economy as well.

The Social Democratic Party ruled in times of unprecedented economic growth. It raised the incomes, so that the medium net salary at this moment is close to 700 euro, while the minimal gross salary is around 465 euro. In September 2019 the pensions were raised by 15%, while in September 2020 they will be raised by an additional 40%. The social democrats followed the policy of economic growth through larger consumption and greater incomes. They opposed what they considered to be a speculative business. For example, the financial sector with the so-called “greed tax” upon the turnovers of its companies. Or they introduced a ceiling upon the price of natural gas for the household.

At the same time the people of the former leader Liviu Dragnea encouraged through state help the industrial production – especially in the automotive sector, while a big part of the IT specialists were freed from income tax. The idea of those measures was to encourage “the good”, productive sector of the Romanian economy and thus to spur new industrialisation.

There are successes in this regard. In 2019 the automotive industry gave 14% of Romania’s GDP and 26% of the exports. 185 000 Romanians have worked init. There are more than 600 firms in this sector. In Craiova and Mioveni (close to Pitesti) cars are being assembled – respectively Ford and Dacia.

However the social democrats’ measures in the fiscal domain created unhappiness in the part of business, which suffered – especially among the corporations, that were unhappy with the often change of rules and the difficult predictability of the government’s decision. The Social Democratic Party indeed raised the incomes. But it also lowered various taxes and didn’t manage to collect the owed fiscal incomes. That is how big budget deficit appeared. The Romanian GDP increased from 160 billion euro in 2015 to 2018 billion euro in 2019. But the Romanian state couldn’t profit from this economic growth by way of greater fiscal income, because of a weakness of the fiscal system.

When the National Liberal Party came to power, it found an explicable gap between income and expenditures. In the end, the budget deficit for 2019 amounted to 4,6%. So far Romania intends to enter the eurozone in 2024, but the IMF’s prognosis is that in the years to come the budget deficit will stay above the threshold of 3% of GDP.

The National Liberal Party came to power in the autumn of 2019 with the intention to introduce a balanced budget, to cut social expenditures, to encourage “the suffering” business in the times of the social democrats. Intentions for reform of the fiscal service were announced with the goal to increase tax collection. It is curious that Bulgaria is given as an example in effectivity in tax collection.

The Romanian elites – the party affiliation notwithstanding, is worried by the delay in the development of the automotive sector in Germany, which is tightly linked to the Romanian automotive industry. A lot of car parts are being produced in Romania in order to be exported later to Germany and the smaller demand for them could lead to a crisis in the northern neighbour.

There is already a slowing down of the economic growth. “The Romanian economy shows signs of tiredness”, wrote in November 2019 radio “Free Europe” and pointed out that in the third quarter of 2019 the economy has grown with only 3%. In 2016 the economic growth was 4,8%, while in 2017 it reached 7%. The commercial deficit in 2019 amounted to 7,9%. The balance of payments is equilibrated due to the influx of foreign investment (more than 5 billion euro for the first 11 months of 2019) and the income from the European funds. But what would happen if a new financial crisis hit the world and the influx of foreign investment is reduced significantly?

The increased presence of foreign companies is an important characteristic of the Romanian economy. A lot of international corporations have established their regional headquarters in Bucharest and through them manage the deliveries in Southeastern Europe. The foreign sector of the Romanian economy gives it great dynamism. It comes with its established markets, with products of higher quality and marks higher productivity of labour growth. Romanian capital is leading in only a few sectors – such as agriculture, furniture, construction.

Probably that is why the Romanian economy is very dependent on external economic environment – especially on the one in the EU. Perhaps the economy can explain why the depletion of the model of wage-led growth came together with the fall of the government. The Romanian politics usually moves in specific “eras”, when either the right-wing, or the left-wing forces dominate.

It looks like in spite of the successful vote of no confidence against the Orban government in the case of snap elections the right-wing parties will continue to rule. This also means domination of their economic philosophy – austerity, balanced budget, low social sensitivity.

It is hardly coincidental that Bulgaria is given more often as an example in Romania in financial affairs. For years the same economic philosophy has been applied in Bulgaria. It is not being introduced to Romania as well. Perhaps it is a part of the package of measures for entering the eurozone. But it could also be a sign of stability and safety for the eliles, which have won from the transition. Whatever happens, they will always have their safety belt – their economic weight.

Orban fell. Long live Orban!

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