A referendum held at the weekend to decide whether center-right President Traian Basescu should be removed from office failed because not enough people went to the polls, but this means the center-left coalition which now has a majority in parliament will keep clashing with Basescu on multiple issues.
“It’s a rather unfortunate situation as focus needs to be applied to reviving the domestic economy and, as experience in the past shows us, any uncertainties lead to a weaker economic backdrop and a longer recovery,” Simon Quijano-Evans, chief EEMEA economist at ING, told Emerging Markets.
“At the same time it does highlight the vacuum created via the continuous focus on the eurozonerather than the European Union as a whole, as new member countries are still looking to converge onto the core member countries,” he added.
Since the eurozone debt crisis erupted two years ago, the focus of the bloc’s leaders has shifted from boosting economies and strengthening democracy and the rule of law in the new, former communist EU members towards keeping Greece in the currency area and helping other periphery eurozone members.
“So much attention is being drawn to the issues in the eurozone. And as a result the risk of more political noise among the new EU members is increasing,” Quijano-Evans said.
The leu hit record lows last week as investors were spooked by the possibility that the center-left coalition - which took power in the spring after two consecutive pro-Basescu governments collapsed – would succeed in sacking the president.
SHORT-LIVED BOUNCE
It rebounded by more than 1 percent on Monday but analysts warn the bounce is likely to be short lived.
“Paradoxically, the apparent survival of Romania’s President in Sunday’s referendum could pave the way for a protracted period of political instability,” William Jackson, emerging markets economist at Capital Economics, wrote in a market note. “This is likely to take its toll on the financial markets over the coming months, possibly causing the leu to fall to new lows against the euro.”
Only 46 percent of the electorate took part in the referendum, well short of the 50 percent plus one needed to validate its results but Basescu’s popularity took a strong hit, with 88 percent of those who did vote saying he should go. The referendum has to be declared invalid by the Constitutional Court for Basescu to resume his position.
The ruling coalition, led by the former communist Social Democrats, impeached president Basescu in early July, sending the leu nose-diving against the euro.
“It now looks like Romania is in for a prolonged period of political instability,” Jackson said. “The government has stated that it is impossible to work with Mr Basescu – suggesting that a compromise solution won’t come easily (if at all).”
“No matter how events pan out from here on, the associated uncertainty is likely to lead to sustained pressure on Romanian assets,” he added.
Quijano-Evans said the turmoil highlighted how exposed certain countries in the regionwere to foreign exchange loans, as well as the lack of recovery because of the difficulty in substituting the loans with credit in local currencies.
In 2009, at the height of the economic crisis in Central and Eastern Europe, Romania received a 20 billion euro loan from the International Monetary Fund (IMF), the World Bank and the EU.
Under this bailout, the government of the time – formed of pro-Basescu centrists - took tough austerity measures such as cutting public sector wages by 25 percent, raising VAT and introducing temporary social security contributions on some state pensions, which analysts said were behind the fall in the president’s popularity.
DEMOCRACY AT STAKE?
The Romanian central bank has tried to keep the leu’s depreciation trend versus the euro on a slow, gradual path this year as cash-strapped Romanians can hardly keep up with payments on their euro and Swiss franc-denominated loans. If negative sentiment about Romania continues in the markets, the borrowers may be the first to suffer.
“If the political uncertainty does continue, it does negatively affect foreign investors’ perception,” Quijano-Evans said.
Both leftist Prime Minister Victor Ponta and President Basescu said in public statements after the referendum that they intended to work together, but commentators are skeptical.
They both claimed victory in the referendum – Ponta by saying that the president’s legitimacy was over because of the high percentage of votes against him and Basescu by saying that the low turnout meant Romanians actually still supported him.
Ponta’s ruling coalition initially tried to change the referendum law to allow for the removal of Basescu from office by fewer than 50 percent plus one of the voters on the electoral roll, but the EU slammed this attempt, accusing the government of undermining the rule of law and intimidating courts.
Such slippages are proof that EU leaders must find a solution to the eurozone debt crisis and think of the future of the whole bloc, not just that of the single currency, some analysts warn.
“It’s not just about keeping the currency union, it’s about the whole future of the EU as a peace project not just an economic process - and the new EU members make up an integral part of this process,” Quijano-Evans said.
“It’s very important for eurozone countries to keep the eurozone together because it has to be the main anchor for the new EU countries to converge to,” he added.