Romania: the next Greece?

by News Agencies

27 June 2010

Romania’s economic evolution remains uncertain and the application of austerity measures announced by the government is a condition for future installments of the loans from EU and IMF, Ernst &Young points out, warning that strikes have been announced.With declining domestic demand and investments, Romania’s GDP dropped by 7% last year, a sudden change compared to the 7.5% growth of 2008. Recession continues in the first quarter of 2010, GDP dropping by 0.3% and becoming 2.6% smaller than before.

However industrial production grew by 3.6% in March, representing a 5.3% increase against 2009. This shows that GDP may rise again in the second quarter, the Ernst & Young report shows, on the background of stock reduction and stability of private consumption.Prospects are still uncertain, Ernst & Young representatives explain. Growing exports which led to a higher industrial production could be undermined by the return of crisis effects in the Euro Zone economy, while incomes of Romanian workers in EU undergo additional pressure. After the weak beginning this year it seems GDP will contract by 1.5% in 2010, while prognosis for 2011 is rising. However risks remain significant, as resistance to austerity measures bring the spectrum of the Greek type crisis over the country’s budget deficit and public debt.

Plans to reduce budget salaries by 25%, pensions by 15% and jobs in the public sector by over 250,000 in the following years are confronted by a massive opposition of people to be affected, but the government survived a no confidence motion with this topic in Parliament.However, with an unused big capacity and low confidence of the business environment, a return of investments in fixed assets is not likely to appear until the end of the year. Moreover, the consumers’ confidence is still low and is expected to remain prudent, considering the threat of significant reductions of jobs in the public sector within the IMF accord, which requests additional reductions of expenses, despite the fact that the deficit target for 2010 was raised to 6.8% of GDP, compared to initial target of 5.9%, the report shows.

Ernst & Young also shows that the application of these austerity measures is a condition for future EU/IMF installments within the economic support package, while strikes will continue to appear.