• A Critical Report on the Crisis in Romania

  • By Petre Damo | 22 Oct 09 | Posted under: Central and Eastern Europe , Romania
  • Introduction: crisis upon crises

    It would not be far from the truth to say that in Romania the crisis overlapped an already embedded multi-layered crisis.

    What is happening today to Romanians in the Romanian state and society – a high degree of poverty, increased discrepancies between the poor and the rich, generalised corruption, economic backwardness and political humiliation, inferior international status – has its origins in the way the communist regime was removed and in the manner in which the Romanian state has been reconfigured in the beginning of the political and economic transition, 1990-1991.
    Alex Mihai Stoenescu, “From the Backstage of the Battle for Power 1989-1990. The First Petre Roman Government”, RAO International Publishing Company, Bucharest, 2006

    In terms of politics, the ongoing crisis has been used as a pretext by the entire political class to justify the difficult social-economic situation and make people forget that before the arrival of the crisis life had been difficult for other reasons. By now, most people have gradually lost trust in the political class, which is regarded as corrupt, illegitimate, and one of the main causes of their problems. 

    A peculiarity of Romanian politics consists in the fact that populism, as well as extreme nationalism and chauvinism, is employed not only by neoliberal parties and the far right but also by the left, particularly by the radical left, as a way to promote themselves. Unfortunately, such a political stance not only reflects a frozen orthodox ideology and the inability to conceive concrete new political solutions, but may also damage the left.

    This rough sketch of the Romanian political stage has been fully confirmed by June’s European Parliamentary elections, when only 27.67% of the electorate voted, which was far below the 43 % average European participation. This represents only 5 million people out of 22 million inhabitants. The percentage was even lower in urban areas, particularly in the capital city where, incredibly, only 15% went to the polls. According to the May 9 declaration by the President of the Senate, it appears that 20% of voters practised so-called “electoral tourism”, that is, voting on separate lists in locations other than their own residential districts, which is one of the main causes of electoral fraud.

    All this makes the winners of the Euro Parliamentary elections, who claim 30% of the 5 million, look rather illegitimate in the face of the other 20.5 million who did not participate in the ballot but are nevertheless Romanian citizens and tax-payers.

    This situation seems to have opened the door to a rise in populism and extremism. The examples cited by analysts and reported in the media are the Grand Romania Party (PRM), which succeeded in winning 8.4% of the vote, resulting in at least two mandates, and the near-illiterate daughter of the president, who managed to win 4.2% in part through the use of foul play and the backing of the Democratic Liberal Party (PDL), seen as the presidential party.

    In terms of social life and social justice, the long-hailed emergence of the middle-class as the sign of a more equitable distribution of wealth has not resolved the discrepancies between the poor and the rich, for it has proven to be a political hoax – the newly rich joined the club of the already rich, the already rich became richer, average-income people in the best case remained so or became impoverished, and the poor became poorer.

    In terms of the economy, despite official boasting of an unprecedented economic growth in 2008, reality surfaced when the crisis hit a weak economy and companies began shutting down one after the other.

    In terms of environmental protection, although Romania has adopted a well-devised Europe-compatible legislation, its practical application is far from matching the European standards, and the fact that the environmentalist parties have such feeble popular support that they have not been able to enter Parliament for many legislative periods evidences a certain backward mentality.

    In terms of culture, the arts and education, the continual decay of moral standards, the replacement of former systems of values with non-values, or, worse, with anti-values particularly in the case of the younger generations, and the increasing appeal exercised by populism are but signs of a general moral and cultural crisis of society. 

    Before the crisis

    Although the first signs of the oncoming crisis have been obvious since late summer-early autumn 2008, the political class and the authorities either avoided the issue or simply denied that the crisis could possibly affect Romania. Not even after the crash of the first American financial institutions, not even after the dramatic devaluation of the national currency followed by the public warning of the Governor of the National Bank, Mugur Is?arescu, of a financial attack on the national currency, the leu (ROL), did they admit that the tidal wave of the crisis was about to hit Romania.

    Probably the most notorious illustration of this is what occurred in the parliamentary elections of November 2008. During the electoral campaign all political parties (except the Liberals then in government), as well as the president and the would-be prime minister, pledged huge salary increases in the public sector, particularly in the field of education, health care, and public administration.

    It is not that such increases were not just and necessary. The problem is that they were used as an electoral lie only to be continued in the aftermath of the crisis when the same political class serenely posed as innocent and used the crisis as a scapegoat. Thus, even though the Parliament passed the law stipulating a 50% raise in teachers’ salaries, the government prevented the law’s implementation, invoking the effects of the financial crisis and the constraints imposed by the IMF. Regardless of the financial reasons and political explanations given, this puts Romania, as an EU member-state, in the delicate position of not observing the Constitution and democratic principles.

    The moral logic is straightforward. In the words of Tudor Vladimirescu, a Romanian revolutionary who in a letter of 1821 referring to the boyars who ruled the country, the state is the people, not the gang of plunderers. That is to say, if the government and the political class did not know, as they claim, of the coming crisis, they are not entitled to rule the country on grounds of their incompetence; on the other hand, if they did know of the coming crisis but made their promises of salary increases in the public service sector only to win the elections, they are not entitled to rule the country on moral grounds.

    When the crisis came

    It appears that applying for an IMF loan under the supervision of the European Commission is perceived by some Eastern European countries as the pillar of any plan for overcoming the crisis. The optimistic estimates of the recession’s duration vary from 2 to 5 years.

    In Romania, the official Crisis Recovery Plan basically consisted of the following five elements: accessing a huge loan from the IMF and the EC, a drastic reduction of public expenses in the state budget, the completion of the Unique Law regulating the wages of public workers, the enforcement of lump sum taxation, and the Call for Social and National Solidarity.

    On May 13, 2009, despite the adoption and implementation of the Recovery Plan, Romania was sanctioned by the EC for an excessive budget deficit of 5.4% of GDP compared to 3% of GDP in 2008.

    Paradoxically, ever since early January 2009 there have been two groups which mounted advertising campaigns – car makers and banks. If the first have not yet done well, banks appear to have increased their profits despite adopting austerity measures including freezing loan policies involving the population and small companies. Thus, according to a report in the June 2, 2009 issue of Romania Libera, the first ten banks in Romania, except for Bankpost, ended the first three months making profits, their cumulative profit amounting to 244 million Euros. Volksbank and ING made record-breaking profits. Some analysts explain the paradox as the result of not having correctly configured their provisions for non-efficient credits.

    On May 22, the governor of the National Bank optimistically declared that he still believes the recession in Romania will be V-shaped and that the lowest point has already been passed, but others have been more cautious, maintaining that the worst is yet to come in the next six months. As of now, the reality does not seem to confirm the more reassuring view.

    The loan

    The loan proper from the IMF and the EC – a sum amounting to roughly 20 billion Euros – is to be delivered in several instalments and is to be paid back at the latest in seven years under unknown conditions. In the end, the exact amount of the loan turned out to be 13 billion Euros from the IMF and 5 billion Euros from the EC.

    The official explanations for applying for the loan, many of which were given by the Minister of Labour on March 24, 2009 during a talk on the Antena3 TV channel, can be summarised as follows: in the first place, since two-thirds of the total amount of the loan would go to the currency reserve of the National Bank, it was necessary to avoid a collapse of the leu, and thus stave off a financial catastrophe; second, it was necessary to win back foreign investors, which, if done, would make the international rating agencies raise Romania’s rating; third, it was said that the loan was needed to support the entire social system (that is, paying pensions, paying salaries in the public sector, sustaining fields such as education, healthcare, culture, and others).

    Most of the criticism of the decision to apply for the loan focused on two aspects: there is no evidence that any state which has borrowed money from the IMF even recovered financially or economically; rather the opposite is the case. The IMF notoriously imposes certain financial, economic, and even political conditions when granting a loan. Consequently, serious analysts and the media expressed their concern about, and the sense of insecurity occasioned by, the veil of secrecy surrounding the agreement between the Romanian government and the IMF.

    Moreover, no one is in a position to supervise the way the loan would subsequently be managed. All this mistrust came from the lack of transparency and democracy surrounding the introduction of the loan. Many added that the biggest loan ever applied for by Romania did not exceed 400 million USD in the early 2000s. Economist Ilie S¸erba?nescu, financial analyst and former Minister of Finance, worried that accepting the loan would risk having it fed into the foreign bank branches in Romania. In other words, the loan might simply be used to cover the loss of foreign banks and transnational companies. This hypothesis was not forgotten when the Ministry of Finance issued Eurobonds in May 2009 after Romania had signed the agreement with the IMF.

    On the other hand, there is much criticism from experts, analysts, and a significant part of the media regarding the manner in which the political decision to accept the loan was taken.

    The idea of applying for an IMF loan came from one person in early January 2009, namely from the president, who had discussed it with José Manuel Barroso. Next, the prime minister took up the idea and so did the government. Only at a later stage did the parliament gave its formal consent to open negotiations with the IMF, but there was no public debate on the issue whatsoever. Considering that it is neither the National Bank, nor the president, nor the government which will pay back the loan, but the Romanian people who will have to work hard and make sacrifices to pay for it for many years to come, it would have been only natural to consult them. This points not only to a democratic deficit but also to the disregard for the principle that in a democracy no single man, not even the president, has expertise in all fields.

    In questioning the loan-application decision one may well bring the argument of the dualism and ambiguity of the political discourses at the top levels at the end of 2008 and at the beginning of 2009, respectively. Initially, the president and the government declared that Romania had enough financial reserve to cope with the crisis without a loan. Soon the discourse changed radically, both the president and the government asserting that Romania urgently needed a loan from the IMF in order to avoid financial disaster.

    Tony Lybek, the head of the IMF in Romania and Bulgaria, underlined in a May 20 interview in Gândul that the conditions of the agreement are less severe than past agreements, but warned that Romania should not take advantage of the more “humane” conditions and use them as an excuse for postponing economic reforms.

    The drastic reduction of public expenses

    The recourse to drastic reduction of public expenses is mostly hitting the low- and average-income section of the population, generating negative social consequences. The main components are: reduction of expenditures on public salaries, freezing public salaries and pensions, cancelling fringe benefits, forbidding the simultaneous holding of several offices, and over-taxation of so-called luxury pensions and the salaries of public servants.

    In accordance with the IMF directives, the reduction of the expenditure on salaries is to be from 8.4% of GDP in 2008 to 7.9% of GDP in 2009.

    Freezing salaries and pensions during the worst year of the crisis is one of the most unpopular government measures. It first affects the majority of low-salaried public workers, not the luxury public servants. There is also a tendency to shift from publicly funded to privately funded pensions. An argument used is that in EU countries like France, for instance, 2% - 3% of contributions are directed to privately funded pensions, and that this percentage should therefore be a target figure in Romania as well.

    Once again, the cancellation of fringe benefits most negatively affects categories of already disadvantaged public workers such as teachers and doctors. For such public workers with an average monthly salary of about 200-300 Euros, “fringe” benefits such as overtime, stress conditions, night shifts, or payment for on-duty shifts are the breath of air needed for survival.

    At the other end, there are documented cases of luxury public servants whose actual income was enormous not so much due to their salary but to the fringe benefits whose total, in some cases, was two to three times higher than their salary. This has led to abnormalities such as the president and ministers receiving lower wages than their assistants.

    Forbidding the holding of several offices has been a quite controversial measure from the start. On the one hand, it is justified since many of the top luxury public servants used to abuse their position and acquire one, two or even more additional jobs. A notorious case is that of a retired commercial pilot, who headed the Civil Aeronautic Authority, and who hired himself as deputy-head of the very same public institution, consequently receiving an astronomic income from the state.

    On the other hand, there are retired actors, doctors or teachers who have a humiliating monthly pension of 150-200 Euros and who really need a second job to make ends meet. A compromise was finally adopted in which people are allowed to have a second job, but if income exceeds a certain level it is more highly taxed.

    Clearly, the only just measure taken by the government is the high taxation of luxury pensions and salaries in the public sector. Unfortunately, this measure is not to extend beyond the year 2009. According to it, salaries and pensions of public servants exceeding the income of the president are to be taxed at a level of 90%. A simple calculation shows that from such taxation of no more than 1,460 luxury public sector pensions and salaries the state will collect a stunning 50-60 million Euros this year. According to a March 24 study of luxury pensioners made public by Antena3 TV Channel, some former judges and pilots receive pensions of up to 3,500 Euros monthly. Such figures give us an idea of how high the wages of these people must be.

    The Ministry of Labour declined any responsibility for having initiated laws allowing such pensions and salaries in the public sector but paradoxically maintained that these pensions and salaries are lawful. He also cynically remarked that “this situation reflects an entire society that is represented in the parliament which passed such laws”.

    Paradoxically, the crisis has had a number of positive effects in Romania.

    First, it revealed the existence among normal public-sector workers of those privileged categories nicknamed luxury public servants. It is important to understand that we are not particularly referring to leading positions, but to average employees. Thus, these luxury public servants work at the numerous state agencies and authorities created as preconditions for accession to the European Union, at various ministries and state departments such as the Ministry of Justice, the Ministry of Internal Affairs, and so on. Astonishing cases have come to light of state agency secretaries cashing in salaries of over 1,000 Euros monthly and of state agency top officials receiving tens of thousands of Euros monthly to the detriment of the vast majority of regular tax-payers. Obviously, getting such jobs does not mainly require, as it should, competence, skill and professionalism, but political links and support as well as nepotism.

    Second, the government, pressured by the mounting crisis, the IMF requirements, media disclosures and by enraged public opinion, was forced to act and cut these obscene public incomes, which was, besides being a practical anti-crises measure, a just one.

    Third, all this accelerated the discussions around the conception and passing of the Law of Public Workers Wages, which brings us to the next element of the Recovery Plan.

    The unique Law of Public Workers Wages

    Low wages are a symptom of a systemic and endemic crisis. Low wages generate emigration and social problems not only in the host country but also abroad. At present, the authorities officially admit that there are more than 2 million Romanian immigrants throughout Europe, most of them in Italy, Spain, and Ireland. Unconfirmed estimates indicate anything from 3 to 4 million Romanian immigrants scattered across the continent and beyond. The truth is that most of these people left their homeland for lack of a decent job or due to extremely low salaries.

    In Romania there has been no unique law regulating the wages of public-sector workers for 19 years now. The logic behind this may be seen in the lack of political will to create a sound society in which wealth is distributed harmoniously, and in the deliberate intention to deepen existing discrepancies so as to increase frustrations that could generate tensions and eventually divide society, setting one social class against another. This kind of politics has been known from time immemorial as “divide and rule”.

    The discrepancies within the public sector may quite easily be understood as discrimination. When, on one hand, a high school teacher receives 200-280 Euros per month, or a doctor 350-400, and on the other hand a judge cashes in from 2,000 to 5,000 Euros per month or a state agency top employee even more, one has to ask who decided on such social injustice and based on what criteria.

    It is clearer now that in these circumstances a 50% raise in teachers’ salaries would have been only a small step toward justice and harmony.

    It is regrettable that trade-unions and NGOs were not strong enough to put this issue on the table of the political class until the crisis and the IMF came and compelled them to do so.

    The Law of Public Workers Wages should be complete by the end of June and enforced by 2010, but the actual state of negotiations between the Ministry of Labour, Ministry of Finance, and the trade unions seem to make this an unrealistic goal.

    On April 21, the FSLI Education Trade Union Federation announced that it was misinformed by the Ministry of Labour, adding that the discussions were sterile and new law discriminatory. Even the Minister of Labour admitted “there are abnormalities in the system”.

    On May 26, the Education Trade Union leaders again criticised the slow pace at which the law is taking shape and how it positions teachers at a low level in the wage grid. They added that the law “does not reflect consultation with the trade-unions”.

    The enforcement of lump sum taxation

    Lump sum taxation means taxing companies by a fixed amount of money according to a profit-making scale, whether they have activity or not. The most contested provision stipulates that companies should pay 500 Euros per year even if they have no activity or they make no profit.

    The official reasoning for enforcing such an unpopular anti-crisis measure was the need to finance the state budget and the determination to eliminate tax evasion.

    Theoretically, it would have been just since there are so many moguls who have used tax-evasion schemes either by declaring that the company has no activity, or by shutting down one company and transferring its activity to a newly established one.

    The problem is that in the attempt to do justice and catch the big tax evaders this regulation will negatively affect small companies that may truly experience reduction of activity due to the effects of the crisis.

    Thus the negative effects of the regulation seem to outweigh its estimated positive ones. Many thousands of small firms and businesses would collapse and at least 200,000 jobs would disappear in this year alone. This would lead to a rise in the costs of services. Moreover, attempts to avoid unjust taxation could lead to a new flourishing of the underground economy.

    One simple question needs to be asked: who will pay for the crisis? Reality compels us to see that it is the majority and impoverished people who will pay for it.

    The Call for Social and National Solidarity

    Both the government and the president launched a Call for Social and National Solidarity in order to overcome the crisis. To the key words “social”, “national”, and “solidarity” the term “responsibility” was soon added. The Call was addressed first of all to the trade-unions to make them call off planned protests and start cooperating with the company bosses and state authorities, which they did.

    Incredibly, during late spring the Dacia-Renault workers were called back to work after a period of facing half-time work and even job loss. They are now working overtime even during weekends and are quite happy with this. The miracle came from Germany and other Western European countries, which launched programmes for scrapping obsolete cars and enticed their citizens to purchase new cheaper ones. This is an example of how European neoliberal governments and transnational companies have, for the time being, managed to cooperate and cope with the crisis.

    Nevertheless, it has been estimated that the number of unemployed Romanians will amount to 800,000 during this year, not to mention the more than 2 million immigrants in Italy and Spain who, if they return home due to the crisis, would result in another 800,000.

    Although the Call for National Solidarity and Responsibility is theoretically desirable, it is not morally right that it has been launched by the rich who are in power and are not paying for the crisis.

    In conclusion

    Solutions for a better life, in a better country and a better world seem even farther off if one expects them to come only from political parties. At least this is the case in Romania. We believe that solutions for constructing a better society should come first of all from the people, from the actors of civil society, such as social movements, networks, NGOs and trade unions. This requires not only healing society of past wounds, fears, myths, as well as historical, social, political, economical scars, but also the development of individual and group self-awareness. For this, educational and cultural work are crucial.

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