Government Starts Plan To Deepen & Extend Crisis In RomaniaThe Inevitable Recession

After having denied economic facts for months, the Government of Romania announced two days ago a 10 billion EUR crisis management plan. The capital market was hardly impressed and dropped another 5% yesterday, while businesspeople appeared reluctant to the Prime minister"s proposals.

Nevertheless, by announcing the plan, Romania joined a limited club: the club of countries whose authorities are making fantasy proposals to stop a crisis they created themselves, paid no attention to it while it was emergent and are now struggling to contain. How can effects be mitigated if the causes remain untouched? In Romania, the monetary and the tax policies worked hand-in-hand to create the illusion of prosperity, which lasted only as long as cheap money was flowing into the economy. A similar situation will not occur before many, many years, if ever. The Government"s plan would be brilliant (why only 10 billion EUR?), except for one tiny problem that the IMF envoy did not see: financing sources. Is the Government planning to issue bonds? If so, they had better prepare for a very tight competition for funds, because almost every other Government in Europe has announced fiscal incentive plans. The proposals to reduce the mandatory health system contribution, issuing subsidies and building homes for the financially challenged citizens will not increase Romania"s economic competitiveness. The plan is trying to preserve the current structure of the economy, but the prospect of economic growth is nil under such circumstances. They want to give a tax exemption for re-invested dividends? Why not for all dividends, because the profit is disbursed to shareholders after the payment of the profit tax? And this is just one classical example of double taxation. The Government"s direct expenses with building social homes will boost once again the price of construction materials and stop the correction of the real estate market. The price of homes needs to drop at least 70% in order to become affordable for the average Romanian. The prudent ones, who saved some money hoping to buy a home, will be punished by the Government and look at their dream fall apart. The IMF representative pointed out that the new fiscal relaxation plan will take the budget deficit beyond 3% of the GDP. Exceeding this threshold is probably just the optimistic scenario of Juan Jose Fernandez Ansola, which is highly unlikely during the current crisis. Keeping the current pace of mass layoffs will create huge pressure on budget revenues, which will have to be offset through drastic public expense cuts, and the target for the budget deficit has to be 0%. There is not much hope for a pragmatic approach to the crisis after the elections, considering that all electoral programs are entirely unrealistic. The leading political parties believe that a 4% increase in GDP is the most pessimistic scenario. What will they do when the National Statistic Institute reports economic regression lasting until the end of 2009? All economic indicators of the developed countries show that the prospects for 2009 are quite grim. John Whitehead, the former Chairman of Goldman Sachs, told the Reuters Global Finance Summit that the U.S. economy would face a crisis even greater than the Great Depression in the 1930s. Whitehead warned that the U.S. financial strength was being threatened by demands to reduce the fiscal burden and also by the long list of governmental plans, according to a Reuters article. "Before I go to sleep at night, I wonder if tomorrow is the day Moody"s and S&P will announce a downgrade of U.S. government bonds. Eventually U.S. government bonds would no longer be the triple-A credit that they"ve always been," Whitehead said. The former Goldman Sachs chairman believes it is necessary to increase taxes in order to finance the programs announced by the Government, but there is no political will to do it. Closer to Romania"s geographical position, the Baltic States may have to give up the Monetary Council and devaluate their currencies in order to avoid prolonged recession. This is the opinion of Bank of America analysts quoted by Bloomberg. "If your real exchange rate is overvalued, there are two options: either devalue, or accept a recession to make inflation fall relative to the trading partners," said Bank of America strategist David Hauner quoted by Bloomberg. Applying the devaluation scenario, even if the financial crisis attenuates, will lead to very negative effects on all the currencies in Central and Eastern Europe. Speculative attacks will stop being an exception and become a rule. Irrespective of the optimistic statements of our authorities, Romania is entering the crisis with a particularly frail economy, sustained only by services and construction. The latest information from the National Bank shows that the medium- and long-term debt reached over 48 billion EUR at the end of September, up by 25% from the end of 2007. The foreign debt made without public guarantees rose by almost 26% in the same interval, reaching 31.5 billion EUR. Romania"s main problem is not the volume of the debt, but the very high difference between the debt growth rate and the GDP growth rate. How can financing sources be found?

The solution to Romania"s problem is not with Keynes and certainly not with Marx. The crisis is an opportunity to increase saving and create a basis for the national capital to trigger a re-launch of the economy. Solutions exist, but the time to fuel economic growth with borrowed money is over.