IMF LOAN CANNOT STOP THE "CORRECTION" Is It Possible To Leap From Accelerated Growth To Depression?

For some years, the Romanian economy has had all the characteristics of an accident bound to happen. It"s a bit too late now to grope for the safety belt after the "vehicle" has collided into the wall at cannonball speed. The latest information from the National Statistics Institute regarding industrial turnover and order intake indicates that Romania is not nearing recession, but depression. As domestic and foreign demand has collapsed, new orders to the processing industries have dropped by an annualized 34.5% in January, after a "mere" 9% setback in December (see chart). The collapse of order intake will lead to an extraordinary collapse of industrial output in a few months from now and that can definitely not be stopped by throwing some more borrowed money in that direction.

Is the authorities" intention unexplainable? No, just useless, but perfectly in line with the spirit of shiny empty wrappings that has been dominating the national economy for over 20 years. The Government must understand that we are witnessing a financial and economic "adjustment" of historical magnitude, as the result of unprecedentedly high debt piling up on top of the world economy.

Loans of 20 or 40 billion from the IMF will not help the Romanian economy, considering that the plan is to maintain its current structure. Perhaps the ending will be delayed for a while, but, judging by the highly unfavourable international context, that"s somewhat unlikely. "We don"t tell New Zealanders we can stop the global recession, because we can"t," New Zealand Prime Minister John Key told the Wall Street Journal. It may seem too good to be true, but there are still politicians who understand how markets and economies work (John Key was the head of a foreign exchange trading division of Merrill Lynch).

Increasingly more bankruptcy cases and job cuts are inevitable, while making new debts to pay off the old ones will condemn Romania to a crisis long after the rest of the world would have resumed growth. Is it possible to leap from accelerated growth to depression? The rapid deterioration of the economy in Q4, 2008 makes us believe that it is possible, especially considering the example of the Baltic States. If, by some miracle, the GDP decreases by less than 5% in 2009, the new agreement with the IMF will make sure that the situation is "corrected" in 2010.

The accelerated collapse of the industrial output is not specific only to emergent economies in Europe. When Germany reports an annualized decrease of the industrial output by 19.3%, it should be clear to everybody that the current crisis is entirely different from other post-War recessions. "Germany"s industrial landscape now looks like a war zone - completely obliterated. That is the price it is paying for being too focused on exports and not stimulating enough internal demand," said Dominic Bryant, a European economist at BNP Paribas SA in London, quoted by Bloomberg.

Unfortunately, this focus on exports is a lead characteristic of the majority of the emergent economies everywhere, from China to Eastern Europe. The crisis has managed to turn a competitive advantage into a heavy burden, as consumers on the Western markets are over-indebted. At the end of the crisis, the traditional markets will not be there anymore, while the ones still left will be much smaller. It is not only useless, but also counterproductive to borrow money from international institutions under these circumstances in order to artificially sustain condemned economic sectors. However, the verdict is not final.

Maybe this crisis is the best thing that is happening to Romania after many decades of failed experiments. Maybe we should pay more attention to the Prime minister of New Zealand. "Your citizens are entitled to expect you to be realistic... to be specific about what it is you"re going to do, what you can or can"t do," John Key further told the Wall Street Journal (the journalist commented that she had had to go to the other side of the world to find a national leader who was talking about market-based approaches to the global recession).

What solutions is John Key proposing to "solve" the crisis? To transform the structure of the economy and boost productivity. "What we do tell them is we can use this time to transform the economy to make us stronger so that when the world starts growing again we can be running faster than other countries we compete with."

State intervention sits diametrically opposite to this crisis management plan...