Too Little, Too Late

A crisis that didn"t exist a month ago has become top priority to the Romanian Government. Despite some negative opinions about the efficiency of a fiscal plan to support the economy, the authorities decided that everything could be solved through an emergency ordinance. The plan has very few positive aspects (i.e. the reduction of the mandatory contributions to the public health system, the cancellation of the tax on collected interest, bonuses for good tax payers) and lots of hopes that ordinances will scare away the crisis by spending money that does not yet exist. The Ministry of Economy and Finance believes they can fool the market and the high cost of financing by reducing the maturity on issued T-bills. This could work for a crisis that does not exceed the middle of 2009, but this crisis is of a different nature and, internationally, no one is avoiding comparisons to the 1930s anymore. While the Government thinks that the number of employees in the public administration should be kept the same for the next 4 years, the National Statistics Institute (INS) reports that the largest demand for workforce in Q3, 2008 came from the public administration. These data, together with the lack of details about how the plan is going to be financed, indicate that a severe cut in governmental spending is not even considered. The authorities seem to have chosen the way advertised by Keynes, who recommended an increase in governmental spending in order to offset the decrease in private consumption. If the future Government tries to stick to the current plan, and maybe even expand it, Romania will have to deal with the international crisis from a very frail position. Willem Buiter, a Professor at the London School of Economics, believes that the risk of a triple crisis - forex, banking and governmental debt - is quite great for small economies, with a banking sector that is largely exposed internationally, a limited fiscal capacity and a national currency, which is not a hard currency at international level (such as the USD or the EUR). Even though one could say that the Romanian banking sector is not largely exposed internationally, all the other conditions are in place. A plan to stimulate the economy, with a deep electoral influence, is not enough to restore confidence in Romania on the international markets, with or without further rating downgrade. Any increase in the budget deficit can trigger a forex crisis and a depreciation of the leu without any warning. If Professor Buitler thinks there is a noteworthy risk that Britain becomes the next Iceland, what else is there to say about Romania? Since the current condition of being a small, open economy with a limited fiscal capacity, Romania only has two options: to keep the leu stable and to adopt fiscal policies that are built on a budgetary balance. If they do not consider Romania"s limited fiscal capacity, the anti-crisis policies will only lead to an uncontrolled increase in the public debt and the generations who will have to pay for it are not yet old enough to vote.

The first mass media references to the Government"s plan sent the leu very close to 3.85 against the euro. What can the National Bank do under these circumstances. Instead of brutally interfering with the market with al sorts of pearls of wisdom and opinions about the interest, the National Bank should also consider that, maybe, the market is right and the key rate is irrelevant at the current level. The high speed at which the crisis is propagating to every sector of the economy will soon put a great deal of pressure on the exchange rate. The depreciation of the leu against the main currencies will amplify the effects of this vicious circle of the crisis.