Romania: Next government will face obstacles to continuing expansionary fiscal policy
December 7, 2016
In the midst of robust growth, Romania will go to the polls on 11 December to elect a new parliament that will have its work cut out following a year of relative political stability focused mainly on normalizing the country’s politics. The backlog of necessary structural reforms to tackle pending issues such as persistently high unemployment will need to be addressed, and yet this will become more difficult as the economy is set to slow next year.
Preliminary polls point to a victory for the Social Democratic Party (PSD), followed by the National Liberal Pary (PNL) and then the upstart Save Romania Union (USR). The country’s two largest parties, which are thus forecast to remain the dominant political forces following the December election, have vowed to continue implementing expansionary fiscal policies if they are elected, yet after this year’s spending escalation, any government will have limited available fiscal space to boost growth further.
Despite its willingness to spend, the country’s political establishment is equally committed to EU budget rules, but there is a risk budget deficits and public debt could slip should that commitment wane as a consequence of political bargaining in coalition talks. Mihaela Neagu, Senior Economist at Garanti Bank adds,
“The local elections held this year may have been a clue for what to expect on 11 December in terms of dominant parties. In our view, all scenarios assume certain alliances will have to be made. In what concerns the intentions set in the political programs, major parties propose further fiscal relaxation which can continue to give a short term boost to the economy. Much care is needed to preserve the macroeconomic stability which the country currently enjoys.”
Both PSD and PNL are advocating continued deficit spending while USR, which was created only a year ago, has built its popularity on promises of deep structural reforms. Neither of the two leading parties has shown a willingness to undertake difficult reforms in the past. They have historically relied on fiscal tools to provide support to growth, allowing them to delay sometimes painful reforms. However, the country’s commitment to the EU means that the election outcome is unlikely to deliver a destabilising shock. Renewed political instability and fiscal profligacy are the main risks to the Romanian outlook as a result of the elections.
Another source of uncertainty is the fate of the current Prime Minister. Dacian Ciolos, who has been heading a technocratic, non-partisan government for the past year, is being backed for another term by the PNL, while not actually standing for any one party or even for a seat in parliament himself. The SDP, which had together with the PNL supported Ciolos’ technocratic, non-partisan government for the entirety of its one year term, has however refused to endorse Ciolos for a further term. At the same time, the President has told party leaders he will not appoint anyone as prime minister who is under investigation, which includes many senior politicians from either side of the political spectrum.
Author: Christopher Mc Innes, Economist