Romania

Politics:

• Analysis

  Romania politics: Quick View - Vote on Schengen accession delayed again

  Event

  The European Council decided at the meeting of the EU Justice and Home Affairs Council on March 7th to postpone making a decision on Romanian and Bulgarian entry to the Schengen area.

  Analysis

  In a pre-emptive move to avoid another snub to Romania's ambitions to join the visa-free Schengen group, the prime minister, Victor Ponta, said on March 5th that Romania would not seek a vote on the country's Schengen membership at the March 7th meeting. Mr Ponta's decision came in response to a statement by the German minister for internal affairs, Hans Peter Friedrich, that Germany would veto Romanian entry into the Schengen area if a vote was called. In the circumstances, the Council decided that a decision on Schengen membership for Romania (and Bulgaria) would be taken by the end of 2013 under the Lithuanian presidency. The Council indicated that accession would involve a two-stage entry process, initially involving the removal of checks at land and sea borders. The Council acknowledged that Romania meets the technical requirements for Schengen entry. However, a number of EU governments oppose Romanian entry on the grounds that the country has made insufficient progress in judicial reform and reducing corruption. These governments are also worried about the prospect of increased "poverty migration" from Romania once controls are lifted.

  The foreign minister, Titus Corlatean, had earlier argued that further delays to Romania's entry might cause the government to lose interest in the process. A growing number of Romanians, including high-level officials, believe that Romania is being treated unfairly, particularly on immigration issues, by EU politicians who are focusing on the issue for short-term political advantage. Some in the governing Social Liberal Union (USL) argue that Romania should focus on priorities other than Schengen entry. By contrast, Romania's president, Traian Basescu, insists that Romania will not be treated seriously in the EU until it takes stronger measures to eliminate corruption and strengthen the independence of the judiciary.

  March 08, 2013

• Background

  Romania: Political forces at a glance

  Political outlook: Political forces at a glance

  Current government: Romania is a parliamentary democracy with two legislative chambers. The current, interim government was formed in April 2012 by the Social Liberal Union (USL), comprising the former communist Social Democratic Party (SDP) and the Centre-Right Alliance (ACD) of the National Liberal Party (NLP) and the Conservative Party (CP), after the USL unseated the previous government in a no-confidence vote in parliament. This is the fifth government to have been formed since the 2008 parliamentary election, after which the Democratic Liberal Party (DLP) formed a coalition government with the SDP, giving it a large working majority across the two parliamentary chambers. The only other parties to win parliamentary representation were the NLP and the Hungarian Union of Democrats in Romania (HUDR). In September 2009 the SDP left the government, which fell in a vote of no-confidence. A new government of the DLP and the HUDR was formed in December 2009, after the incumbent, Traian Basescu, won a second presidential term. However, popular protests in early 2012 led to the resignation of the prime minister, Emil Boc, who was replaced by an independent, Mihai Razvan Ungureanu, who formed a new cabinet. The government was short-lived, falling in a no-confidence vote in April 2012.

  Structure of parliament, June 2012
  (no. of seats)
  	Senate	Chamber of Deputies	Total
  Democratic Liberal Party	39	110	149
  Social Democratic Party	43	96	139
  Centre-Right Alliancea	29	58	87
  Hungarian Union of Democrats in Romania	8	20	28
  National Union for the Progress of Romania	13	14	27
  National minorities	-	17	17
  Independents	2	10	12
  Total (incl vacant seats)	137	332	471
  a Made up of the National Liberal Party and the Conservative Party.
  Sources: Chamber of Deputies website; Senate website.

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  Next elections: The next parliamentary election is scheduled for November 2012 and the next presidential election is scheduled for late 2014.

  Download text file (csv format)

  June 22, 2012

• Structure

  Romania: Political structure

  Official name

  Romania

  Legal system

  Parliamentary republic; a new constitution was adopted in 1991 and 2003

  National legislature

  Bicameral parliament composed of the Senate (176 seats) and the Chamber of Deputies (412 seats). Both chambers are directly elected from 41 multimember constituencies, comprising 40 counties and the municipality of the capital, Bucharest

  Electoral system

  Universal direct suffrage over the age of 18

  National elections

  December 9th 2012 (legislative); November 26th and December 6th 2009 (presidential). The next parliamentary election is scheduled for December 2016 and the next presidential election is scheduled for late 2014

  Head of state

  President, Traian Basescu

  National government

  Cabinet, headed by the prime minister, nominated by the president. The Social Liberal Union (USL) government led by the prime minister, Victor Ponta, comprises the Centre-Left Alliance of the Social Democratic Party (SDP) and the National Union for the Progress of Romania (UNPR), and the Centre-Right Alliance (ACD) of the National Liberal Party (NLP) and the Conservative Party (CP)

  Opposition parties

  Christian Democrat-New Generation Party (CD-PNG); Democratic Liberal Party (DLP); Greater Romania Party (GRP); Hungarian Union of Democrats in Romania (HUDR); People's Party-Dan Diaconescu (PP-DD)

  Prime minister: Victor Ponta (SDP)

  Deputy prime minister & minister of public administration & regional development: Nicolae Liviu Dragnea (SDP)

  Deputy prime minister & minister of finance: Daniel Chitoiu (NLP)

  Deputy prime minister without portfolio: Gabriel Oprea (UNPR)

  Key ministers

  Agriculture, forests & rural development: Daniel Constantin (CP)

  Communications & information technology: Dan Nica (SDP)

  Culture: Daniel Constantin Barbu (NLP)

  Defence: Mircea Dusa (SDP)

  Economy: Varujan Vosganian (NLP)

  Education & research: Remus Pricopie (SDP)

  Environment & water management: Rovana Plumb (SDP)

  European affairs: Leonard Orban (independent)

  Foreign affairs: Titus Corlatean (SDP)

  Health: Gheorghe Eugen Nicolaescu (NLP)

  Interior: Radu Stroe (NLP)

  Justice: Mona Pivniceru (independent)

  Labour, social protection & the family: Mariana Campeanu (NLP)

  Transport & infrastructure: Relu Fenechiu (NLP)

  Parliamentary speakers

  Lower house: Valeriu Zgonea (SDP)

  Upper house: Crin Antonescu (NLP)

  Central bank governor

  Mugur Isarescu

  March 18, 2013

• Outlook

  Romania: Key developments

  Outlook for 2013-17

  • The government led by Victor Ponta, comprising parties from the Social Liberal Union (USL) and technocrats, has a large majority and is in a strong position to pursue its policy agenda in 2013-16.
  • Romania's membership of the border-free Schengen group will be decided at the end of 2013: opponents cite the country's failure to reform the judiciary and tackle corruption as a reason to block membership.
  • There is some uncertainty about whether the government will try to negotiate a new stand-by arrangement with the IMF from mid-2013, but continued euro zone troubles make this more likely.
  • The government will find it difficult to reduce the budget deficit as a share of GDP in 2013 without cutting public-sector personnel and public investment projects.
  • We forecast weak real GDP growth of 1% in 2013, reflecting continued recession in the euro zone, and still-anaemic domestic demand. Annual growth is forecast to average about 4% in 2014-17.
  • After recording a deficit of less than 4% of GDP in 2012, the current account is forecast to record an average deficit of about 5.5% of GDP in 2013-17.

  Review

  • The European Council decided at the meeting of the EU Justice and Home Affairs Council on March 7th to postpone making a decision on Romanian and Bulgarian entry to the Schengen Area.
  • The consolidated budget registered a surplus of Lei1.039bn (US$311.7m) in January.
  • The central bank kept the monetary policy rate unchanged at its February meeting, at 5.25%, where it has stayed since March 2012.
  • The banking sector suffered losses of Lei2.12bn in 2012, almost three times as much as in 2011. This is the third successive year of losses.
  • The European Commission has threatened legal action against Romania for failing to comply with its obligations under EU law with regard to equal tax treatment of domestic and foreign companies.
  • Romania narrowly avoided recession in 2012, with real GDP growing by 0.3% year on year.
  • Romania issued US$1.5bn-worth of ten-year US dollar-denominated bonds on February 14th at a greatly reduced cost compared with its last sovereign issue, in October 2012.

  March 18, 2013

Economy:

• Background

  Romania: Country fact sheet

  Fact sheet

  Annual data	2012a	Historical averages (%)	2008-12
  Population (m)	21.4	Population growth	-0.1
  GDP (US$ bn; market exchange rate)	169.4b	Real GDP growth	0.3
  GDP (US$ bn; purchasing power parity)	270b	Real domestic demand growth	-1.1
  GDP per head (US$; market exchange rate)	7,904.2	Inflation	5.7
  GDP per head (US$; purchasing power parity)	12,699	Current-account balance (% of GDP)	-5.7
  Exchange rate (av) Lei:US$	3.47b	FDI inflows (% of GDP)	2.8
  a The Economist Intelligence Unit estimates. b Actual.

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  Background: Romania fell under communist control at the end of 1947. The communist leader, Gheorghe Gheorghiu-Dej, embraced Stalinism, but gradually loosened Romanian ties with the Soviet Union. The split widened under Nicolae Ceausescu, who took over as party general secretary in 1965. The grip of the Ceausescu clan on the economy and polity ended in a coup in December 1989. Parliamentary and presidential elections were held in May 1990. A new constitution was adopted in 1991, and this was revised in 2003.

  Political structure: Romania has a bicameral parliamentary system. The Senate (the upper house) has 137 seats and the Chamber of Deputies (the lower house) has 334. Both chambers are directly elected for a four-year term from 41 single-member constituencies, comprising 40 counties and the municipality of the capital, Bucharest. The head of state is the president, currently Traian Basescu, who is serving a second five-year term. The Social Liberal Union (USL), comprising the SDP and the Centre-Right Alliance (ACD) of the National Liberal Party (NLP) and the Conservative Party (CP), formed a new government in April 2012, after unseating the unpopular administration run by the Democratic Liberal Party (DLP) and the Hungarian Union of Democrats in Romania (HUDR).

  Policy issues: Gradualism was the hallmark of reform in Romania in the 1990s. Macroeconomic stabilisation programmes were undermined by a failure to undertake structural reforms, and periods of growth were superseded by bouts of high inflation and macroeconomic imbalance. Important structural reforms in the early 2000s helped to stabilise the economy, but lax fiscal and incomes policies led to overheating in 2007-08, as well as to rising external imbalances. A painful fiscal adjustment was a central component of Romania's IMF stand-by agreement in 2009-11; further fiscal and public-sector structural reforms are the focus of the 2011-13 precautionary stand-by agreement.

  Taxation: Romania introduced a flat tax of 16% for personal income and corporate profits in January 2005. From July 2010 the uniform rate of value-added tax (VAT) increased from 19% to 24%. Social security contributions are high, equivalent to 49.5% of gross wages. Tax rates are likely to be raised as a result of fiscal shortfalls in the near term.

  Foreign trade: In 2012 merchandise exports totalled US$58.1bn and merchandise imports totalled US$67.5bn. The current-account deficit was US$6.5bn, equal to an estimated 3.8% of GDP. Around 70% of exports went to the EU in 2011.

  Major exports 2011	% of total	Major imports 2011	% of total
  Machinery & equipment	26.9	Machinery & equipment	27.3
  Base metals & products	12.2	Minerals & fuels	12.1
  Textiles & products	8.0	Chemicals & products	9.9
  Minerals & fuels	5.7	Textiles & products	6.4
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  Germany	18.6	Germany	17.1
  Italy	12.9	Italy	11.4
  France	7.5	Hungary	8.7
  Turkey	6.1	France	5.8

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  March 18, 2013

• Structure

  Romania: Economic structure

  Data and charts: Annual trends charts

  
  

  

  March 18, 2013

• Outlook

  Romania: Country outlook

  Romania: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The Social Liberal Union (USL), the political alliance of the Centre-Left Alliance of the Social Democratic Party (SDP) and the National Union for the Progress of Romania (UNPR), and the Centre-Right Alliance of the National Liberal Party (NLP) and the Conservative Party (CP), won a resounding victory in the parliamentary elections held on December 9th. The president, Traian Basescu, re-appointed Victor Ponta as prime minister. By winning a two-thirds majority in both chambers the USL reached a "constitutional majority", which will make it possible for the alliance to propose revisions to the constitution without the support of other parties. However, the process of initiating constitutional revisions also involves obtaining 500,000 signatures across the nation, the participation of the president, and approval by a referendum (Articles 150-1 of the constitution). In principle, the two-thirds majority would also allow the USL to impeach the president, subject to the approval of the High Court of Cassation and Justice (Article 96). However, given the backlash generated in the EU by the USL's latest attempt to impeach the president, in 2012, the new government will be wary of going down this route again.

  ELECTION WATCH: The next parliamentary election is scheduled for November 2016 and the next presidential election is due in late 2014. The USL's main challenger in the December 2012 election, the Alliance of the Romanian Right (ARD)--dominated by the Democratic Liberal Party (DLP), which led the government until April 2012--performed badly. It won only 13.6% of the seats in both chambers. Many leading figures in the ARD failed to win a seat. The alliance dissolved immediately after the elections. The DLP now faces the difficult task of winning back support from a hostile electorate. The populist People's Party-Dan Diaconescu (PP-DD), which recorded one of the largest shares of the vote ever for a new party in the 2012 election (around 14%), may become the main focus for disenchanted voters.

  INTERNATIONAL RELATIONS: The European Commission's report on Romania's progress under the co-operation and verification mechanism, published on January 30th, was broadly favourable in tone, but argued that the government needs to intensify its efforts to reform the judiciary and tackle corruption. The Commission will continue to monitor the government's progress before reporting at the end of 2013. The European Council decided at the meeting of the EU Justice and Home Affairs Council on March 7th to postpone a decision on Romanian and Bulgarian entry to the Schengen Area until the end of 2013. The Council said that accession would be a two-stage process, initially involving the removal of checks at land and sea borders. The Economist Intelligence Unit expects further delays to Romania's Schengen membership given the "Fortress Europe" climate in recession-hit Europe. Disillusionment with the EU among Romania's top politicians will be tempered by recognition of the need to maintain access to EU funding and markets. The authorities have reacted angrily to suggestions that the UK government may not apply its EU treaty obligations to give full working rights to Romania citizens in 2014.

  POLICY TRENDS: The government has agreed with the IMF that approval of the final review of the precautionary stand-by agreement will be extended by three months, until the end of June. This is to allow time for the implementation of structural reforms, including the privatisation of the state-owned rail-freight company CFR Marfa; the launch of initial public offerings (IPOs) in the energy sector; the repayment of government arrears, predominantly owed by local governments; and the introduction of "co-payments" for the use of health facilities. There are no guarantees that the Romanian authorities will find a suitable private buyer for CFR Marfa in the agreed timeframe, especially as a new owner would have to absorb the company's debts to avoid EU state-aid procedures. There are also differences of opinion between the IMF and the government over privatisation in the energy sector. If the IMF board does not approve the programme in June, because of failure by the government to meet the requirements, the arrangement will lapse. The government intends to negotiate a new agreement when the current one expires, but if relations with the Fund were to break down over the existing arrangement, negotiating a new one would become difficult.

  ECONOMIC GROWTH: Recovery from recession in 2009 and 2010 has been modest. Romania avoided negative growth in 2012, but only by a whisker, with real GDP growing by 0.3% while gross value added fell by 0.2%. Data for 2012 are difficult to reconcile with data for 2011, largely because of revisions to 2011 data which are yet to be published in full, and owing to the unexplained redistribution of output between sectors of production. Positive quarterly real GDP growth of 0.1% in the fourth quarter, which enabled Romania to avoid a triple-dip recession, may have to be revised, as it is the result entirely of a statistical discrepancy.

  INFLATION: The consumer price index (CPI) increased by 6% year on year in January and by 1.3% month on month, compared with a 5% year-on-year rise in December 2012. This was the second consecutive month of accelerating inflation, taking inflation to its highest level since June 2011. The acceleration was driven by increases in electricity, food and tobacco prices. The January inflation number was in line with expectations, given planned large increases in administered prices (electricity, heating, natural gas). As well as annual changes in administered prices for energy, other exogenous pressures on inflation include volatile food prices. Food prices are expected to continue rising in the first half of 2013 because of the residual impact of the weak 2012 harvest (a normal harvest in 2013 should bring about a slowdown in price rises in the second half of the year).

  EXCHANGE RATES: The value of the leu fell by 4.9% on average in nominal terms against the euro in 2012, to Lei4.46:EUR1, and by 12.1% against the US dollar, to Lei3.47:US$1. The leu depreciated by 6.5% in real terms against a trade-weighted basket of currencies. The depreciation of the domestic currency in 2012 was a consequence of a combination of factors, including domestic political instability related to three changes of government in the first half of the year, and the attempted impeachment of the president and scheduled parliamentary elections in the second half. Risk aversion towards emerging markets emanating from the Greek and European sovereign debt crisis and the worsening economic outlook in the euro zone also took their toll on the leu. The authorities have intervened only moderately to support the currency or to absorb excess liquidity, prompting speculation that the National Bank of Romania (NBR, the central bank) is happy to allow the currency to depreciate within certain limits. However, the leu has appreciated steadily against the euro since July 2012, and stood at Lei4.36:EUR1 on March 11th. We expect the leu to remain subject to turbulence in 2013, given the persistence of euro zone uncertainties, but forecast a modest real appreciation of the currency in 2013-17, in line with productivity differentials, as the economy recovers.

  EXTERNAL SECTOR: The current-account deficit narrowed by 15.1% year on year in 2012, to EUR5bn, equivalent to about 3.8% of GDP. The EUR899m reduction in the overall deficit resulted largely from a EUR540m contraction in the incomes deficit and an increase in the surplus on services of EUR238m, while credits, debits and balances on other items in the current account did not change significantly. The narrowing of the deficit on incomes was largely caused by falls in net outward flows in incomes from foreign direct investment (FDI). Within the category of current transfers, the surplus on intergovernmental flows fell from EUR613m to EUR313m, while the surplus on "other sectors" (principally workers' remittances) rose from EUR2.73bn to EUR3.05bn. The surplus on the financial and capital account fell from EUR5.5bn in 2011 to EUR3.98bn in 2012. Net intergovernmental flows on the capital account (including transfers from the EU) increased from EUR566m to EUR1.62bn. Meanwhile, net inflows from the IMF fell from EUR908m to -EUR1.6bn as the NBR commenced repayments of debt. Net inflows of FDI fell from EUR1.82bn (revised downwards from EUR1.92bn) in 2011 to EUR1.61bn in 2012, and covered 32% of the current-account deficit. Current-account data are not expected to change significantly in 2013, but the deficit will expand incrementally as growth accelerates over the forecast period, averaging about 7% of GDP in 2013-17.

  March 11, 2013

• Forecast

  Romania: Country forecast summary

  Country forecast overview: Highlights

  • The Social Liberal Union (USL) won an overall majority at the parliamentary election on December 9th, and the new cabinet of the prime minister, Victor Ponta, is in a dominant position politically. However, we expect the alliance to be prone to disagreements over the medium term, given the sharp personal and policy differences between the two main constituent parties, the Social Democratic Party (SDP) and the National Liberal Party (NLP).
  • The discredited former ruling Democratic Liberal Party (DLP) performed badly in the elections and now faces the difficult task of winning back support from a hostile electorate. The populist People's Party-Dan Diaconescu (PP-DD), which performed well at the polls, may become the main focus for disenchanted voters.
  • The scale of the USL's victory was a blow to the president, Traian Basescu, whose term expires in 2014 (he cannot stand again for office). Mr Ponta and Mr Basescu have called a truce in their long-running political feud. However, tensions are likely to come to the fore again, especially as the presidential election draws near, causing political difficulties for the government.
  • The government's macroeconomic programme for 2013-16 involves continued fiscal consolidation and reforms to improve revenue collection, the management of public funds and the absorption of EU funding. Reforms to state-owned enterprises and the healthcare and education systems are likely to encounter political and social opposition.
  • The government proposes to reduce the rate of value-added tax (VAT) to 19% from 24%, and to reduce VAT on processed foodstuffs (reportedly to 9%); but reductions will be introduced only when fiscal conditions permit. It is also proposing to reduce employers' social security contributions by 5 percentage points in exchange for undertakings to preserve employment levels.
  • Romania narrowly avoided recession in 2012, with real GDP growth of 0.3%, and we forecast weak growth of 1% in 2013 as a result of weak external and domestic demand. We forecast a gradual acceleration of growth rates to an average of about 4% per year in 2014-17, as GDP is boosted by exports and rising domestic demand.
  • Romania will probably delay adoption of the euro, scheduled for 2015, by several years. We expect the current-account deficit to average about 5.5% of GDP per year in 2013-17, following a sharp correction in 2009-12.

  

  March 18, 2013

View detailed map

Country Briefing

Land area

238,391 sq km; 12th-largest in Europe

Population

21,528,627 (May 28th 2008)

Main towns

Population in '000 (July 1st 2006):

 Bucharest (capital): 1,931

 Iasi: 317

 Constanta: 306

 Cluj-Napoca: 306

 Timisoara: 304

 Craiova: 301

 Galati: 297

 Brasov: 281

Climate

Continental

Weather in Bucharest (altitude 92 metres)

Hottest month, July, 16-30°C (average daily minimum and maximum); coldest month, January, minus 7-1°C; driest month, February, 33 mm average rainfall; wettest month, June, 89 mm average rainfall

Language

Romanian

Weights and measures

Metric system

Currency

Leu = 100 bani; the plural of leu is lei

Fiscal year

Calendar year

Time

Two hours ahead of GMT

Public holidays

January 1st-2nd, January 6th, Easter (Orthodox calendar), May 1st, December 1st, December 25th-26th

January 11, 2013