The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of this site. This site does not give financial, investment or medical advice.
Submitted by Serban V.C. Enache…
My country of Romania always found itself at the crossroads of empires. But perhaps the biggest ball and chain the country faces is that imposed by its own political class. Last year, the Romanian Government’s debt to GDP ratio was 35 percent and its fiscal deficit was 3 percent. The new installed Government, led by Ludovic Orban from the [center-right] liberal party, is a puppet of president Iohannis, a wholly-bent Western stooge. On Sunday, Romania faces presidential elections, and the sitting president has the first chance of winning.
As always, the new Government complained about the heavy burden left over by the previous one, in this case, the previous Government was that of the social democrats, wholly inept and corrupt, but at least they didn’t engage in austerity. Prime minister Ludovic Orban said that the previous PM took all the money out of the emergency account to disperse it toward local party organizations [political favoritism, corruption etc]. Echoing Orban, Romania’s national bank governor, Mugur Isarescu [in that position for almost 30 years] said that the scheduled pension increases, promised by the social democrats, are going to expand the fiscal deficit very much, and that’s bad for macro-stability, especially since the IMF warned European countries of a looming recession.
The new Government also wants to strengthen the second tier pension fund: the first tier is Government funded and administered, the second tier receives payments from the first, but is privately managed, and the third tier is optional and fully private. I can offer Orban the simplest solution on this matter, allow private agents to purchase Government interest-bearing bonds. It’s the same solution the Thatcher Government came up with. Quite the irony given her political ideology with regard to the state; the state was too incompetent and wasteful to help out the poor, to plan and make investments, yet the UK Government was needed to provide private investors with a default-free savings vehicle that offered nominal yields above the inflation rate. Socialism for the rich, social-darwinism for the plebs. But I digress…
A financial crisis [negative demand shock] in Europe, if it comes, will be made worse if Governments take pro-cyclical fiscal policy. What does that mean? It means that, when private sector spending levels shrink, the Government also engages in shrinking its net spending – both phenomenons further depress demand levels, translating in job losses and lower effective output levels. Romania’s capacity utilization rate has suffered a downward trend over the months of 2019.
What about inflation levels? Food prices have seen the biggest oscillation, from 3.77 percent in January, peaking at around 5.24 percent in May and 5.15 percent in July, until reaching 4 percent in September. Producer prices increased by around 3 percent since January. However, CPI transportation remained flat and lower compared to 2018. The rise in costs isn’t attributable to the size of the fiscal deficit. By far the biggest problem in Romania is that investment spending looks great on paper, but on the ground is largely absent. In other words, a lot of money is spent on projects that never finish, that never get to be used by business and consumer agents. So as time goes on, the country’s throughput and output and input rates suffer.
The next largest contributor to inflation is the cartelization of economic sectors [price gouging]. Intermediary surcharges slapped on top of other surcharges, markups over markups, which inflate the price of fuel and electricity, even though production costs are very low. The financial sector is cartelized as well; so much so that media commentators and even the head of the national bank discourage class-action lawsuits against banks caught breaking the law and taking advantage of their customers. The scare tactic used is: oh, if they get fined and sued, the bank will raise its fees and its customers will fork up the bill. In a real market economy, if a bank were to do that, it would risk its customers migrating to other banks who kept their fees the same. So they’d have no incentive to pass the fines and lawsuit costs onto their customers, they would simply have to accept a smaller profit margin. And if they tried to pass the costs on, they’d go under. But in Romania, where cartelization occurs, banks agree among each other to hike fees, and the consumer can’t migrate anywhere else. Of course, like most countries in the world, the Romanian tax code punishes labor the most with taxation, while rent-seeking is hardly taxed. And while there is a bankruptcy law for business entities, there is no bankruptcy law for individuals.
Another factor, specifically for 2018 and I speculate it’s the case for the present year as well, the current account deficit was highest in 5 years. Exports stagnated, but so did imports. External debt reached an all time high at 108.97 billion euros, rising fast compared to last year. Another, flagrant element is the minimum wage hike, combined with the situation in the labor market, the scarcity of skilled workers – with double the job vacancies compared to 2010. Just like pretty much the entire Trans-Atlantic system [of countries], Romania never recovered to pre GFC employment and output levels [GFC = Great Financial crisis of 2008].
During 2019 [period when the social dems were in charge], the national bank decided to increase its foreign currency balances. The social democrats tried to get the national bank governor in parliament to answer various economic and financial questions, but Isarescu turned down their invitations. He was on vacation… Isarescu’s wage is secret. But from credible sources within the national bank, he makes 20 thousand dollars [in lei] per month. In a sane, proud country, this man would be immediately removed from office. But that’ll never happen. Hell will freeze over before a truly national political faction will get the country’s reins and put an end to the colonial state, subservient to foreign embassies – who treat Romania as a collection of fiefdoms, another buffer zone against Russia, which has to remain underdeveloped in case of a land war.
At any rate, what the new Government should do is propose a rectified budget, necessary for the Government to make all basic payments to the recipients in question – this, of course, will require a vote in parliament, which I’m sure their majority will greenlight – and only afterwards should they cut into the previous administration’s bureaucratic excrescence. Iohannis never mentions things like debt and deficit levels, lack of tax revenue etc when he calls on the Government to allocate 2 percent of GDP for the Defence department [so these funds can be directed to the Military Industrial Complex and make Washington happy]. But when it comes to social security, when it comes to renovating hospitals, supplying hospitals with basic medicine, when it comes to the life of plebs overall, the Government’s spending powers are always deliberately limited by politicians.
As a note of irony, the IMF and IBRD rectified Romania’s GDP growth figure from 3.2 percent to 4 percent – a feat of the social democrat administration. Meanwhile, more than half the national media in the country was bemoaning a financial disaster for the country, unless the social democrats are ousted; and the Romanian diaspora was a major target of this ceaseless, poisonous propaganda. Kudos to the neoliberal financiers behind the whole effort [Soros included], both on mainstream outlets and on social media [Facebook was all theirs]. They continue to hammer the population with their doomsday fear-mongering, invoking European sanctions against Romania, should the Government’s budget exceed the ball and chain rule of 3 percent fiscal deficit. In order to adhere to the Euro somewhere in the future, the Romanian Government has to abide by the Maastricht rules, even though it still has its own currency, even though countries like France and Germany frequently violate these rules [the size of fiscal deficits and the size of current account surpluses] and nothing happens to them – no fine, no warning, no nothing.
But the “lowest” in the Periphery have to dance whenever the Western elites snap their fingers. This type of ball and chain measure [the 3 percent maximum fiscal deficit as percentage of GDP] was used by the IMF after ’89, during Romania’s so-called transition phase, when it acquired loans from the institution. Such arbitrary constraints are meant to neutralize a country’s monetary sovereignty, forcing the money issuer to behave like a household or corporation. In this manner, the sovereign state is forced to sacrifice both investment and the social safety net, while laying off workers and selling off public assets at below value prices. A few months ago, after ExxonMobil said it was trying to sell the licence for gas exploitation in the Black Sea [the Neptun Deep perimeter], Klaus Iohannis visited the White House alone, without the PM, who at the time was Viorica Dancila, leader of the social democratic party. In 2018, the social democrat Government modified the off shore law’s fiscal and environmental aspects, making the big trans-national player sneer. Iohannis probably pledged more boons for American business interests, a return to the secret collaboration protocols between the secret service and the prosecutors [and who knows what else] – a solid way to guarantee a second term for himself. On Sunday I’ll be off to vote and invalidate my ballot.