PRESIDENT TRAIAN BASESCU is getting annoyed about the constant lambasting his country gets as the most corrupt in Europe. He lashed out last month at a German politician who called for Romania’s EU bid to be frozen. “Any European politicians will be taken seriously only if he mentions the specific problem of corruption he means,” Basescu said. Romania has been little more than a kleptocracy for a long time, though it is starting to change. Rampant corruption is still a big problem and might yet scupper a bid to join the EU by January 1 2007. Transparency International, the Berlin-based corruption watchdog, lists Romania as the most corrupt country in the region and a recent study by the European Central Bank warned that it had the region’s weakest institutions.
The EU has specifically linked Romania’s qualification for entry to progress in battling corruption. EU expansion affairs commissioner Olli Rehn made sure he fired a warning shot across Bucharest’s bows during his first inspection trip at the end of February. “Every day, every week, every month counts, they have to be used in order to conduct the necessary reforms in the judiciary and fight against corruption,” he told a news conference. “This is the priority of all priorities.”
But all the criticism is perhaps unnecessary. The centrist government of Basescu, a former ship’s captain, defeated the incumbent Social Democrats in a surprise result in December and has come out fighting.
Anti-corruption platform
The straight-talking president was swept into power on a tough anti-corruption platform and has replaced most of the top tier of government with like-minded, youthful ministers. For example, Monica Macovei, a former human rights campaigner, has crossed the fence and was appointed the new justice minister. Basescu has given the new cabinet six months to produce results or face dismissal.
Basescu has kicked off the legislative drive to bring Romania’s laws in line with EU norms with a wide-ranging package of laws designed to combat corruption that was due to go into force as Euromoney went to press.
A few high-profile politicians from the previous administration have been arrested and their dodgy deals undone.
Basescu, who rose through the ranks of the old administration, has not escaped accusations of graft himself. In mid-February, he was forced to give up an apartment that he had bought from the state at a knock-down price in 2001 when he was mayor of Bucharest.
Businessmen already report a change in the business climate. “Of course there is corruption here as there is in all the transition countries, but now there is a totally different atmosphere,” says Dan Paskarin, chairman of HVB Bank Romania. “You can already feel the changes. Clients used to say that they had to do things the unorthodox way to get the necessarily approvals, but that has stopped. This government is operating with much more transparency.”
Romania’s prospects look rosy if Basescu can stick to his guns. The latest European Bank for Reconstruction and Development transition report found that EU accession hopes have proved to be an effective goad for all the governments of aspirant countries to push through real reform.
And change will be easier to make during Romania’s current upswing. The economy is expected to put in another year of blistering 8%-plus growth, which make it the fastest-growing state in the region.
Currency concerns
Still, there is a lot to do. Last year’s 9.3% inflation and 8% current account deficit are worries, as is the 10% appreciation of the leu. The National Bank of Romania has been forced to intervene heavily on the foreign exchange markets to hold back export-killing appreciation, but with little success: in February the central bank spent €600 million to bring down the value of the leu by 10%, only for the currency to bounce back to its previous level just two days later.
The central bank is planning to liberalize the currency regime in April – at present foreigners are not allowed to hold domestic accounts – and effectively float the leu, which should bring some relief. The central bank has promised not to target exchange rates but rather concentrate on maintaining the current five months-worth of import cover the bank holds as a reserve.
Elsewhere reforms have progressed well. Agriculture remains a mainstay of the economy and bumper harvests last year were a big contributor to the strong growth.
Tax reforms began with a bang after the government slashed rates and introduced a 16% flat-rate tax on both personal income and corporate profits. Businesses complain that social taxes are still heavy – over 40% in most cases – but these are also slated for reform and tax receipts were already up by 25% last year on the back of strong economic growth.
External debt is a meagre 25% of GDP, so the government has plenty of borrowing power – a fact acknowledged by Standard & Poor’s, which granted the sovereign an investment-grade rating in November.
And with the form already set by last year’s accession of 10 countries from central and eastern Europe to the EU, foreign investors are piling in. Romania attracted €3.4 billion in foreign investment last year – most of it in a quest for cheap labour in light industry – twice as much as in 2003. A large part of this sprang from a few huge privatizations such as the sale of oil concern Petrom, which brought in €1.5 billion by itself.
“If anything we are going too fast,” says HVB’s Paskarin. “We have foreign direct investment, booming retail, huge privatizations and lots of large companies moving in. The authorities are already under pressure from the IMF to touch the brakes.”
