AUSTERITY FEVER BRINGS DOWN ROMANIA´S GOVERNMENT / THE WALL STREET JOURNAL ( HIGHLY RECOMMENDED READING )

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April 27, 2012, 1:12 p.m. ET

Austerity Fever Brings Down Romania's Government
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By ANDREW PEAPLE

European governments are dropping like flies. Romania's center-right government fell on Friday after losing a parliamentary vote of confidence, just two months after Prime Minister Mihai Razvan Ungureanu's government took office. Like other European leaders, Mr. Ungureanu has lost popular support for a tough austerity program. For Mr. Ungureanu—and whoever takes over in Romania—pressure from the International Monetary Fund is making things even more difficult.





Romania's economy has been performing relatively well. Like other emerging countries, Romania relied heavily on foreign investment before the 2008 financial crisis, while its current-account deficit reached 11.6% of GDP in 2008. Two years of recession followed, but Romania's economy recovered to grow by 2.5% in 2011. The government's budget deficit fell to 4.2% of GDP last year from 7.3% in 2009.



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Romania's Achilles' heel, though, is that foreign banks make up over 80% of its banking system. Sudden capital flight is an ever-present danger, so Romania agreed to a €5 billion ($6.6 billion) precautionary credit line with the IMF and European Union last March.



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In return, the country has accepted stringent conditions that would be tricky for any European country to meet, including reducing its budget deficit to 1.9% of GDP this year. Already, Romania has made painful cuts: Public sector employment has fallen 14% since 2008, and its remaining workers have had their wages frozen. But the IMF is also pressing Romania to liberalize its energy and transport sectors, and introduce more private-sector involvement in health care.


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Such reforms might come straight from the Washington Consensus textbook, but they have aroused huge domestic opposition. Protests against planned health system changes brought down the previous government in February: Romania's centre-left opposition has been increasingly critical of the now-fallen government's belt-tightening.



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But the opposition has already said it wants to retain the IMF's support. In truth it has little choice but to keep up the austerity, with market confidence already fragile: The Romanian leu fell 0.3% against the euro on Friday, its sharpest one-day fall this year.



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Like others in Europe, Romania is finding there is no easy way out of the economic blues.


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