“Our budget deficit stands between 3.5 percent and 4 percent of GDP this year, we’re outside the EU treaty,” Boc, who was nominated yesterday to be prime minister, said in Bucharest today.
The outgoing government had previously targeted a shortfall of 2.3 percent of GDP this year and 2 percent next year. The EU stability and growth pact requires governments to keep their budget deficits below 3 percent of GDP, and provides for financial penalties for countries that breach the ceiling. Even if the policy is likely to be flexibilised in 2009 given the severity of the economic slowdown, this stance is hardly applicable to the Romanian case, since the economy was in effect booming during most of 2008, and the bubble only finally burst during the financial crisis of October.
The spending program of the new government, which was published today by Romanian newswire Mediafax, includes plans to reduce spending next year to narrow the budget deficit to 2.5 percent, but we will see if this move is now enough to satisfy officials in Brussels and analysts at the credit ratings agencies. Romanian sovereign debt was effectively lowered to junk bond status by Standard and Poor's last month, and there is of course no possibility of euro membership with such a rating.
The draft also includes a 45 percent pension increase and an increase in the minimum wage to 600 lei ($208) from 540 lei as of Jan. 1, a reduction of the value added tax for staple foods, infrastructure investments and incentives to companies to stimulate growth and create jobs. Contrarian voices were thus not hard to find and Varujan Vosganian, the outgoing Liberal finance minister, told Realitatea TV in an interview today that the measures included in the working draft will push the budget deficit to 6 percent of GDP next year.
The Liberal Democrats and the Social Democrats, who formed a governing coalition with a two-thirds parliament majority on Dec. 14, also agreed to keep a 16 percent flat tax over the next years.
Industrial Output Falls Back Sharply In October
More evidence that a major contraction of economic activity is now underway in Romania came in today with the publication by Eurostat of the harmonised industrial output data for October. Output in Romania fell a seasonally adjusted 3.4% from September, and 3.2% from October 2007. In fact the rate of expansion in Romanian industry has been slowing since the spring, and as you can see in the chart below we are simply moving over to negative readings on a year on year basis. Still this data will now start to give us a nice handle on the actual rate of contraction as it takes place.
The Leu Being Dragged Down By The Zloty
Poland's currency is falling very sharply at the moment, as the slowdown in Western Europe reduces demand for its industrial products and an internal credit crunch slows down domestic demand. The zloty had its biggest intra-day drop in a month today, falling to its lowest level in more than two years, amidgrowing concern the economic slowdown is worsening. The zloty was down as much as 2.5 percent at one point, falling to 4.0812 per euro, its weakest level since July 10 2006, and passing through the psychologically important 4 per euro level. The zloty has been the worst performer over the last month among regional peer currencies when compared with the euro.
The Romanian leu fell today to 3.9462 per euro from 3.9426 late yesterday, while the Hungarian forint dropped 0.2 percent to 268.34.