Romania has just slashed civil service salaries and pensions. A sign of things to come?

Flying into Timisoara, the day after Romania’s President announced swingeing cuts of 25% in salaries for civil servants and a 16% reduction in pensions for all those unlucky enough to be retired, was a sobering moment, writes Nick Hood. The pensions cut reverses most of a 20% increase rather recklessly brought forward by the previous government ahead of the 2009 election.

Even more interesting was discovering the next day that the Vice-President of the Central Bank had been an insolvency practitioner in a previous commercial life. With the current state of the UK’s public finances, this may yet be a path sensibly followed by our own Bank of England.

Romania’s own financial position is very far from healthy, although one local professional did comment cynically that they had been wise to access the IMF’s resources for their $17.1bn lifeline back in early 2009, before the PIGS crisis began to preoccupy markets and institutional bankers alike.  What, he asked, would have been left after Greece’s begging bowl had been filled, and then maybe Portugal and Spain’s?

A recent World Bank survey put Romania 55th in the league table for doing business, dragged down by poor ratings for the difficulty of employing workers and for tax burdens on enterprises. Education and skills levels amongst the 22m population are a major issue.

But maybe more of a problem is this conundrum: the banking system is relatively liquid, but there is an admitted reluctance by banks to lend to business following the impact of the world recession. The country’s banking system has already disclosed that 10% of all its loans are non-performing, a figure which will almost certainly rise further in 2010. So the instinct to avoid adding to this toxic financial waste dump is understandable.

This may reflect Romania’s curious trajectory through the crisis, starting as the only emerging European economy to grow faster in 2008 than in 2007 and then falling heavily back down to earth with a 15.5% negative swing into recession in 2009.

Worryingly, foreign direct investment collapsed from around $13.5bn in 2008 to under $5bn in 2009, reflecting hardships in developed countries and uncertainty about prospects in Central and Eastern Europe. Having Italy as your second largest investor is not a very comfortable economic model right now.

Whatever the harsh financial realities may be, there is a reassuring air of confidence among bankers and professionals as they discuss the way forward and out of the recession. And refreshingly, a number of Romania’s judges have been regular attendees for some years now at European legal events, designed to share Western knowledge and experience at using commercial common sense to make inflexible laws work in the real world.
 
And besides which, where else can visitors experience the joys of such delightfully mangled English as seen on the menu of Timisoara’s top restaurant - our puzzlement at what 'Sparrow Grass Sauce' might be turned into hysterical amusement when the sauce boat disgorged a fragrant Asparagus sauce...