Fisher Investments Editorial Staff
Geopolitics

Democracy Wins in Romania

By, 07/31/2012

Well folks, it’s yet another supposedly critical week for the euro. The ECB convenes Thursday, and most observers anticipate some clarity on Mario Draghi’s plan to “do whatever it takes to preserve the euro.” Jean-Claude Juncker, head of the Eurogroup (eurozone finance ministers), said the EFSF may “act together with the ECB,” strongly suggesting coordinated sovereign debt purchases are in the offing. Meanwhile, as Greece’s coalition leaders are debating the €11.5 billion in budget cuts needed to secure their next aid installment, rumor has it ECB officials are forming a plan to ease a bit more of Greece’s debt burden.

Helpful as these potential developments may sound, we’d suggest not holding your breath—time and again we’ve heard “this week is crucial for the euro,” only for the week to pass largely uneventfully, but the currency union keeps pulling through. Maybe the ECB does announce a seemingly grand plan, and maybe it does help somewhat. But even further sovereign debt purchases aren’t a silver bullet solution—like all measures taken thus far, they’re a stopgap to buy peripheral nations time to fix their underlying competitiveness issues and strengthen their private sectors. Granted, buying time likely would give markets more confidence the eurozone isn’t fracturing beyond repair, which should provide a measure of relief for stocks at some point, but that doesn’t mean Europe’s issues simply go away—and chances are, even if the ECB does take action, this won’t be the last critical weak for the euro.

The overwhelming desire for quick action has placed European institutions under heavy fire of late for their perhaps overly democratic, slow-go approach to fixing the debt crisis—particularly as officials deem various purported solutions as inconsistent with European treaties. But these same institutions should likely be lauded for their insistence on treaty adherence in Romania.

Democracy is relatively new to the former Soviet bloc, and in recent years economic troubles have exposed some severe cracks in some nations’ political systems. We saw this recently in Hungary, and Romania’s in the spotlight. In 2010, the center-right government passed tough budget cuts, including raising the sales tax to 24% and a 25% reduction in public-sector wages, to comply with an EU/IMF bailout. As we’ve seen throughout the periphery, these were hugely unpopular, and the government eventually fell to a no confidence motion. Center-right President Traian Basescu, however, remained in power as he was re-elected to a five-year term in 2009.

The center-left Liberal Social Union, led by Prime Minister Victor Ponta, took power in May and subsequently launched efforts to remove Basescu, who had become Ponta’s arch rival. On June 26 they voted to water down Romania’s impeachment rules. The previous rules required 50% of the electorate to vote in favor of impeachment for the president to be removed; however, under the new rules, the impeachment would pass if a simple majority of votes cast in the referendum supported it—a much lower threshold. For good measure, they also curbed the constitutional court’s powers and removed the speakers of both houses of parliament. Thus, when parliament voted on July 6 to suspend Basescu and hold a referendum on impeachment, there were no internal checks and balances to stop the undemocratic, unconstitutional process.

There were, however, fail-safes at the international level—namely, the Lisbon Treaty and the institutions that stood up to enforce it. As grounds for impeachment, Ponta argued Basescu overstepped his mandate by championing the budget cuts, essentially exhibiting undue influence over parliament (or, as Ponta put it, meddling in areas that are typically the province of the prime minister). However, considering a democratically elected parliament passed these budget cuts in a fully constitutional manner, it hardly seems Basescu committed the “high treason” Romania’s constitution requires for impeachment. Thus, the European Commission summoned Ponta to Brussels, where they expressed “deep concern” and suggested a July 18 report on Romania’s democratic progress would condemn the government for undermining the rule of law unless Ponta U-turned. Facing this veiled threat of legal action over treaty violations, the government compromised, agreeing on July 16 the referendum would be valid only if turnout exceeded 50%. Brussels took note.

The referendum took place Sunday, and turnout was only around 46%, invalidating the vote and ensuring Basescu remains in power. Ponta said he doesn’t intend to pursue impeachment again and claims he has “learnt all the lessons from this period.” What those lessons are isn’t clear—but his scheme’s failure and his decision to abandon it are big victories for democracy.

Romania’s story is a timely reminder that Europe’s treaties and institutions do help serve a big, important purpose: They can help keep former Communist states from slipping back into tyranny. And that, in turn, can help these nations—some of which, like Romania, Bulgaria and Hungary, are struggling economically—have a fighting chance at economic growth and prosperity, which go hand in hand with freedom and the rule of law. Decades of communism forced millions of eastern Europeans into poverty. But if democracy’s safeguarded, free markets can likely continue lifting them out.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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