Cablegate: Romania: Presidential Campaign Features Plenty of Economic

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SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ENRG PGOV PREL SOCI RO
SUBJECT: ROMANIA: PRESIDENTIAL CAMPAIGN FEATURES PLENTY OF ECONOMIC
RHETORIC BUT LITTLE SUBSTANCE

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Sensitive but Unclassified; not for Internet distribution.

1. (SBU) Summary: With just over a week to go before the first
round of the presidential election, Romania's economic woes are
foremost in the minds of voters. The leading presidential
candidates have been long on rhetoric but short on specifics about
how they would return the country to economic health, knowing full
well that the office of President actually has little direct power
to implement any of the measures promised. For the most part,
economic prescriptions offered by the top three candidates --
incumbent President Traian Basescu (PDL), Mircea Geoana (PSD), and
Crin Antonescu (PNL) -- deviate little from their respective
parties' platforms. Broadly speaking, Geoana would raise taxes and
increase government spending, while Antonescu pledges to cut taxes
and shrink the size of government. Basescu's PDL would like to
occupy the middle ground between these two extremes. In actual
practice, ideology always takes a back seat to realpolitik in
Romania once an election is won, and the policies pursued after the
election will have much more to do with who is named Prime Minister,
and that person's relationship with the President, than with the
President himself. End Summary.

2. (SBU) Romania's yawning government budget deficit has brought
tax policy to the top of the agenda. Basescu, perhaps wishing for
an economic recovery sooner rather than later, believes that the
current revenue shortfall is temporary and that the 16 percent flat
income tax and 19 percent VAT tax rate should be preserved, with the
VAT possibly increasing later in 2010 if revenues remain down.
Antonescu supports the PNL line that taxes should be decreased where
possible, and suggests lowering the VAT to 15 percent and the income
tax rate to 10 percent. He proposes to balance these cuts with a
dramatic government downsizing. Geoana, looking out for the rural
population and pensioners who remain PSD's core constituency, would
support a progressive income tax and lower VAT on "basic
necessities." In Romania, however, everything is negotiable. For
example, in a recent private meeting with business leaders, Geoana
reportedly was already backpedaling on his call to implement a
progressive income tax in the face of strong pushback from the
businessmen in attendance.

3. (SBU) Regarding energy policy, Basescu's strong expertise in the
area has left few openings for his challengers to exploit, although
Geoana has made statements about the need to focus on conservation
in an effort to draw a distinction between himself and the
incumbent. There is broad agreement on the need for supply
diversification, with at least rhetorical support for the Nabucco
pipeline common among all candidates. (Geoana, however, takes a
much more nuanced view vis-a-vis energy relations with the Russians
than does the strongly anti-Russian Basescu.) Renewable energy,
excepting a brief mention by Geoana, has received short shrift,
although its further development could bolster energy security, and
the European Union (EU) will almost certainly push for more in this
area in the next several years. In terms of carbon-free energy
production, nuclear power has broad support, with Basescu coming out
most strongly in favor of this option.

4. (SBU) Romania's economic Achilles heel remains its
underdeveloped agricultural sector, employing nearly 30 percent of
the population (by far the highest percentage in the EU) but
accounting for only eight percent of GDP. Small plots of land and
the failure to adopt modern agricultural techniques have meant huge
weather-dependent swings in production every year. The large rural
population has made reaching this constituency a priority for all of
the presidential candidates. Antonescu believes that support for
entrepreneurship and efforts to improve access to commercial credit
would help this sector to grow. Basescu, perhaps recognizing that
GDP is being held back in part by underemployed laborers in the
rural sector, would like to find ways to reduce the agricultural
workforce and move excess labor to other sectors, although he offers
few specifics. Geoana, on the other hand, has vowed to train a
cadre of farmers in new technologies, while offering the proven
vote-getter of "living credits" (subsidies) to make rural life more
attractive to young farmers.

5. (SBU) Underinvestment in infrastructure is another commonly
recognized barrier to Romania's further growth. While EU funds
could help, none of the parties has proven capable while in
government of fully tapping this potential resource. Of the funds
available to Romania since 2005, only 2.11 percent had been
disbursed as of September 1, 2009, with a miniscule 0.09 percent
going to transportation projects. Both Basescu and Geoana
acknowledge the pressing need for infrastructure improvements, yet
offer few solutions (aside from promising better use of EU funds)
for financing them. Geoana has suggested a better coordinating body
for accessing EU funds, while the current PDL government has tried a
similar tactic to improve Romania's poor absorption rate, with only

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modest results. Antonescu's platform largely skirts the
infrastructure investment issue, preferring to focus on lower taxes
instead. Basescu holds out hope for improvements in navigation on
the Danube River, while Geoana promises investments in roads, rails,
airports, and waterways.

6. (SBU) Healthcare in Romania suffers from the double drains of
insufficient resources and widespread corruption and the candidates
are all eager to be seen as doing something about it. Basescu
sponsored a blue-ribbon commission to systematically evaluate the
system, although few of the recommendations from the 2008 report
have yet been implemented. He also broadly supports increased
decentralization of Romania's vertically integrated and
state-controlled health system. Antonescu, looking for the rural
vote, says that access should be expanded in rural areas, but offers
few concrete plans. Geoana would look to the government to diminish
health disparities in disadvantaged populations, curb pharmaceutical
prices, increase medical salaries, and modernize facilities.
However, with Romania currently devoting less than four percent of
GDP to healthcare, compared to an average of eight percent in the
rest of the EU, real improvements will require a major infusion of
resources in addition to administrative reforms.

7. (SBU) The recent decision by the IMF, European Commission, and
World Bank to postpone their review of Romanian compliance until a
new government is in place has lobbed a live grenade into the midst
of the campaign. With the next funding tranches from these
institutions now delayed, all of the main candidates are engaged in
vigorous finger-pointing in an effort to deflect blame. Both
Basescu and Geoana acknowledge the importance of meeting the IMF's
criteria, and the PSD has supported efforts in Parliament to allow
the lame-duck PDL Government to submit a budget. However, with the
Parliament scheduled to take two weeks of unpaid leave as a "budget
saving" measure starting next week, nothing is likely to happen
until after the election. While the PNL has traditionally been the
most hostile to deals with the IMF, Antonescu has promised his
party's support for the prior actions needed to keep the program on
track. Whoever is elected president will be under pressure to name
a prime minister and work to pass a 2010 budget quickly so as not to
prolong delays in disbursements under Romania's IMF-led loan
agreement.

8. (SBU) Comment: While the voters' deep economic concerns are
inescapable in this campaign, the fact remains that the President
has very little direct ability to improve the economy. This is
little consolation for the incumbent Basescu, who is hurt by
association with the unimpressive record of Emil Boc's PDL-led
government. The true test will be whether whoever is elected
actually nominates a prime minister with a credible economic plan
and a pragmatic approach to following the IMF program and bringing
Romania out of the current recession. Just like one year ago, when
the parties were showering goodies on everyone during the
parliamentary election campaign even as the economy went over a
cliff, an air of unreality pervades this campaign as well. All the
candidates are promising new spending as a panacea for Romania's
multiple ills, while ignoring the stark reality that this money is
not to be had. In order to stay within IMF deficit targets, Romania
will have to cut government spending by at least three percent of
GDP -- or more than eight billion dollars -- in 2010. That will
still leave a deficit of nearly six percent of GDP needing to be
financed, and growth-smothering tax increases may have to accompany
painful spending cuts. Not surprisingly, none of the candidates is
saying much about that. End Comment.

GITENSTEIN

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