The recent rapid and abrupt sequence of actions taken by the Romanian Government is baffling. Not only has the Government wilfully destroyed piece by piece the letter and the spirit of democratic institutions and the rule of law it took the country decades to construct, it has also forcefully thrown Romania out onto a very rough path forward, for its economy and its people.
Such aggressive moves do not proceed without damaging consequences for investor and business trust. Without confidence that the law will be there to enforce contracts, to ensure a stable and secure environment for investments in a country, to protect property rights against abuses, businesses won’t grow, people will not thrive. The rule of law is essential for development and growth, to protect and enable innovation, creativity and productivity to flourish. In turn, all are pre-requisites for strong and sustainable competitiveness.
When political power is exercised at the expense of the rule of law, trust and confidence to create wealth through private enterprise is undermined. If rules can be changed at the whim of the powerful, what happens to investments? If the rule of law can’t be trusted and respected, potential is closed off and options are limited.
At macro-economic level, too, there are severe consequences for Romania’s currency, which has been at its worst levels in recent years - for a while it was the second worst performing currency after the Sudan pound. There are consequences for the country’s ability to borrow internationally. Immediately following the President’s impeachment, Moody’s credit rating agency decreased the outlook on Romania’s rating from stable Baa3 to negative. In concrete terms, there remain only a few steps for Romania’s debt to become ‘junk’ nobody would like to be left holding and that fact has already increased the cost of borrowing money for the country.
There couldn’t be a worse timing for this, as Romania has been borrowing more dozens of millions from the IMF just in spring 2012 and although to date it has given verbal assurances, it has been unable to prove it would have the discipline to service its debt.
Why does all this matter? Any country needs to be a performing and trustworthy actor on international markets, in order to fuel its economy, to make its own financial markets function well, to attract and retain investors and be able to participate in international trade. Romania is no different and any belief that the Romanian market could be self-sufficient is an illusion. Romania has no choice but to remain over time a trusted international trading partner or this would severely damage its present ability to grow and the outlook for the future.
These dramatic events take place at a time when Romania’s potential should be driving big steps forward. There is enormous potential in the agriculture sector. With worldwide food security concerns, Romania’s agricultural base, its abundance in natural resources and skills could see it become the bread basket of Europe and a major supplier for the world food trade. Equally, there is significant potential in the provision of energy, with the rapid rise in new and especially in clean and renewable energy technologies. The same could be said about significant potential for the tertiary sector, for innovation and R&D, especially in technical domains.
In addition, in an environment where the eurozone had been shaky since the financial crisis, Romania had built a reputation for a stable financial market, with controlled inflation and a relatively stable currency, with little structural debt. Its relatively high rates of return compared to the rest of the European Union have made it attractive to investment, domestic and international.
All that and more, Romania stands to lose. Growth depends on confidence. Confidence in a future where what is fair and just is the expected norm. The state’s institutions cannot be highjacked by the political leadership without severe economic and social consequences and the damaging of domestic and international investor and citizen trust.
Fortunately, in the business community there has been a clear and strong reaction in recent days. Previously relatively passive towards the country’s political happenings, entrepreneurs and corporations have reacted strongly to the unravelling of the rule of law. Organisations such as the Romanian Business Leaders, the American Chamber of Commerce, the Foreign Investors Council, other Romanian and foreign investors in the country are rallying their membership to make a stronger move to engage the business community in contributing to economic growth, social stability and sustainability based on values of integrity, altruism, fairness and respect for the rule of law.
To clarify, this is not about political preference. Whichever part of the political spectrum rules the country at any point in time, it should make its outmost priority respect for and protection of the rule and the spirit of the law. The outcome of the recent referendum vote was not important for what it told us about one side or the other. But it was germane in deciding whether Romanians have the right to choose a President at election time, as opposed to a coup d’état.
More than any other country in Europe’s history, Romania has experienced what it means to have no respect for human rights, citizen rights, no freedom to own and grow businesses, to innovate and thrive. After decades of wrong and two decades more of trying to rise above history, the ease with which the current Government has unravelled the law in just a matter of weeks, should be of concern to every citizen, every entrepreneur and investor, in Romania and abroad.
A version of this post was published in Romanian on Friday 27 July, in the Ziarul Financiar.