May 4, 2012 / 10:05 AM / 7 years ago

Analysis: Central Europe walks austerity tightrope

BUCHAREST (Reuters) - When Romania’s government cut salaries by a quarter in 1931, it collapsed and the country ran through 22 different cabinets in a decade and slid into dictatorship and war.

Eight decades later, another government introduced a similar austerity measure under an International Monetary Fund-led bailout. It fell and parliament threw out its successor after just two months.

Voters in eastern Europe can tolerate a lot after the hardships of communism. But those politicians who pushed austerity to keep markets at bay are now feeling their wrath.

“Some of these governments are in a permanent state of crisis where the prime ministers are spending more time holding the governments together than actually running the state,” said Otilia Simkova, an analyst at political research group Eurasia.

The pattern of political instability is repeated, to varying degrees, across the former communist countries of the European Union’s eastern wing. Although most do not use the euro, the debt crisis in their biggest trading and banking partner has rippled a long way.

It is raising serious questions over how these countries, still trailing far behind most of the western EU, can keep their budgets in reasonable shape and fend off market attacks while simultaneously trying to promote economic growth.

Some people are starting to question whether joining the EU - a symbolic break with the past of dictatorship which seemingly promised a future of rapidly growing prosperity - was worth it.

Few believe joining the bloc was a mistake, but given Romania’s per capita wealth has flat lined at less than half of the bloc’s average - and despite Brussels funds to help it catch up - it is clear the expected benefits have yet to materialize.

“The fact that the government cut salaries is madness,” pensioner Constantin Badea said outside government headquarters in Bucharest, a chaotic city scarred by the projects of communist dictator Nicolae Ceausescu, where some areas still have no running water or electricity and unpaved roads.

“Small and poor countries like ours do not have the same benefits from European Union membership as bigger and more developed fellow members,” the 75-year-old said. “There are people here who live on a monthly wage of only 150-200 euros.”

GOVERNMENTS ON EDGE

Protests against austerity and corruption erupted across Romania in January, toppling the centre-right government that cut public salaries by a quarter and raised sales tax. Many private sector workers endured even bigger salary cuts.

The fate of governments in the EU’s second-poorest member, where the average monthly wage is 350 euros ($460), is a warning to other backers of austerity.

The centre-right Czech cabinet won a parliamentary vote of confidence last month, gaining a new lease of life after the break-up of a junior ruling party brought the austerity-driven administration to the brink of collapse. It would almost certainly lose an early election.

The government’s preference for hiking indirect taxes has particularly hit those on lower incomes, including pensioners. Unions that last month staged the biggest demonstration since the 1989 end of communism are planning more.

“I haven’t had my pay raised for several years, while all the stuff is getting more expensive. I understand we are having a crisis but things are getting difficult,” said Jindrich Svejnoha, a 49-year-old carpenter from Pribram, south of Prague.

“I don’t care if it is Petr or Pavel (in power), but they should do something about the economy and corruption.”

Further north on the shores of the Baltic, Latvia - intent on joining the euro zone despite the continuing crisis but which has the EU’s highest poverty rate - has had three governments in three years and Lithuanian voters look set to turn out their cabinet in an autumn election.

The government of Slovenia, a former Yugoslav republic and euro zone member, was ousted by parliament amid internal coalition squabbles and an inability to implement reforms that would help the ailing economy.

Slovakia, another euro zone member, lost a government in a row over the currency bloc’s bailout fund. Even Poland, the only EU country to avoid recession in the last four years, aims to gradually raise the retirement age and cut some pensions.

ANGER AND FRUSTRATION

Visiting Romania in April, EU Council President Herman Van Rompuy said while Romanians had accepted austerity with resilience, there was also “anger and frustration.”

Former Prime Minister Emil Boc and his Democrat-Liberal Party (PDL) saved Romania from a far worse market mauling. Austerity, and keeping the IMF bailout going, kept interest rates on its debt at acceptable levels and pulled the leu currency away from a record low.

But it also extended recession and now political instability has sent the leu tumbling again, which is particularly painful for some two-thirds of borrowers who took out loans in euros. Many question what benefit belt-tightening has brought.

The IMF says Romania now has some room to ease austerity, balancing cost-cutting with giving the economy space to grow, but this does little to mollify those who have felt the pinch.

“I wasn’t paid well in the years of growth, so in the years of recession I wasn’t going to be paid better,” said Daniel Toma, who left the financial industry and is trying to start his own online business platform, but faces higher prices and a 30 percent rise in mortgage payments because of the weak currency.

“The worst thing with EU entry was they opened the way to speculators and all those bubbles were created,” the 29-year-old said over iced coffee at a cafe.

Victor Ponta of the leftist Social Liberal Union (USL) has taken on the task of governing for seven months until an election. It remains to be seen what impact that has on popularity ratings of more than 50 percent, given he has committed to keeping the IMF deal.

There is still only small support for extremists, despite continuing issues with integration of the minority Roma. But the populist Dan Diaconescu, a media mogul who wants deep tax cuts and higher wages and pensions, has backing of up to 18 percent in opinion polls and could yet be king maker after the election.

“The PDL is likely to be punished in November but I think voters do not have much faith in the USL, which is why Dan Diaconescu’s party is attracting support,” said Dennis Deletant, a Romania expert at University College London’s School of Slavonic and East European Studies.

WORSE THAN 1930s

Romania’s southern neighbor Bulgaria holds the uncoveted title of the EU’s poorest country. But its centre-right Prime Minister Boiko Borisov has found a way to preserve his popularity - do nothing to alienate voters.

Austerity, including wage and pension freezes, has been relatively mild as Bulgaria kept strict control over its budget even before the financial crisis struck to maintain the peg of its lev currency to the euro.

The result is that while many Bulgarians are unhappy with Borisov’s record and the economy is still struggling, it is lower-scale discontent that has yet to seriously damage his ratings with an election due next year.

“To a certain extent, I am pleased with the Bulgarian government’s measures. But my wages have stayed the same for about three or four years now,” soldier Georgi Stefanov said in the spring sunshine outside Sofia’s national theatre.

Borisov, a former bodyguard who cultivates his macho image, may soon be a rare thing in the EU’s emerging east - a prime minister who enforced austerity and lived to tell the tale.

The extent of the convulsions wracking this half of the continent was underscored by Vasile Ilies, a retired teacher who remembered Romania’s troubled 1930s when he spoke to local news site Citynews shortly before he died last month, aged 100.

“Everything is about politics now in Romania and this has created useless state jobs and posts benefiting from huge salaries,” Ilies said. “Today’s crisis is worse than the one in the 30s.”

Additional reporting by Jan Lopatka in Prague, Andreea Birsan in Bucharest and Antoaneta Roussinova in Sofia; editing by Janet McBride

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