Centre-left government pursues fiscal expansion amid difficult cohabitation, public opposition
The new centre-left government in Romania has had turbulent first months in office as its attempt to curtail the country’s widely praised fight against corruption triggered the largest public protests in decades. As the protests have started to subside, we take a broader look at where we believe Romania is heading under the centre-left government, and explore how two alternative scenarios would impact this baseline assessment.
Most likely scenario
Our most likely scenario sees the coalition between the Social Democratic Party (PSD) and the Alliance for Liberals and Democrats (ALDE) consolidate its power. The government moves to repeal several reforms to improve the business environment and reduce corruption initiated by its predecessor and policy-making becomes less transparent. The government’s persistent efforts to curb the fight against corruption worsen its relations with President Klaus Iohannis and trigger regular public protests, but this does not threaten the coalition’s stable majority in parliament. The coalition pursues an expansionary policy agenda designed to favour its core supporters, low-income and rural groups, which increases fiscal uncertainty. However, the country remains firmly within the EU and transatlantic political and military sphere, and the security environment remains benign.
Both our credible alternative and outlier scenarios see the governing parties launch an impeachment process against Iohannis, triggered by growing pressure from political allies to fulfil pledges to curtail anti-corruption efforts. To make way for this agenda, the coalition moves to suspend Iohannis, prompting a referendum on his impeachment.
Credible alternative scenario
Our credible alternative scenario foresees that the referendum is framed as a choice between the political establishment and reformist forces, which mobilises voters and ensures that the referendum comes out in Iohannis’ favour. The government is weakened by internal power struggles and eventually collapses, forcing early elections. The prolonged period of political instability shifts focus away from normal policy processes, which causes delays and increases uncertainty for investors.
Outlier scenario
Our outlier scenario sees Iohannis’ popularity decline rapidly as a result of sustained political and media campaigns to discredit him, and he is voted out of office and replaced by a candidate close to the governing parties. Without independent checks on its powers, the government moves to swiftly increase its control over the judiciary, public administration and key institutions. The influence of vested interests in both politics and business increases, fuelling growing corruption risks for foreign investors. Economic prospects weaken and propel many young people to leave the country, while worsened relations with the EU lead to growing eurosceptic sentiments.