Romania Faces Crucial Vote

By JOE PARKINSON

BUCHAREST -- Romanian voters on Sunday will try to end a two-month political vacuum that has blocked economic changes and postponed an international aid program.

Center-right President Traian Basescu, a blunt-talking former ship captain, lost his lead in the polls this week after a spate of political gaffes and a dispute over a video. His challenger, Social Democratic Party candidate Mircea Geoana, is a former foreign minister and ambassador to Washington.

"A lot of people out there feel that Romania is lurching on the edge of a precipice," said Nigel Rendell, an economist at RBC Capital Markets. The Romanian economy could falter "if we don't get a decent election result and a government formed pretty quickly."

The vote -- which will give the new president powers to nominate a new prime minister, influence cabinet policy and potentially dissolve parliament -- will be pivotal to steering Romania's economy from its worst recession since the collapse of communism.

The new government's most pressing task will be negotiating budget conditions with the International Monetary Fund and the European Union, which together loaned Romania €20 billion ($30.2 billion) earlier this year to pre-empt a balance-of-payments crisis.

The EU in July criticized Romanian lawmakers for being too soft on graft, while the latest corruption index from think-tank Transparency International ranked Romania as the most corrupt country in the EU, followed by Bulgaria and Greece.

The IMF has postponed additional aid until after the election, when it wants the new government to produce a program of fiscal and economic changes.

Many Romanians have no real enthusiasm for either candidate. Cristian Ionescu, a 35-year-old manager for the southeast European operations at a credit insurance company, said political corruption and indecision will aggravate Romania's recession.

"The political situation in this country is uniquely bad for business, as the politicians work for themselves and against us. The future looks very uncertain," he said.

Romania has suffered more than most of its neighbors in the global economic downturn. Gross domestic product contracted 7.1% in the third quarter from the same period a year earlier, according to government data. The IMF expects this year's budget deficit to balloon to as much as 7.8% of GDP, more than twice the 3% level the EU considers healthy.

Mr. Basescu, the leader of the Democratic Liberal party, narrowly won the presidency in 2004 on a promise to speed market-oriented economic policies and bear down on corruption.

But since then, his fortunes have turned. The most damaging episode was the publication last week of a four-year-old video clip that appears to show him slapping a 10-year-old boy in the face. The president contends that it was doctored.

Mr. Geoana has denied any involvement with the video, and has taken pains to play down demands by firebrands on the left to block some IMF demands, such as big cuts in the public work force.

"We will not jeopardize the IMF loan," he said in an interview. "I am not a continuator of the Communist Party."

But Mr. Geoana also said changes would have to proceed cautiously: "The risk of social unrest is very present."

The IMF is demanding that the 2010 budget -- which can't be drafted without a functioning government -- reduce the deficit to below 6% of GDP. Central bank Governor Mugur Isarescu has already warned that tax hikes look increasingly inevitable, and finance ministry technicians have begun simulating the effects of an increase in the 19% value-added tax.

Bogdan Ionel, a 31-year-old musician, played to packed houses when Romania was still booming last year. But work dried up as businesses closed or cut budgets.

"For the last two or three months I need money so I play on the street to survive," he said. "The young people here want change but they don't like either candidate."

The latest poll by Insomar for Realitatea TV shows President Basescu trailing Mr. Geoana by eight percentage points, the largest gap yet in a campaign that only last month he was expected to win.

"It now seems clear that Geoana is going to win," said Alina Inayeh, director of Black Sea Trust, a Bucharest-based think tank. "But this isn't a positive vote -- people have had enough of Basescu and the scandals he's provoking, as well as the terrible state of the economy."

Write to Joe Parkinson at joe.parkinson@dowjones.com