For those of you who have children, the following scenario could be familiar to you: your child (or a friend) makes a fool who deserves a punishment, but also generates an uncomfortable situation for the parent. But he decides to forgive him this time, with the promise that “if you ever do, I will punish you and the punishment will be twice as harsh,” writes in an opinion published on the blog Horia Braun-Redei, the ERSE Asset Management.
And because many children are in the category of those who test the limits, the probability of the recidivism is a high one, so that the parent is found after some time in the same situation, in which the problem is to fulfill their promise.
Only, and this time, the punishment generates great disadvantages for the parent too: imagine, for example, that they should punish their offspring during the leave, which would sacrifice from the precious time to relax with the family and would break the whole “vibe” of the holiday. That word, like a calculated “offender”, the child knows when to plan his boiler in such a way as to minimize the probability of applying the punishment. And, indeed, the parent gives way this time, of course with the “firm” promise that “if it happens again, I do with you.”
The problem of intertemporal inconsistency
Any parenting specialist will highlight how wrong this approach is, because it offers the wrong educational signals, which will understand that not every wrong deed generates consequences, that the parent can be fooled and that it is weak, that it is not for promises, and so on, which and the parent itself knows, made the promise/ threat.
Well, the above situation describes a problem that can also be transposed in the economic field, being known as “the problem of intertemporal inconsistency” (in English, time inconsisten problem). This was described and popularized by economists Finn Kydland and Edward Prescott, they were militating for the existence of rules that “compel” the behavior of economic policy decision-makers, forcing them to hold on to institutional promises (such as maintaining the stability of price or the budgetary balance or avoiding overload) discretionary decisions.
The latter can be optimal in the short term, but this “local” optimality (the above equivalent of a quiet vacation for everyone) is in direct contradiction with the general, long -term optimality (in the example above, to give the child a lesson to use them in life and to build a quality character).
This theory was largely based on the basis of institutional concepts such as the independence of the Central Bank, considered by economists essential for winning the struggle with inflation, but also at the basis of fiscal rules such as the limits in the Maastricht Treaty of the European Union on the maximum limit of the Budget Deficit (3%), of 3% of PIB)
Yes, exactly, there are precisely the limits that Romania partially violates (for example, at the level of the budget deficit) for years (more precisely since 2018) and for which our country is in the so-called “excessive deficit procedure”. And the reason why we are in this situation is related to the past decisions of the governors, who were probably optimal at that time, especially from perspectives other than economic ones, but who created a clearly sub -optimal situation for the country's macroeconomic stability, at least in the perspective of the financiers of his sovereign debt, whether it is the European Commission (the European Commission) part, foreign institutional investors).
As Romania depends to a significant extent on these financiers to cover its current needs, payments and pensions, but also for financing its vital infrastructure investment projects, a set of austerity measures or, more precisely, stabilizing and changing the tendency of public deficit. Moreover, the positive reaction of the prices of the Romanian assets to the adoption of the first measures of the Bolojan Government is testified for the favorable way in which the investors received these measures.
Romania risks falling into the trap of reverse intertemporal inconsistency
Obviously, the measures of the new Government, which included increasing taxes and discounts, were received much less favorably at the level of the population, unions and economic agents, not to mention the political forces in opposition, generating some discussions even within the ruling coalition.
Taking into account the current context, which is a rather high fragmentation of the government support, but also the historian of other reformist programs with the focus that Romania has adopted in the past-especially during the years 2010-2012-, I think, in case of continuing from here on the road, Romania risks reverse, in which the optimal short -term measures from an accounting point of view will affect the political sustainability of the economic balance of the country in the long term.
More on Romanian, a large program of austerity continued “to the white canvas” risks not to pass the test of time, as not many of the measures of other “reformist” governments, such as the Boc 2 or Cioloș Government, have passed.
In order to give a concrete example, the law of fiscal responsibility, adopted in 2010, which established the budget balance landmarks and which should have ensured the identification of financing sources for any increase of the government expenses and the prior impact analysis for any fiscal-budgetary measure, has been transformed throughout the year, has been transformed throughout the year, Strict mechanisms of correction of the deficit of the deficit from the target in the medium term or for the application of the letter and, in particular, of the spirit of the law.
The economy of Romania is in a quasi-stagnation phase and with a complicated external context
But perhaps the examples in our brief post-December history, few enough to be statistically relevant, do not represent a sufficient landmark, and the argument can be brought that in the meantime the Romanian society has matured, and maybe, in most of it, some true structural reforms (I confess that I also register here)
Even in this case, however, I would argue that the stage implementation of the reforms, at a rate that will ensure their social acceptability and, above all, the possibility of adapting the society, it seems to me a strategy with higher success. I know, the time is short and the postponements of the past frustrating, but let's recognize, the current economic moment is most favorable to measures of austerity or upsetting the economic structures, as inefficient and inequitable as they are currently.
The economy of Romania is in a quasi-stagnation phase, with the engines of domestic consumption based on salary increases that are likely to be exhausted and with a complicated external context by the commercial tensions induced by Trump's rates. At the same time, the inflationary impulse given by the increase of VAT and excise duties causes that monetary relaxation measures (ie interest reduction) should most likely be postponed. In such a context, tax increases risk inducing an economic recession that will also affect the budgetary receipts, probably requiring new deficit correction measures.
Moreover, the adoption of austerity measures during a period of economic stagnation is often considered counterproductive in the specialized literature. For example, in his recent book dedicated to the subject of austerity, Italian economist Alberto Alessina (Alberto Alesina, Carlo Favero, Francesco Giavazzi-“Austerity: When It Works and When Itsn't”, Princeton University Press, 2019), along with its collaborators, concludes that the timing of an austere program is an essential factor for an essential factor for an essential factor for an essential factor for an The probability of success in reducing the deficit, the optimal adoption period being obvious in which the economy is expanding.
The same authors believe that the measures to restrict the government expenses have a more benign economic effect than the tax and tax increases, which affect the economic growth. On the other hand, measures to reduce expenses can be more socially and political.
Another reputed economist, Barry Echengren, recently stated that, throughout the history of a large number of episodes of fiscal adjustment from various countries he studied, his finding was that their success is robustly correlated with two determining factors: either they came in periods of alert economic growth, or they had a transpartious support, so that they had a change in the power adjusting objectives.
In Romania, none of these elements are met at this time and that is why I ask the question of whether the current measures and the current reformist momentum will pass the test of time.
But if these conditions are not currently met, this does not mean that they cannot be created. Thus, if after stabilized the ship, the Government will turn more towards policies to encourage economic growth, for example by reducing bureaucracy and implementing intelligent industrial policies, to capitalize on Romania's competitive strengths, as well as the financial resources made available by the European Union, the conditions of a more robust economic.
The strengthening of institutions and regaining the respect of citizens, focusing on “process”, especially on the democratic process – several well -written, concise and reasonable implementation terms and fewer emergency ordinances with immediate implementation -, the adoption of more robust rules to be implemented on the background and not just for form, which is only possible to benefit. Large democratic, but then difficult to reversing, are just a few of the elements that could cause austerity measures recently adopted to become a cost accepted by society for tangible benefits and which will therefore be less likely to some “counter-revolution”.
Returning to the example of the introduction, we are in the situation in which the parent already punished the child, trying, it is true to explain the reasons, in his opinion, well founded. But if the lack of punishment gives wrong educational signals, nor the persistence of the binomial mistake-peppery is not an optimal long-term solution, because the repetition of mistakes masks the existence of other problems that must be discovered and addressed. After all, both in the economy as in the family life, we must keep our eyes on the final goal, which can only be that the economy, as well as our dear child, grow up, mature by learning from mistakes and avoiding repeating them in the future.
