We are not out of the crisis yet

There is a big debate nowadays about the official ending of the economic crisis in Romania on April 1, 2011. On March 31, I attended the talk show “Special Edition” as a guest, at Antena 3 TV station, where I argued that we can’t talk about officially passing the crisis. For example, I surveyed some friends of mine from the Young Entrepreneurs Association who are running various businesses and asked them whether their activity has developed during the last three months and whether their activity is more developed than this time last year. The result……no way! They diminished their activity. If somebody had a slight increase, as it is the case of a bread production business, the rate of benefit has decreased to zero, due to much bigger production costs (and he is not hiring black labor).  At the same time, producers can’t increase the price because people simply do not have enough money. The situation could however improve. We will officially get out of the crisis when demand goes up. Demand goes up if prices go down (as increasing people’s income is out of the question). Given the current situation in Romania, prices will go down if the Government is decreasing the Value Added Tax (VAT) which is at warring high levels (24%) and the gasoline excise taxes. Also, a smaller VAT of 5% is needed for basic food products, because the other EU countries are using VAT between 5 and 9 percent. So, we may end up buying bread from Bulgarian companies, which will be cheaper than the Romanian bread, leading to the bankruptcy of Romanian producers. I was gladly surprised to discover that the former Prime Minister of Romania, Mr. Calin Popescu Tariceanu, is endorsing a VAT level of 19%. At the same time, he is not a supporter of a reduced VAT for basic food products. He argues that the difference between the two VAT levels will not diminish the prices, but will increase the rate of benefit for producers. Also, many other derivatives will be produced, to benefit from smaller VAT taxes. From my point of view, it wouldn’t be a problem if producers will have a bigger rate of benefit, as they will have more resources to invest and hire more people. The problem of derivatives can be addressed with proper legislation. The conclusion is that we are still going to struggle with the crisis for at least one more year.