Romania's top court rejected parts of an austerity package related to pension cuts today in a ruling that could endanger an IMF-led bailout package for the second-poorest European Union state.
Disbursement of about €2 billion in aid from the International Monetary Fund and the European Union depended on the court's approval of a government move to cut state wages by a quarter and reduce pensions by 15 per cent.
The full austerity measures - including the wage cuts, which the court did not object to - will now be sent back to parliament, which must bring them in line with the constitution, a process which could take months.
There were five challenges brought to the bills, of which two were accepted by the court.
In a statement, the court said it concluded that two items in the austerity plan violated the constitution: the overall 15 per cent cut in pensions and the recalculation of magistrates' pensions. The statement did not elaborate, but the court is to release the full reasoning for its ruling by Monday evening.
The €20 billion, IMF-led aid package is vital for the recession-afflicted economy, and the Constitutional Court ruling hit currency and stocks in the large Balkan country, which along with neighbour Bulgaria joined the EU in 2007.
It also raises serious questions over the fragile centrist coalition government of prime minister Emil Boc, which only narrowly survived a no-confidence vote earlier this month called over the austerity measures.
Thousands of Romanians protested against the cuts in Bucharest today, saying they will pare already low salaries and pensions and leave them struggling to make ends meet and support elderly relatives. Some public sector workers have gone on strike.
Mr Boc said the government planned to continue with wage cuts and cutting pensions, except for those of magistrates, which the court ruled were unconstitutional.
The government has an alternative savings package ready which it can negotiate with the IMF, Mr Boc told reporters. He declined to give further details.
The government will now probably raise VAT to offset the delays in spending cuts.
Romania's leu currency fell after the decision and was down 1 per cent on the day.
The main stocks index also tumbled 5.1 per cent and Romanian sovereign Eurobonds dropped sharply.
Investors are nervous about the debt and deficit position of emerging European economies like Romania, after Hungarian assets slumped in early June on comments from officials that it might suffer a crisis similar to Greece's.
Romania urgently needs to reform its vast public sector, which employs a third of total employees and costs the state about twice as much as it should, according to economists.
The Social Democrat opposition had challenged the austerity measures after failing to topple the government a no-confidence vote last week, saying they would have an unfair impact on the poorer members of society.
The Constitutional Court has a history of overturning reform bills, complicating government efforts to rein in spending. But analysts had expected new appointees backed by the government to tip the scales in favour of the austerity measures.
Reuters