Romania's centrist coalition government has backed itself into a corner by agreeing to raise the wages of Bucharest subway workers, encouraging other unions to demand more and likely slowing much-needed reforms.

The European Union's second poorest country, which had to go to the International Monetary Fund last year to shore up its public finances, has pledged fiscal tightening and is trying to crawl out of a recession with painful budget spending cuts.

Romania must reform its vast and highly unionised public sector, which accounts for a third of all jobs. The state payroll swallows 9 percent of gross domestic product, a figure experts say is twice as high as it should be.

Hundreds of thousands of other public workers, like teachers and civil servants, plan a series of strikes and analysts warn Wednesday's decision to cave in to the subway workers' demands makes further concessions likely.

"It sets a precedent and it shows that those who can blackmail the government ... will do so," said Mircea Marian, political commentator at daily Evenimentul Zilei.

"What will likely happen is that the government could cover the costs by taking money slated for investment."

Some 5,000 subway workers in Bucharest had planned to stop work, demanding a 20 percent pay rise in the first major union action this year, which could have caused traffic gridlock in the capital city of some 2.2 million people. [ID:nLDE62G261]

Keen to avoid a further loss of public and parliamentary support, already battered by the crisis, the government averted the strike by agreeing to increase wages by up to 10 percent.

Analysts say that decision alone will not harm public finances but it may unleash more concessions and hence hurt negotiations with the IMF, which revived Romania's 20 billion euro aid deal last month on the government's pledge to downsize the public sector and enforce far-reaching reforms.

"It will become an issue if this is not a one-off event," said Raffaella Tenconi, chief economist at Wood & Co in Prague.

"If the government consistently at the next strikes starts granting generous adjustments then in that case, yes it will become a problem," Tenconi said, forecasting more serious consequences for the lei currency.

PROTESTS

Uncertainty over economic growth this year adds to worries that budget plans may be unrealistic. The government plans to cut the deficit to 5.9 percent of GDP from 7.3 percent in 2009.

But it failed to collect as much revenue as targeted in January due to recession and tax evasion, and Finance Minister Sebastian Vladescu sees revenue only recovering from March.

Romania has so far largely avoided the mass protests that have rattled governments in other east European states such as Bulgaria, Latvia and Lithuania, but now faces a wave of action.

Teachers in poorer eastern regions have started boycotting classes at about 160 schools, protesting against a decision to stretch overdue wage payments over three years. The move has angered powerful education unions, who said on Thursday they will stage a national strike from April 22.

Prime Minister Emil Boc has a fragile parliamentary majority and depends for support on a group of independent lawmakers who could be swayed under pressure from the street.

If the government does concede and spend more on workers' salaries, it could face trouble with the IMF and European Union, which is contributing to the aid package, said Unicredit economist Gyula Toth.

"The government in Romania, the coalition, is in a relatively stable position, mostly because the IMF is there," Toth said.

"The IMF is monitoring the situation pretty strongly. I believe they will not tolerate any major increase in spending."

Reuters; Balkans.com