Europe News

Another country has become a headache for the EU and investors

People demonstrate against a cabinet decree passed earlier in the week decriminalising some graft offences, in Bucharest, Romania February 4, 2017.
Stoyan Nenov | Reuters

Half a million people took to the streets of Romania over the weekend against the Romanian government's plans to tinker with the constitution so it would make it easier for people to get away with corruption.

Even though the month-old government announced Sunday that it was scrapping the constitutional changes, protestors did not go home, claiming they have lost trust in the government.

Both European Union officials and investors have raised concerns over corruption and asked Romania to increase transparency.

The new center-left government wanted to implement judicial changes that would reduce prison sentences for crimes involving corruption and make it more difficult to charge public officials.

"The government in Romania now has reversed its plans but the events clearly show that the process of reducing corruption in Romania still remains far from over," Arko Sen, director at Bank of America Merrill Lynch Global Research told CNBC via email.

He added that the recent events add "to the generally negative trend in Romania's credit risk profile over recent years."

"We remain bearish on Romanian bonds," he said.

Despite the government backtrack, some analysts believe that the socialist party will make use of its parliamentary majority to ease corruption checks.

"The determination of the PSD-led government to charge ahead with the contentious criminal justice reform in disregard of widespread public discontent and political opposition sets a scene for tumultuous period ahead, highlighting a risk of further deteriorating operating environment," Andrius Tursa, advisor on central and eastern European issues at Teneo Intelligence said in a note last week.

The European Commission, the European Union's executive arm, said Monday that "the fight against corruption needs to be advanced, not undone." Top EU officials have expressed last week "great concern" regarding the developments in the eastern European country.

According to Zsolt Darvas, senior fellow at Bruegel, the stance of the Romanian government could not only impact investor trust and relations with the EU, but also to broader negative economic implications.

The Commission said in its autumn economic forecasts that Romania would grow at a slower rate this year compared to 2016. It projected a 3.9 percent gross domestic product for 2017 compared to 5.2 percent in 2016.

Poland, another eastern European country has had some tensions with the Commission after putting through constitutional changes that affected the judicial system. The Polish government is in talks with the authorities in Brussels to ensure its changes to the constitutional court would not affect democracy.

Both countries have registered strong growth figures in recent years. Nonetheless, investors told CNBC that when it came to eastern Europe, there wasn't a single regional assessment of opportunities there.

"We would not generalize from events in Romania to the region. For example in Transparency International's corruptions perceptions index Poland stood 29th while Romania is at 57th place. Investors are likely to differentiate significantly between different countries in the region. In Poland after the post-election uncertainties that began in 2015 we think the tide is turning more positive as inflation recovers and the undervalued currency remains attractive," Sen from Bank of America told CNBC.

Follow CNBC International on Twitter and Facebook.