Somehow, the most dramatic and violent of the anti-communist uprisings that erupted in eastern Europe in 1989 and 1990 managed to provide the smallest democratic pay-off. Many Romanians now refer to it as the “stolen revolution”.

Since then the country has been run mostly by ex-communists, though liberals and anti-communists had their chance, as well. Whatever their stripe, successive governments either resisted change or proved incompetent, allowing the 1990s to pass as a lost decade.

Under heavy pressure from the International Monetary Fund and the European Union, which Romania is keen to join, the last government finally took important steps and laid a foundation for economic growth. Yet, political leaders still avoided accountability, indulged in or excused corruption and delayed many fundamental political and economic reforms. Romania, it seemed, remained haunted by the legacy of Nicolae Ceausescu.

In December, that may have changed when Traian Basescu, a former sea captain, was elected president in a stunning victory over Adrian Nastase, the incumbent prime minister. A coalition government, led by Mr Basescu’s Alliance for Justice and Truth, took power soon after. It immediately pledged to lower taxes, fight corruption and make other key reforms.

Combined with Romania’s approaching membership in the European Union and solid prospects for economic growth, this is giving rise to hopes that, 15 years after Ceausescu’s execution, Romania may finally have reached a decisive turning point.

The government showed its seriousness by rushing to conclude a coalition agreement with two smaller parties in order to implement a radical tax package before the year’s end. This was crucial as tax code changes can be introduced in Romania only on January 1. So, hours after being sworn in on December 29, the cabinet approved the introduction of a flat 16 per cent tax on both personal income and corporate profits. The government hopes the changes will help spur investment and reduce Romania’s rampant tax fraud.

Mr Basescu’s cabinet choices sent another important signal. In addition to avoiding, for the most part, figures associated with past governments, the president awarded several top posts to relative youngsters. He appointed a 40-year-old finance minister, a 36-year-old foreign minister and a 44-year-old human rights activist as justice minister.

“We can finally speak about a transition,” says Calin Tariceanu, the prime minister. “A new political generation has come into power that has no links with the past.”

It will take more than a few young faces, however, to convince Romanians that the country has turned a crucial corner – a point Mr Basescu readily concedes. “I also have this feeling that we have made a break with the past, but a feeling is not reality,” he says. “The key will be if my administration can prove this with action, if we can make changes as fast as possible.”

Much is at stake both for Mr Basescu’s government and for the country. In April Romania is to sign a historic accession treaty with the EU. This sets the stage for full membership in 2007 if the country can stick to promised reforms. A qualified majority of EU members can, however, postpone entry by a year if the government stumbles in addressing any of nine specific problem areas. They include corruption, judicial independence, social security, border security, state aid and environmental protection.

Those same reforms will be painful, costing jobs and causing prices to rise. In addition, EU membership may initially provide a shock, especially given the comparatively low bar set by the EU for Romania’s entry.

EU decisions on enlargement have always relied on a mix of technical and political considerations. Candidates are required to meet a level of demonstrated readiness that can vary depending on the political willingness among members to open the club’s doors. In Romania’s case, some commentators say the EU diluted the formula in favour of political considerations more drastically than ever before, meaning Romania will be the least prepared country to join the union.

In his recently published book Theft of a Nation, Romania since Communism, British academic Tom Gallagher argues that the EU may regret lowering its standards in order to rush Romania’s accession. But, he adds, Romanian companies may suffer the most for their lack of readiness for full exposure to the common market.

All the more reason, then, that the government should proceed quickly with reforms that reduce the state’s distortion of the economy through bureaucratic interference, state aid and corruption.

A more level playing field now would give healthy companies more time to prepare for EU membership.

Fortunately for Mr Basescu, many companies are already thriving despite those distortions. The economy is expected to grow 5.5 per cent this year, following on last year’s 8 per cent expansion. A bumper harvest, remittances from Romanians working abroad and a credit boom all explain part of that burst but it also includes, say economists, a healthy level of sustainable growth.

Recent privatisation deals struck by the previous government should begin to benefit the economy, as should a continued expansion of credit for companies and households. A heavy preference for foreign currency loans, however, has added an uncomfortable level of risk to the banking sector.

The government is also counting on the lower corporate tax rate to attract more foreign investment, especially in export-oriented manufacturing and services.

In short, circumstances are converging in Romania to justify more optimism than at any point since the 1989 revolution.

Still, the government’s task is enormous. “The most dramatic process of modernisation Romania has ever gone through,” says Mihai-Razvan Ungureanu, the young historian turned foreign minister. And Romanians have had their hopes dashed before. As one European diplomat put it: “Yes, it could be a turning point for Romania. But they could still screw it up.”

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In a region known for its elegant and increasingly restored cities, the Romanian capital is, unfortunately, an ugly duckling among the swans. Instead of dazzling visitors with art deco or baroque, Bucharest overwhelms them with brutalist architecture. Add the dust, the traffic and the ubiquitous trash and the city once described as the Paris of the east is now sometimes referred to jeeringly as the New Delhi of the west.

Snide comments are not the only consequence. Though Bucharest is prospering, city officials worry that the capital’s rough appearance is holding back the local economy. “Bucharest has an image problem,” says Adrian Bold, the city’s chief architect. “It doesn’t help attract investors.”

It does, however, have a neglected historic quarter ripe for redevelopment. Most promising is the Lipscani district, once the grounds of a 16th century royal palace built by Vlad Tepes, the Wallachian prince who inspired the Dracula tale. The ruins of the palace remain, as well as scores of 18th and 19th century houses along narrow, cobble-stoned streets named for medieval guilds and merchant groups.

The city also has a plan, announced late last year, that aims to transform the neighbourhood over the next two years and with it, Mr Bold hopes, the image of the capital. City Hall has secured €10m from the European Bank for Reconstruction and Development to rebuild the area’s decrepit infrastructure, pedestrianise most of the streets and add small parks and fountains.

The capital hopes to spark additional private investment by selling prime real estate outside the historic quarter to developers on the condition that they also invest in the Lipscani section. The idea is modelled, says Mr Bold, on the scheme used to redevelop London’s Docklands.

Plans for the Lipscani neighbourhood will only be the start.

According to Marinela Berza, head of the city’s urban planning office, it represents a 12 hectare pilot project, with the entire plan aiming to redevelop 57 hectares in central Bucharest.

So far, property agents are intrigued but sceptical. Similar plans surfaced a decade ago, but government officials always seemed to drop or block the project. Funds mysteriously disappeared. This time, however, may be different. A series of crucial factors are lined up to support, rather than undermine the plan.

For starters, Romania is finally moving to resolve thousands of cases of restitution stemming from communist-era property seizures. Many of these cases, bogged down in the country’s corrupt courts and opposed by the previous government, had turned investment in historic properties into a hazardous business.

The government, elected in December, not only supports restitution but is also acting to clean up the courts. It also helps that Traian Basescu, the president, was previously mayor of Bucharest. Unsurprisingly, the government energetically supports the plan. The previous administration treated Bucharest as enemy territory, refusing to help finance investments or grant guarantees necessary for outside financing.

Equally important, Bucharest is booming. In addition to the explosion of retail outlets, homes and office buildings, money is also flowing into cafes, restaurants and galleries.

The nightlife has developed a distinct buzz, catering to the capital’s nouveau riche and expatriate crowd. But it still lacks a centre of gravity. That could be the Lipscani district if the city follows through.

While some have their doubts, others have already begun investing. The area’s prices have doubled in the last year to €600 to €800 per square metre, according to Adina Covaceanu, an investment sales broker for Colliers International. That is, however, slightly misleading. Buyers typically have to invest another €400 per square metre to repair 60 to 80 years of neglect.

Additionally, Bucharest’s property market is heating up so quickly that there are plenty of easier ways to make money in town, drawing funds away from the historic district.

Dragos Dragoteanu, general manager of Euroest, a property brokerage, says most investors prefer to buy empty plots and build residential or office space.

This allows larger single-project investments and avoids the hassles associated with restoring historically protected structures. “It’s a lot less complicated,” he says. Yet, there is no denying the romantic draw of Lipscani and the potential it represents for a city desperately in need of a facelift. “It has a character all its own,” says Ms Covaceanu.

“There are all sorts of gems throughout the old town just waiting to be polished off.”

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The lure of the west is still strong for Romania’s brightest young graduates in spite of the recent inflow of investments and jobs. But back in the early 1990s, when the country was a political mess and the economy in a shambles, the lure was overpowering.

Sitting in his favourite fish restaurant in Bucharest, Dan Ostahie remembers watching his sister and her husband emigrate to the US in 1992. Each had a technical degree; she now works for Oracle, he for Cirrus Logic. Mr Ostahie, a native of Piatra Neamt, a small city in north-east Romania, was convinced that he would soon follow.

Of his 44 classmates in the electronics and telecommunications department of Bucharest Polytechnic University, he estimates that at least 70 per cent went abroad.

“I also wanted to leave,” he says. “The dream was to go to the US.”

He was, however, distracted by a small business venture he had launched back in Piatra Neamt importing, repairing and selling used western televisions. Focused on the job at hand, Mr Ostahie never did leave. Just over a decade later, it is hard to see how he could have done better living the American dream.

A boyish 38, he has built his company, Altex, into the country’s largest retail chain for electronics, white goods and home appliances. He is also one of the country’s wealthiest men, with a net worth estimated at between €70m and €80m.

The story of how Mr Ostahie went from student repair boy to multi-millionaire is an impressive tale of resourcefulness, courage and good timing, with a few acts still to come.

Now that Altex is several steps ahead of the multinational retailers just now hitting the market, he may soon face a big decision as the company becomes a prime target for acquisition.

Such a future was completely unimaginable in 1991 when, through a friend of a friend, he managed to buy a truckload of clapped out televisions from Switzerland with his $2,000 life savings. He quickly made his money back but demand so outpaced his meagre supply he decided to take a loan. Sceptical of the young Mr Ostahie and with little experience in lending to small companies, the local bank demanded collateral. Much to his mother’s disapproval, Mr Ostahie’s father agreed put up the family house for $10,000. He had 30 days to repay.

“I did it because I enjoyed it,” Mr Ostahie recalls, “first for the technical repair and then I found I liked sales.” The repairs, he says, were sometimes difficult, but the sales came easily. “You could sell as many as you could import. The market was like a sponge,” he says.

He made his first deadline, to his mother’s relief, and was soon able to borrow more. Eventually, he diversified into household appliances. In 1994, he took the next logical step, opening a shop and importing new goods. He struck a deal to sell goods for Rotel, the Swiss electronics maker, whose representative acted like a business mentor to him. Gradually, the number of shops grew to 34 by the end of 2001.

Until then, Mr Ostahie’s success could be attributed to his own energy and pluck. Good timing then came into play as privatisation of the banking sector sparked an explosion in retail lending. He arranged Altex’s first consumer credit deal in 2002, and sales took off. “It was like putting up the sails with the wind blowing in the right direction,” he says.

Turnover leapt from €16m in 2001, to €35m in 2002, and to an impressive €115m in 2003. Mr Ostahie projects sales this year to hit €200m. Altex now operates 125 shops – 25 fully owned – in 70 cities and towns. The company has also opened four huge stores of 2,000 sq m to 4,000 sq m under the name Media Galaxy, with a fifth set to open this month. It plans to open shops in Serbia and Bulgaria in the next two years possibly followed by Macedonia and Bosnia-Herzegovina.

With companies such as Germany’s MediaMarkt and the UK’s Electroworld expanding in the region, it seems natural that he will field takeover offers. Mr Ostahie, who owns 100 per cent of Altex shares, seems quite open to the idea.

“Of course, there will be a chance to sell. The big question is whether I would stay with the company or go. But I can handle either decision.”

The young tycoon, who talks as eagerly about wine as his business, sounds ready to try something new but not another start-up. “I will never be able to start from scratch again. I have done that already,” he says.

He is also showing no signs of wanting to emigrate.

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Adriana Iliescu, the 67-year-old retired history professor who in January became the oldest woman known to have given birth, may seem an odd sort of an inspiration.

But her country is trying to do something rather similar. Romania wasted its post-Ceausescu youth. Privatisation was slow and erratic, corruption went unpunished and bureaucrats thrived in the tangle of regulations. Investment was flooding out, not coming in.

It is now trying to make up for lost time. A dynamic government elected in December and led by the centrist Alliance for Justice and Truth is pushing wholesale reform. It hopes to usher the country into the European Union as quickly as possible and to reshape a growing but distorted and unbalanced economy.

For all its flaws, the previous government can take credit for laying some of the foundation. The Social Democrats, under pressure from the International Monetary Fund and Brussels, cut the official budget deficit to about 1.5 per cent of gross domestic product in 2004. Inflation has dropped from 55 per cent in 1999 to under 10 per cent.

The Social Democrats also belatedly cleaned up and began selling off the banking sector. A subsequent credit boom, combined with a steady flow of remittances from Romanians working abroad, has helped the economy expand by more than 5 per cent every year since 2001.

Growth for 2004 is likely to have topped 8 per cent, mostly on strong demand, though up to 2 per cent is due to a bumper harvest that followed a drought in 2003. The government’s growth target for 2005 is 5.5 per cent.

In October the EU declared Romania a “functioning market economy”. Bond yields and lending rates have fallen markedly.

In November, Fitch Ratings gave Romania its first ever investment grade rating. Capping the positive run, the EU decided in December to open its doors to the Balkan country on January 1 2007, though entry can be delayed by a year if the government fumbles additional reforms.

Romania remains, however, an acutely poor country where the average net wage is just $180 a month and annual GDP per capita just $3,090. Registered unemployment has fallen over the last four years but so has employment.

Bucharest and several of the country’s larger cities are thriving, with construction and retail sectors experiencing an unprecedented boom. But the picture is much bleaker for rural Romania and is likely to get worse before it gets better. One-third of employment in the country and 15 per cent of GDP is tied up in the declining agricultural sector.

Moreover, though foreign investment has risen neatly to €3bn in 2004, it comes mainly on the back of one-off privatisations in the energy sector, much of which will initially cause job losses as new owners pare down bloated companies. Another significant portion of FDI has poured into contract manufacturing in textiles and shoe making, low-skill sectors that are likely to move further east before long.

“Romania is a country where foreign investment goes primarily into privatising state-owned assets and using cheap labour,” says Gabor Hunya of the Vienna Institute for International Economic Studies

With the end of large-scale privatisation nearing, Romania must attract more greenfield investments in export-oriented manufacturing and services that demand higher skills.

Otherwise, the country may face real difficulty in creating jobs and financing its current account deficit which rose to more than 8 per cent of GDP at the end of last year.

Inter-company and tax arrears, allowed to balloon by flaccid tax collection and weak bankruptcy laws, represent another dangerous distortion of the economy. By some estimates, arrears equal 40 per cent of GDP.

Not unlike Ms Iliescu, the elderly mother, the new government has launched a last-minute Stakhanovite effort, hoping to remove constraints on business, level the playing field and raise transparency.

Traian Basescu, the president, has announced a war on corruption and slashed taxes. Corporate profit taxes have fallen from 25 to 16 per cent in an attempt to spur investment. Personal income taxes have dropped to a flat 16 per cent from between 18 and 40 per cent, a move designed to lure tax cheats into the system. Tax evasion is so widespread in Romania that the real economy is estimated to be nearly twice the size of official GDP.

Plans are afoot to toughen tax collection, tip the legal advantage from debtors to creditors, beef up bankruptcy rules and make labour laws more flexible for employers.

Changes will also come for capital markets. Romania will open its capital account this year, giving foreign investors direct access to local currency deposits and the ability to buy and sell domestic debt.

The new government is also planning to breathe life into the local equities market by selling minority stakes in state-owned companies currently up for sale and others already majority privatised. Stakes in the savings bank CEC, oil company SNP Petrom and telecoms company RomTelecom could hit the exchange as early as this year.

Yet even if the tax cuts, anti-corruption fight and capital markets measures prove successful, the centrist government has a long way to go before establishing its credibility and improving the business climate.

“I do hope we will not see these tax cuts reversed a few months from now. One can never quite be certain in Romania of how things will evolve,” says Patrick Leonard, tax partner at KPMG in Bucharest.

Others point out that Romania’s smothering bu- reaucracy will take years to change.

“Investors probably have the correct impression that things here are very Byzantine,” says Matei Paun, managing partner at BAC, an investment advisory firm.

Yet the new government is saying all the right things. Ionel Popescu, the finance minister, told the FT that the state should act “more like a referee than like a player in the economy”.

President Basescu says that “the state has to privatise as much as possible. The state is a disaster when it involves itself in business”.

But for now, these are just plans and, while the government is clearly ambitious, it may also prove unstable.

The alliance’s coalition of convenience with two smaller parties holds a very thin majority in parliament, and its popularity may fade as it takes tough steps to win EU membership in 2007, such as raising energy prices.

Investors, like that dawdling Ms Iliescu, can be forgiven for taking their sweet time

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The colour was purely coincidental but it certainly did not hurt.

Shortly after the Orange Revolution toppled ex-communists in Ukraine, the Alliance for Justice and Truth, also sporting orange as its primary shade, defied nearly every prediction to turn the same trick in Romania.

Led by Traian Basescu, the surprise winner of December’s presidential election, the Alliance has since formed a coalition with two smaller parties and launched an ambitious series of reforms aimed at strengthening the economy, securing EU membership and, says Mr Basescu, “making Romania a democratic country in real terms”.

Romanians toppled the boorish dictatorship of Nicolae Ceausescu in 1989 yet managed to replace it with a swamp of corruption and client politics.

The Alliance claims it will change that, but is it for real? In a country familiar with disappointment, many are sceptical. Cynics say there are few broad policy differences between the Alliance and the Social Democrats, the party it defeated.

Many also fear the current coalition, led by a surprisingly youthful slate of ministers, will repeat the disaster of the patchwork government of 1996-2000, an administration remembered chiefly for its paralytic lack of unity and spectacular incompetence. The coalition has little room for error with a three-seat majority in the lower house of parliament.

A different platform of stated policy goals, however, is not what Romania necessarily needs. No one actually stood against fighting corruption, encouraging investment or joining the EU. What most Romanians desire is the political will needed to achieve those goals.

Mr Basescu, who served as transport minister and then mayor of Bucharest, may be the man to deliver. “He is a credible guy – more so than I would have given him credit for before the elections,” says one European diplomat.

A former oil tanker captain with a no-nonsense approach and an unpolished form of charisma, he is not afraid to give bold orders and take risks. He jumped into the presidential race only in October, after Theodor Stolojan, the Alliance’s first candidate, withdrew citing health problems.

“He took responsibility for running when no one believed in him and he won,” says Dorel Sandor, a political analyst who served as a paid adviser to Mr Basescu’s campaign. “He is a wild political animal.”

In his first two months in office, Mr Basescu has used his bully pulpit to great effect. He has championed a government anti-corruption drive and warned civil servants to follow the law and not politics. This has ruffled feathers, but it has also struck a chord with the public. The Alliance’s popularity has skyrocketed. Mr Basescu has, in turn, used this to great advantage by threatening his own coalition partners with new parliamentary elections should they think twice about supporting the Alliance’s legislative agenda.

Given the Alliance’s popularity, some believe he should call a snap election even without such pretext, but that is unlikely. In spite of the temptation to reach for an outright majority in parliament, the Alliance has pressing business. Romania must finalise its accession treaty with Brussels, due for signing in April, and continue reforms in order to keep accession, itself, on track for January 2007. A slip could cause EU members to delay Romania’s entry for a year. As for his cabinet ministers, in a country eager for a break with the past, their youth and inexperience may prove an advantage.

“What Romania needs at the moment are people who are determined to rebrand the country,” says Mihai-Razvan Ungureanu, the 36-year-old foreign minister.

In any case, not all the cabinet ministers lack grey hair. Calin Tariceanu, 53, the prime minister, has significant experience both in politics and business without being tainted by accusations of corruption. As a low-key personality, he also complements Mr Basescu, letting the more flamboyant president dominate the spotlight while he has got down to work in relative quiet.

The quiet is, however, unlikely to last. Mr Tariceanu has promised to enforce bankruptcy rules and strengthen tax collection. Under its accession treaty with the EU, Romania will also be obliged to end certain industrial subsidies and nearly double energy prices. The prime minister’s true test will come after he follows through on reforms that he admits will be “extremely painful”.

Another intriguing question is whether the Social Democrats will be ready to take advantage when the government’s popularity fades. Following its shock defeat, the party that ruled Romania for all but four of the last 15 years, is facing its first real internal crisis.

Most observers believe Ion Iliescu, the former president, who was elected to the senate, and Adrian Nastase, former prime minister and now speaker of the lower chamber, are engaged in a battle for control while other, more modernising voices are also looking for an opening. “They could end up transforming themselves or they could divide,” says Mr Sandor. “At this point it is difficult to envisage them [re-emerging] in the short term.”

Still, the Social Democrats claim 600,000 members and enjoy wide support among wealthy business figures, especially outside Bucharest. The party is almost certain to make an eventual comeback.

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It is the most often cited problem facing Romania. It infects the most mundane of public services and the largest of public contracts. In distorts the economy, twists the administration of justice and contributes significantly to poverty by sapping public and private resources. It is, of course, corruption.

In its quest to join the European Union, however, Romania has pledged to confront the problem. A government led by the centrist Alliance for Justice and Truth, appears to be taking that pledge seriously. It must, however, pass some important tests before it makes a substantial impact.

Since taking office in December Traian Basescu, the president, has repeatedly urged police, prosecutors, regulators and judges to remove politics from their work. “Institutions in Romania have a habit of looking to the ruling party [for direction]. What I say now is: ‘Look at the law and act accordingly’,” he says.

The president surprised his own party and delighted rights groups by appointing Monica Macovei as justice minister. Ms Macovei, formerly head of the Romanian Association for the Defence of Human Rights, has long called for anti-corruption measures and a more independent judiciary.

Now she will get a chance to implement “the reforms I was demanding when I was on the other side of the barricades”.

Earlier this month the government lifted the immunity from prosecution privilege that former cabinet ministers enjoyed. Concrete cases have also been launched. A former local leader for the Social Democrats, the previous ruling party, was recently detained and charged with alleged abuse of office and making false written statements.

In January police opened a more important criminal investigation against several executives at Rafo Onesti, an oil refining company. Officials say Rafo evaded €480m in taxes by selling petrol off the books to black market distributors. The company has denied the charge.

Calin Tariceanu, the prime minister, says he wants a team of investigators experienced in tackling corporate fraud, possibly from Britain, France or Germany, to help unravel the layers of offshore companies and complex accounting the company has constructed, in his view, to hide corruption.

According to Jonathan Scheele, head of the European Commission’s delegation in Bucharest, the government’s handling of Rafo will be watched closely. “This is a very important test case,” he says. “It is important for the business environment, for the new government’s ability to collect taxes and for fighting corruption.”

Dorel Sandor, a political analyst, agrees. He believes success in prosecuting Rafo and a few other high-profile cases will have enormous impact. “Basescu doesn’t have to win a fight against 200 people, just 20. After that the market for corruption will be changed,” he says.

Mr Tariceanu says his government will also review €3.6bn worth of state contracts with three large western companies. The contracts are with Germany’s EADS to build a border security system for €1bn, France’s Vinci in a €500m motorway construction project and with the US company Bechtel for a separate €2.1bn motorway project.

All three contracts were signed by the previous government, which used loopholes in the public procurement law to award the contracts without competitive tender. Mr Tariceanu has not accused any of the companies of corruption, but says the prices involved are too high. At the same time, however, diplomats are warning the new government not to turn the anti-corruption drive into a political vendetta.

Then there is the other great issue – the 1989 revolution – that any Romanian government must address if it wants to come clean with its citizens. Hundreds of millions of dollars in state funds, mostly under the control of security services, are believed to have vanished after the hasty execution of Nicolae Ceausescu.

But the mystery of the revolution is not only about money, it is also about the truth surrounding the downfall of Ceausescu and the murky and violent transition of power that followed

Most Romanians are convinced the full story has been covered up by political, military and intelligence officials with secrets to hide.

Mr Basescu says he is willing to open up classified government files and that much will be revealed in the coming months.

“For me it is very simple: Ask the state institutions to put the truth on the table,” he says. If they resist, Mr Basescu says he “will make it very difficult for them.” Asked why he can be trusted to when past presidents have failed, he says “because I was not involved. I watched the revolution on television.”

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Monica Fleseriu, Raiffeisen Bank’s branch manager in the Transylvanian city of Sibiu, hears the same story over and over from loan applicants: “Don’t worry, my real salary is much higher,” they assure her. But, says Ms Fleseriu, “I can’t give them credit because they can’t prove it.”

Across the country, she says, Romanians looking for mortgages or new cars are marching back to their employers and demanding that more of their real pay go on the books.

Romania’s growing appetite for household credit is proving a powerful ally in the government’s fight against tax evasion.

Not that Romanians are not borrowing already. Overall household lending grew by two-thirds in nominal terms in the year to November. Mortgages more than doubled. Banks partnered with white goods retailers to provide consumer loans on the spot.

This follows a long-awaited clean-up and sell-off in the banking sector in recent years that introduced a cluster of foreign banks to Romania.

In the last 18 months, they have turned aggressively to retail lending, and that push will grow stronger when the government unloads two state-owned banks in the next year.

Yet, even amid the fierce competition, banks in Romania are struggling to penetrate the market with more sophisticated and diversified services. They may also be facing a risky accumulation of foreign currency loans that could sour if the local currency reverses its recent appreciation against the euro and dollar.

For the moment, banks are still celebrating their ability to make profits from loans, and understandably. Just two years ago, investing in treasury bills was the only way to make money.

Concerned by inflation, the central bank tapped its foot on the brake in 2004, imposing stricter limits on lending. Even so, the expansion should continue. Retail lending in Romania is just €137 per capita. Non-government credit is less than 20 per cent of gross domestic product.

“They have got a lot of room to catch up,” says Tim Beck of Fitch Ratings.

No wonder, then, the approaching sale of Casa de Economii si Consemnatiuni (CEC), the state-owned savings bank with €1bn in assets, is generating intense interest. CEC’s total deposits have shrunk in recent years but it retains millions of small customers and a presence in almost every Romanian city and town. “Investors are falling over themselves to buy CEC,” says Charles Robertson, an economist at ING.

Erste Bank of Austria says it will bid for CEC, while Austria’s HVB, Raiffeisen and Rabobank, Hungary’s OTP and Italy’s Unicredito Italiano are all reportedly interested. Erste Bank says it might take two years to upgrade CEC’s network of more than 1,400 rickety branches, but is worth a shot. JPMorgan Chase is advising the government on the sale with an invitation for bids expected next month.

The privatisation of Banca Comerciala Romana (BCR) will prove trickier. With €6bn on its balance sheet – about one-third of the entire market – BCR is Romania’s largest bank by assets. But the government has twice tried to attract a strategic buyer, and each time failed to get a satisfactory bid.

In 2003 it sold a combined 25 per cent to the European Bank for Reconstruction and Development and International Finance Corp which have helped restructure the bank.

Still, BCR is saddled with low-margin activities and will need additional restructuring and significant investment. Daiwa Securities is advising on the sale, expected by the first quarter of 2006. HVB, Erste Bank, Unicredito and Germany’s Deutsche Bank are reportedly interested. If successful, the sale would add extra energy to the market.

“We expect a larger contribution to competition in the sector, including through product diversification,” says Cristian Popa, central bank deputy governor.

Observers hope diversification picks up quickly because lending is becoming riskier. Some banks have pulled together to set up two credit history bureaus, but the effort is in its infancy. Delinquency rates are low – non-performing loans amounted to 3.3 per cent of banks’ capital in October – but it remains easy to default on loans and a shock could persuade first-time borrowers that debt repayment is for chumps.

Such a shock might come if Romania’s leu, which has appreciated 10 per cent against the euro in the last three months, weakens significantly. Almost 60 per cent of domestic non-government credit is extended in foreign currency, often to companies whose revenues are purely in lei. Individuals borrow about 55 per cent in lei. The rest, warns Graeme Justice, resident representative of the International Monetary Fund, are living under an “interest rate illusion” that it is cheaper to borrow in dollars and euros. Companies and households could get clobbered if the national currency bounces off the ceiling. Thus the race for further diversification into fee-based services, but that is proving difficult. The explosion of retail borrowing in 2002 and 2003 astonished many bankers but consumers and retailers remain wary of using other bank products.

Steven van Groningen, head of Raiffeisen’s subsidiary in the country, says Romanians refuse to bank by internet, phone or post; many trudge to a branch just to get an inky olive stamp on their ATM receipts. Credit cards are all but unheard of, says Mr van Groningen, and even debit cards inspire suspicion.

“Customers just don’t like the damn things,” he says. When they receive their salary on a card account, “the first thing they do is go to the cash machine and take it all out”. People would rather pay to take cash out of ATMs than use their debit cards in the shop for free. Yet, he cannot blame them. “I tried to pay at a petrol station a couple of days ago – it took me 15 minutes.”

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Nearly nine centuries after its founding by Saxon settlers, the Transylvanian city of Sibiu, originally Hermannstadt, is back in German hands.

Under the leadership of Klaus Johannis, mayor since 2000 and a descendant of Saxon settlers, Romanian chaos and corruption have been replaced by Germanic efficiency and industriousness. That, at least, is the story told repeatedly by locals – mostly self-effacing ethnic Romanians – who clearly care little for political correctness.

In truth, Mr Johannis may be less validation of ethnic stereotypes than proof that change can happen quickly in Romania, a country dogged by poverty and corruption, if local officials are capable and committed.

In four years, the mayor, a former secondary school physics teacher, has transformed a faded backwater into a model for municipal government and a magnet for foreign investment.

“Before, people just wanted to leave,” says Viorel Andrievici, a management consultant in Sibiu. “Johannis has shown that one man can make a difference. After four years, we are proud of our city again.”

Immediately after his first election, Mr Johannis beefed up the contracts for rubbish collection and street cleaning – a practical and symbolic move that seemed to awaken the city’s sense of self-respect.

He has pared down the local bureaucracy and sold municipal land cheaply to investors promising jobs. The airport was modernised to handle international flights and tax collection was reformed. Previously well-connected businesses, including state-owned companies, suddenly found they could no longer dodge local property taxes and had to pay up with everyone else.

City revenues more than doubled in Mr Johannis’ first term allowing him to improve local services and invest in schools, which lacked proper heating when he took office. He also managed to convince the European Commission to name Sibiu, along with Luxembourg, the EU’s cultural capital in 2007.

When he ran for re-election in 2004, the mayor was rewarded with an astounding 88 per cent of the vote. Locals like to joke that Nicolae Ceausescu, the communist dictator, never won an election so decisively.

The business community seems equally pleased. “The city is really open to the needs of investors, and the mayor is truly available to them,” says Monica Fleseriu, branch manager for Raiffeisen Bank in Sibiu.

Mr Johannis’ efforts have put Sibiu on the map, especially in Germany where he has made a special effort to attract investment. His efforts are paying off just as a wave of foreign investment has hit Transylvania.

Overall foreign direct investment in Romania is up sharply but is driven largely by privatisation. Transylvania, by contrast, is attracting greenfield investment.

Along with Brasov, Timisuara and Cluj, Sibiu is benefiting from the eastward flow of capital as wages in the new EU member countries rise. Some investment is limited to low-skill industries such as textiles and shoe making but more and more demand comes from the electronics, automotive and software sectors.

In the last four years Sibiu has drawn €150m (or about €900 per capita) in foreign investment, according to city officials. The largest single investor is Continental Automotive Services, the electronic components division of Continental, the German tyre maker. It opened a manufacturing plant and engineering development centre last June that will employ 500 by the end of this year.

Many in Sibiu give most of the credit to the mayor but the region also offers a border with the EU and better infrastructure than the rest of the country. Still, locals insist that Transylvania is distinct from eastern and southern Romania for other reasons.

The ethnic German population has nearly vanished – it accounts for less than 2 per cent of Sibiu’s 170,000 inhabitants – but many say that centuries of Saxon influence, as well as 200 years of Habsburg rule, gave Transylvania a more dynamic and hard working character.

Mr Johannis at first tries to tread carefully around the subject, but eventually concedes. “It is true. The history of Transylvania is different from the rest of Romania,” he says.

“The work ethic is different. And most mayors here see themselves as public servants rather than taking care of their own interests.”

Local pride, perhaps. Andreas Brand, general manager at Temic, cites low wages, decent road connections to Hungary, daily flights to Germany and the mayor’s willingness to solve problems. But he does not discount the German connection. “I am from Nuremberg, and the city really feels familiar to me. I don’t feel like a foreigner here.”More German investments are likely to be on the way.

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After years of delay, those hoping for energy privatisation in Romania had settled into an “I’ll-believe-it-when-I-see-it” attitude. In 2004, they finally saw it.

Under heavy pressure from Brussels and the International Monetary Fund, the government launched a hefty sell-off that will continue into next year. The decision will boost the Romanian economy by delivering bloated, outdated and loss-making utilities into private hands. It will also prove painful: thousands of jobs will be lost and energy prices will rise drastically.

But in the long run, many expect the economy, and customers, to benefit from the investment into, and more rational operation of such sizeable companies.

Until now, prices have been kept artificially low. The government allowed utilities to survive by dodging taxes and other charges. “It was a vicious circle,” says Radu Creciun, an economist with ABN Amro Bank in Bucharest. “At some point they had to cut this circle and make these companies stand on their own feet.”

Beyond fixed-network services, the sale of oil and gas giant SNP Petrom, Romania’s largest company, will also have an impact by giving other competitors fairer trading conditions. RomPetrol, a smaller, private, company, is cheering the sale of Petrom as much as OMV, the Austrian company that won the bidding.

That sector will see real competition, with ramifications for the wider battle over the oil industry across central and eastern Europe.

The sell-off began last June, when Italy’s Enel agreed to pay €112m for 51 per cent in two electricity distributors. In October, Gaz de France paid €311m for 51 per cent in one of Romania’s two large gas distributors, and Germany’s Eon bought 51 per cent in the other for €304m. Deals with the Czech Republic’s CEZ and Eon for two more electricity distributors are almost complete. Four electricity distributors and three gas or coal-fired generating stations remain.

For the investors in distribution, questions remain over pricing and other regulatory decisions, although Romania must raise prices significantly by the end of 2006 as a condition for joining the European Union.

Other aspects of market liberalisation remain hazy. Competition in the oil industry, on the other hand, is all too clear. In July, OMV became a big operator when it paid €1.5bn for 51 per cent of Petrom. The company comes with 8m tonnes of capacity at two refineries and 660 petrol stations. More importantly, it produces 6m tonnes of crude oil and 4.5bn cu m of natural gas annually and holds proven crude reserves of 1bn barrels.

The acquisition leaves OMV well placed to be the strongest oil and fuels company in the Danube corridor from Bavaria to the Black Sea. In addition to its home market of Austria, it has a strong marketing presence in southern Germany, Hungary, the Czech Republic, Slovakia, Slovenia, Bulgaria and Romania.

Nonetheless, Petrom will require a substantial makeover. The rest of OMV, with 6,000 employees, reported €7.6bn in sales in 2003.

By contrast, Petrom, with 51,000 on staff, had just €2bn in revenues. In addition, Petrom’s refineries, production operations and station network are all badly outdated.

By its own account, OMV will have to invest another €300m to €400m to restructure and modernise Petrom over the next three years. In spite of that, OMV looks to turn Petrom into a serious money spinner.

Regionally, OMV’s main rival is Hungary’s Mol. Domestic competition will come mainly from RomPetrol. Ironically, OMV owns 25 per cent of RomPetrol but will soon divest because of its Petrom acquisition.

Built around a single ageing refinery, Petromidia, that the state sold in 2001 largely for its debts, RomPetrol has become Romania’s over-achiever. In 2004 it posted €1.61bn in gross revenues, up 27 per cent on 2003, and $92m in earnings before taxes and deductions, up more than three-fold. Revenues and profits should continue to rise this year because Petrom’s sale to OMV has ended the government’s interference in pricing, which suppressed the entire market.

Refining margins are also sky high. But even when conditions were more difficult, RomPetrol showed itself to be smart and innovative. It thoroughly transformed the Petromidia refinery and built Romania’s most modern retail and wholesale network.

Both OMV and RomPetrol, meanwhile, look sure to benefit from the new government’s crackdown on Romania’s rogue refinery, Rafo Onesti. Until recently, Rafo was allowed to carry huge debts to the state in unpaid taxes and unpaid invoices from other state-owned companies.

It owed Petrom $400m for crude shipments. According to investigators, it may also have supplied the black market with 2m tonnes of petrol every year. Several Rafo executives are under criminal investigation.

Another sign that Romania’s energy sector may be turning the corner.

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In a neat office surrounded by rural huts in north Bucharest, Ahmad Agill draws a diagram to demonstrate how Euro Fashion, the knitwear business he manages, will perish unless it can push its brand.

Mr Agill, a native of Iraq whose company knits pullovers and makes blouses for clients such as Lacoste, C&A and Roberto Cavalli, still has some advantages over Asia. Shorter shipping distances reduce costs and allow his clients to respond to changes in European fashion faster. But that will not be enough before long, especially now that the European Union has scrapped quotas on textile imports from World Trade Organisation countries, which include China.

“By 2007 [when Romania is expected to join the EU], salaries will be too high. Unless you are established and have capacity to invest, you will die,” says Mr Agill.

Euro Fashion is trying to promote its own brand, but this is difficult. Almost all its income comes from western clients who slap their own labels on the goods.

Now Mr Agill is finding it harder to recruit enough workers for between €200 and €250 a month, well above the Romanian average wage: “If I find another 100 people tomorrow, I will hire them.”

Mr Agill’s looming headache is Romania’s, as well. The country has benefited from the outsourcing and offshoring phenomena in recent years, but has failed, so far, to add enough value that will keep the deals flowing as wages and salaries rise. Companies such as Euro Fashion will have to be more creative and Romania, in general, will have to attract much higher-skilled jobs if it hopes to prosper in the global economy.

Calin Tariceanu, the new prime minister, agrees. “Investments in Romania are using mainly our workforce and not our intelligence,” he says.

A shift is beginning. Clothing, textiles and footwear accounted for 29 per cent of exports in 2004 but grew in total value by only 6 per cent over 2003, according to the Romanian National Institute of Statistics. Exports of machinery and electronics, meanwhile, grew by 33 per cent to account for 18 per cent of all exports.

There are also signs that Romania may grab a slice of the more recent trend among multinationals to offshore or wholly outsource back office business support services, such as call centres, accounting, transaction processing and IT services.

When consultant Schnecker van Wyk Pearson established TeleCenter.ro after deregulation of the telephone system in 2003, it hired 20 people to sell lottery tickets, insurance and mortgages to Germans. By the end of 2004 the business had mushroomed to 350 employees and the company expects to quintuple in size within 12 months, says Viorel Pascale, managing partner.

The average pay (wages and commissions) for each caller at TeleCenter is €400 per month, against €3,000 in Germany. Mr Pascale says good managers are hard to find but language skills abound. Such jobs, as well as those demanding technical skills, are better able to withstand cost pressures. Offshore software development and IT services have thrived, growing by 30 per cent to €146m in 2003, according to Pierre Audoin Consultants. One estimate suggests they have grown by as much again in 2004.

The education system’s stress on hard sciences has survived communism, and Romania has no shortage of skilled geeks. Bucharest Polytechnic University alone churned out 29,000 IT graduates last year, says Liviu Voinea of the Group of Applied Economics. Moreover, says Mr Voinea, IT is a low-investment, high-return business that allows Romanian start-ups to get a piece of the action.

Those start-ups now have to compete with foreign entrants. Aidan Joyce, an energetic native of Galway in Ireland, came to the country in 2003 and soon decided to move the entire software development part of his business to Bucharest.

His company, Infopoint Systems, designs software and portals for printing digital photography and has 1,000 terminals in supermarkets across the US. He says engineers in Romania are sharper than those in Ireland. “They are very resourceful with what they have…and they hack if they have to.”

If Romania is going to benefit fully from its educated young professionals, rather than continue to see many of them emigrate, the new government will have to work hard to help reduce the costs of doing business. Lowering the corporate tax rate from 25 per cent to 16 per cent was a good start, say companies, but much more is needed. Bribe taking, for example, has not dampened since Mr Joyce used a belt to lock himself in the sleeper compartment of his Budapest to Bucharest train because Romanian guards kept poking around for what they called supplements.

“Corruption is in every facet and form here in Romania – from establishing fixed phone lines to practically everything else,” he says.

Dealing with bureaucracy is even more expensive. With just 25 employees, Infopoint has to maintain a full-time accountant and a lawyer. “The fiscal codes and the law change every day,” says Mr Joyce. Red tape skews even well-meaning policies. The previous government exempted young IT workers from income taxes but the law was so riddled with restrictions that many companies found it hard to take advantage.

Competition is growing fiercely with more than 1,500 IT companies in the market. Mr Joyce remembers being interviewed in depth by a man purportedly from a prominent US newspaper who turned out to be a commercial spy. Wage expectations, in turn, have risen.

Infopoint has already snooped around in Chisinau, Moldova’s capital (too unstable for now, they concluded). Mr Joyce says he is learning Chinese.