By Luiza Ilie
BUCHAREST (Reuters) - The fate of Romania's president hangs in the balance as the Constitutional Court considers whether his rivals who run the government can change the rules of a referendum which will decide whether he will be impeached.
The ruling Social Liberal Union (USL) of Prime Minister Victor Ponta suspended President Traian Basescu on Friday saying he had overstepped his powers, a move the court confirmed on Monday was in line with the constitution.
The Constitutional Court will consider on Tuesday a law changing rules for a referendum to impeach the president, a plebiscite scheduled to take place on July 29.
The government wants to change how many votes are needed to impeach Basescu, from a majority of the whole electorate to a majority of those who actually vote - which could determine the result.
The dispute between Ponta's leftist alliance and his right-wing rival Basescu has raised international concerns about respect for the law and the constitution in the European Union's second-poorest country, which has slipped back into recession.
"It was determined that the procedure for suspending Mr Traian Basescu from the function as President of Romania was respected," the Constitutional Court said in a statement.
The political chaos has raised doubts over Romania's International Monetary Fund (IMF) aid deal and with government effectively paralyzed by the dispute, the leu currency has plunged - falling a further 0.7 percent on Monday, again close to an all-time low - and borrowing costs risen.
The government had a long list of reasons for suspending Basescu, including what it said was his attempt to pressure judges and breach the constitution.
Basescu said the charges against him were political and an attempt by Ponta to take control of the judiciary. Romania's president is in charge of the country's foreign policy and nominates the prime minister.
He was able to influence the previous government's austerity policies because of his close links to the centre-right Democrat-Liberal Party (PDL), which led that government.
"The process to remove President Basescu is unacceptable," German government spokesman Steffen Seibert told a news conference. "We expect the Romanian government to restore confidence in the country and in its constitutional process."
Ponta's USL backtracked on a plan to replace Constitutional Court judges after international criticism, but is now issuing emergency decrees that take immediate effect before the court can rule on them.
Analysts say the referendum rule change - passed just weeks before the impeachment vote - may be rejected. But in a further complication, Ponta's government has also passed an emergency decree backing its referendum rule law.
So even if the court rejects the law change, it may not be able to overturn the decree - certain to add to international accusations the government is dispensing with the judiciary.
The Council of Europe has already asked constitutional experts to examine the suspension of the president after Germany and the United States criticized the action, saying it threatened the rule of law.
Romania's politics - unstable at the best of times - have been in chaos for months and Ponta is the third prime minister this year, after protests against austerity and corruption toppled his predecessors.
"The Romanian parliament's vote to impeach the President leaves the country clouded by uncertainty and casts doubts on the future of the country's IMF/EU program," said Capital Economics analyst William Jackson.
"This is likely to keep the leu and bond yields under pressure - in the short-term at least."
Impeaching Basescu would mean Romania would have to elect a new president in the autumn as well as holding a parliamentary election, which will stall policies and raise expenditure as it tries to keep the 5 billion euro ($6.15 billion) IMF-led aid deal on track.
The USL is favorite to win the parliamentary election, though there have been no opinion polls in the past month.
The government denies it is endangering the rule of law and says it is sticking to the deal with the IMF, which wants Bucharest to overhaul energy prices and the outdated health system and to sell inefficient state assets.
(Additional reporting by Radu Marinas and Sam Cage in Bucharest and Gareth Jones in Berlin)