Global Economics

Glimmers of Hope in Latvia


The economic numbers still look grim. But the political situation in the battered Baltic nation has stabilized, offering prospects of improvement on the horizon

Latvians seem to have a thing for doctors and scientists. Three of the most important people in the country—the president, the speaker of Parliament, and the mayor of Riga—are physicians, and on 12 March one prime minister with a degree in solid-state physics was replaced by another with exactly the same education.

Outwardly, the similarities end there. While the former prime minister, Ivars Godmanis, is not only one of the most experienced politicians in Latvia, but also one with a mass of idiosyncrasies that have become the stuff of political legend, his successor, Valdis Dombrovskis, is only 37 years old and exudes a bland, laconic calm that is the polar opposite of Godmanis' moiling floods of words, explosive interjections, and grimaces worthy of a silent movie hero. However, their education has left its mark. Each man is very comfortable with numbers, and Dombrovskis' ability to get a grip on the frightening figures in the country's budget will determine whether he can lift Latvia's sagging economic fortunes. He is exchanging the relatively quiet and unquestionably materially comfortable life of a member of the European Parliament for what may be the most challenging job in the European Union—saving Latvia from what he himself has called "bankruptcy."

The outlook is grim. In December Latvia negotiated a 7.5 billion euro bailout with the International Monetary Fund and the European Commission that was based on a projected 5 percent decline in the country's gross domestic product. After only two months that projection was revised downward to a truly horrific 12 percent drop in output. The IMF program already included a round of painful cuts in wages and public expenditures to keep the budget deficit within 5 percent of GDP, but the new economic forecasts mean that even more cuts will have to be made, and these will not be easy. Already the teachers' union is planning to demonstrate in early April against planned salary cuts, the organization representing Latvia's local governments is gearing up for protests, and the medical professions, which are also well-organized, will certainly want to have their say.

As a result, Dombrovskis is already talking about going back to the IMF to renegotiate the agreement and get the international donors' permission to raise the allowable budget deficit to 7 percent of GDP. On 20 March, in an interview with Reuters on the sidelines of a meeting of EU government leaders, he also said that Latvia may have to ask the EU for an additional billion euros to cover the increased need for financing.

However, the odds are not very good that either the IMF or the EU will be willing or able to increase Latvia's aid package. It is true that the IMF will be getting more funds from the EU, and the bloc is also doubling the size of its fund to help new member states in Central and Eastern Europe that have been hard-hit by the global financial crisis. But this has been done in the expectation that more dominoes will soon fall. Romania has already started negotiations on an aid package with the IMF and the EU, and rumors swirl about which countries will be next. International organizations simply may not have enough money to go around, and Latvia has already received an unusually generous package for a country its size. So Latvia may simply have to grit its teeth and make the cuts necessary to get the deficit under 5 percent.

FAINT GLIMMERS

With all the gloom over the budget, it can be easy to overlook some of the small positive signs that have emerged since President Valdis Zatlers nominated Dombrovskis at the end of February. For one thing, the new government promises a degree of political stability after the increasingly dysfunctional last months of the Godmanis cabinet. Dombrovskis represents Jaunais Laiks (New Era), a party that has been out of government since the spring of 2006 but that has mostly managed to maintain its image as the party of clean government. This could help raise the low level of public trust in government. The fact that two of the parties from the previous coalition were willing to support Dombrovskis indicates how desperate the economic situation has made them, but standing on the edge of a precipice seems to have concentrated their minds. They are even starting to vote for laws that will undermine the power of patronage and business interests in the Latvian political system.

On the same day that the Dombrovskis government was confirmed, lawmakers voted overwhelmingly in favor not only of the elimination of oversight councils in state enterprises, which had turned into sinecures for party hacks, but also for changes in the law on criminal procedure that will make it easier to prosecute people for criminal conspiracy, giving the prosecutor general a powerful weapon in the fight against political corruption. The new government also has a number of new faces such as the ministers of the interior and economy; they have already made a good impression. All of these changes mean that the threat of early elections has receded, removing another destabilizing factor on the Latvian political scene.

The challenges facing the new government in the coming months are huge. No one can tell if Dombrovskis and his cabinet will be up to meeting them. Nevertheless, for the first time in a long time there is a feeling in Latvia that at least on the political level things are moving in the right direction.

Provided by Transitions Online—Intelligent Eastern Europe

Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus