Latvia: Government collapses

Riga — Latvia’s center-right coalition government collapsed Friday, a victim of the country’s growing economic and political turmoil and the second European government, after Iceland, to disintegrate because of the international financial crisis.

The government in Riga, faced with forecasts of a severe drop in the economy this year, was the first in Eastern Europe to succumb to turmoil caused by the crisis. Its collapse rounded out a week that saw worries about feeble investment, banks and output in Central and Eastern Europe coursing through international markets.

Latvia has had a history of revolving-door politics and complex coalitions since pulling free of the Soviet Union in 1991. Prime Minister Ivars Godmanis, who presented his resignation to President Valdis Zatlers on Friday, had been in power only since December 2007. But the precipitous plunge of Latvia’s economy, which helped provoke the worst riot since 1991 last month, played a major part in the government’s downfall.

Godmanis said he would continue to govern until a new coalition was formed.

“I am ready to continue working, but I think that responsibility for the consequences created by this government’s resignation must be taken by those parties that overturned the government,” Godmanis said, according to news reports. Two of his coalition partners, the People’s Party and the Greens and Farmers’ Union, had demanded his ouster, he added.

His departure comes at a critical juncture for Latvia, a former Soviet state with 2.2 million people. After entering the European Union in 2004, Latvia and its two neighbors, Estonia and Lithuania, posted Europe’s highest growth figures, earning the moniker the “Baltic Tigers.” Now Latvia shows the Continent’s biggest losses.

Gross domestic product shrank by 10.5 percent last month at an annual rate, compared with levels a year earlier. By the end of 2009, Latvia’s economy is projected to shrink by an overwhelming 12 percent, Finance Ministry officials say. Other analysts believe that even these figures may be optimistic.

“I wouldn’t be surprised if it’s 15 percent,” Peteris Strautins, chief economist for Swedbank in Riga, said last week.

The crisis led the government last fall to secure an aid package worth €7.5 billion from the European Union, the International Monetary Fund and other sources. It came with strict conditions, and now the government is cutting spending wherever it can. Hospitals and schools throughout the country are under threat of closure, as local administrations find their budgets reduced by as much as 40 percent. Government salaries have been cut by 25 percent.

Meanwhile, the country’s export-driven economy, which burned red-hot when easy credit flooded the world banking system, has now ground to a halt. Unemployment has rocketed in Latvia, while those who have managed to hold on to their jobs are receiving significantly less pay. The construction, real estate and farming, as well as other sectors, are teetering.

Public discontent, unsurprisingly, is rising, while trust in the government has plummeted along with the economic figures. After about 10,000 people gathered for a peaceful demonstration in January, violence broke out. Scores of protesters battled police officers and ransacked stores, while 40 people were injured – the country’s worst rioting since the Soviet Union’s breakup.

In February, farmers, who say they have seen both foreign and domestic markets dry up, blockaded the capital in tractors and forced the resignation of the agriculture minister, Martins Roze.

Latvia became one of a growing list of countries to turn to international financial institutions. Now, amid the political meltdown, the IMF will visit next week to assess its program.

The government’s resignation led some observers to believe that Latvia may see early elections this year – and with it the risk of a more populist, less financially stringent administration.

Others, however, believe that the country is simply going through a necessary period of pain that is better to experience early and so as to enter a recovery as soon as possible. Anders Aslund, senior fellow at the Peterson Institute for International Economics and an expert on the region, said Godmanis’s resignation was simply “democracy in action.”

“It is better to take the [economic] blow immediately, than to have a long steady slide,” Aslund said in a telephone interview.

Latvia has been among the countries hardest hit in Eastern Europe, but it is by no means the only one. Ukraine, suffering from an even worse political deadlock, saw industrial output shrink by one third last month – the worst drop in over a decade – because of a slump in steel production, the country’s economic mainstay. Moody’s Investors Service warned this week that some of Europe’s biggest banks might face a downgrade because of overexposure in the East.

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By David L. Stern

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