Election will not threaten Lithuania's austerity plans: PM

VILNIUS Mon Sep 17, 2012 3:59pm EDT

Lithuania's Prime Minister Andrius Kubilius arrives for a meeting with his Japanese counterpart Yoshiko Noda at the latter's official residence in Tokyo February 20, 2012. REUTERS/Yuriko Nakao

Lithuania's Prime Minister Andrius Kubilius arrives for a meeting with his Japanese counterpart Yoshiko Noda at the latter's official residence in Tokyo February 20, 2012.

Credit: Reuters/Yuriko Nakao

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VILNIUS (Reuters) - Lithuania's austerity policies, touted as an example for Europe of how economic shocks can revive growth, will stay put whatever the outcome of an election between a centre-right government and centre-left opposition, the prime minister said on Monday.

Lithuania holds a parliamentary election in October. It is the biggest electoral test for Prime Minister Andrius Kubilius since he introduced one of Europe's harshest austerity programs, leading to a collapse in GDP of about 15 percent in 2009.

The Baltic state has since recovered to be one of Europe's fastest growing economies, expanding about 6 percent last year while remaining pegged to the euro.

It is heralded as an example of what countries such as Greece could achieve with "internal devaluation" - cutting wages and increasing productivity rather than allowing currencies to fall.

While Kubilius is unpopular in polls, in part due to what is perceived as voter fatigue with spending cuts and tax increases, the prime minister dismissed fears an opposition win would lead to more populism.

"Consensus is still here," Kubilius told Reuters. "I see the statements of different political parties, very strong statements, on the basic fiscal discipline as a prerequisite of future activities."

After a path of tax increases and spending cuts to keep the budget deficit in check, Kubilius's government lags all three main opposition parties in opinion polls.

"Of course we see some kind of mismatch of what some parties are declaring about their proposals," Kubilius said. "But I think that usually reality after elections brings very quick understanding that there is no way for some kind of rather populist ideas to be implemented."

THE BALTIC CRASH

After financial liberalization in the 1990s, the Baltics, including Latvia and Estonia, all notched up big deficits, financed by easy credit from Nordic banks. When that credit dried up and exports collapsed, the economies fell off a cliff, tax revenues shrank and unemployment surged.

Kubilius said there was voter pressure to ease austerity, which has sparked demands for relief from high fuel prices and unemployment - as well as worries from investors about a populist backlash.

"For people, it's not very easy to accustom to quite such a prolonged period of time when the government is not able to come out and to say - OK guys, here is the money and we can spend."

Underpinning Lithuania's fiscal policies are its ambitions to join the euro.

To adopt the euro, Lithuania has to meet the Maastricht criteria on government debt, deficits, long-term interest rates, inflation and currency stability via a peg against the euro. Kubilius said 2014 was a realistic date for joining.

The state budget is on track to reach its deficit goal of 3 percent GDP this year, as fixed under the rules to join the euro zone. But the biggest problem has been to keep inflation in check, given Lithuania's dependence on outside factors like food and energy prices.

"I'm absolutely confident that next year we shall be really very strongly below Maastricht criteria," the prime minister said. "Then ... we shall have more precise possibilities to say clearly how we are moving with the strategy on joining the euro."

But he warned public confidence in the euro was thin.

"We would expect that the euro zone as a club will come back in better shape ... We see of course that public opinion is not very positive at the moment despite the fact that we are pegged to the euro."

(Editing by Janet Lawrence)

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