Lithuania opposition talks on government after austerity backlash election

VILNIUS Mon Oct 29, 2012 3:47am EDT

Lithuania's Prime Minister Andrius Kubilius stands in his office in Vilnius October 1, 2012. REUTERS/Ints Kalnins

Lithuania's Prime Minister Andrius Kubilius stands in his office in Vilnius October 1, 2012.

Credit: Reuters/Ints Kalnins

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VILNIUS (Reuters) - Lithuanian opposition parties that won Sunday's election in a backlash against years of spending cuts and austerity held talks early on Monday on a new government that could determine the country's path to the euro zone.

In a warning to other governments in the midst of budget cuts, the Social Democratic Party, the Labour Party and the party of an impeached former president said they had displaced Prime Minister Andrius Kubilius in an election on Sunday.

Kubilius won praise abroad for slashing the budget deficit after a deep crisis four years ago, but was less liked at home as wages slid and unemployment rose.

"People have sent the main message that they would like change in the economy and in the social sector, they want the new government to create new jobs and increase wages," said Social Democratic Party leader Algirdas Butkevicius, the candidate for prime minister for the three parties.

The parties have said they would aim to increase the minimum wage, make the tax system fairer and boost investment.

But economists have warned the new government will have little room to loosen austerity as the country needs to borrow from debt markets. The country needs to raise 7.6 billion litas ($2.85 billion) in 2013, about 6.5 percent of projected output.

Early Monday, Butkevicius said the three parties had secured a majority in the 141-seat parliament and that he would talk with the president, who has the formal role of nominating the prime minister, during the day.

Kubilius's Homeland Union was the second biggest party in parliament, but had little chance of a coalition deal.

CRISIS

With a 13 percent jobless rate, the Baltic nation is one of the European Union's poorest countries and the population has fallen below 3 million for the first time since the Soviet Union's collapse in 1991 as thousands leave to find work.

The government's failure at the ballot box comes despite warm words abroad for a more resolute economic course than those taken by Greece and other euro zone states struggling with debt.

The International Monetary Fund praised the government's "determined policy implementation" in June.

After a collapse in economic output of 15 percent in 2009, the second-biggest decline in the European Union after northern neighbor Latvia, gross domestic product rose 6 percent last year and is expected to increase by about 3 percent this year.

The budget deficit fell to 5.5 percent of GDP in 2011 from 9.4 percent in 2009. The Kubilius government has drafted a 2013 budget with a 2.5 percent fiscal gap.

In a sign of possible coalition tension ahead, Labour's leader, Russian-born businessman Victor Uspaskich, has said he may push for a budget deficit above the EU limit of 3 percent of output.[ID:nL5E8LE6ZU] Butkevicius has said he would be fiscally responsible and could seek euro entry in 2015. [ID:nL6E8L2DQJ]

Lithuania has sought closer ties with the European Union since becoming independent from the Soviet Union in 1991.

Uspaskich says the country should not rush to adopt the euro while the currency is in crisis and public support is low. The Labour leader is on trial for tax evasion by his party between 2004 and 2006, a charge he denies.

The two election rounds gave the Social Democrats 38 seats, the Labour Party 29 and the party of former president Rolandas Paksas 11, for a total for the planned coalition of 78 in the 141-seat parliament. A first round was held two weeks ago.

Lithuania's politicians were aware pressure from the markets would not allow them to be too generous, said Lars Christensen, chief emerging markets analyst at Danish bank Danske Bank.

"I'm quite happy that this election, no matter the outcome, will not lead to crazy economic policies," Christensen said.

Lithuania takes the EU's rotating presidency in the second half of 2013 and must repay a 1 billion euro bond in March.

"They have their hands tied at the moment," DNB economist Rokas Bancevicius said.

(Reporting by Patrick Lannin; Editing by Stacey Joyce)

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