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Analysis: Latvia shows austerity not always electoral poison
October 4, 2010 / 2:15 PM / 7 years ago

Analysis: Latvia shows austerity not always electoral poison

LONDON (Reuters) - Latvia’s election last weekend showed voters can forgive -- perhaps even reward -- the toughest austerity measures if they are seen as necessary and voters do not blame those in power for the economic crisis.

Prime Minister Valdis Dombrovskis and his coalition partners -- formerly a minority government that pushed through Europe’s toughest spending cuts -- won a majority.

That pleased investors, who had worried a more inconclusive result might stymie reforms and endanger an International Monetary Fund/European Union bailout.

“On the face of it, it is remarkable that the coalition has received such strong backing given the austerity that has being inflicted,” said Neil Shearing, senior emerging markets economist at Capital Economics.

Even compared to other troubled economies such as Ireland and Greece, Latvia’s cuts have been brutal.

Public sector workers saw their pay reduced by up to 50 percent, output shrank 18 percent in 2009 and unemployment soared to record levels.

There is more pain to come as the government aims to reduce its budget deficit from a targeted 8.5 percent of GDP in 2010 to 6 percent in 2011 and three percent in 2012.

But there are some signs it has worked. Meager growth looks to be returning, ratings agency Fitch has upgraded its credit rating outlook and Latvia avoided a devaluation that would have made it impossible for many to pay foreign currency debts.

“FRESH FACE” FACTOR

But analysts caution against reading too much into the result, citing factors from its tough history -- seen making Latvians more resilient -- to local electoral issues.

The principal party arguing against austerity, Harmony, struggled to broaden its electoral base beyond ethnic Russians.

Crucially, Dombrovski -- who only became prime minister in March 2009 after riots linked to the crisis forced out the previous government -- was still seen as a “fresh face” and not to blame for the initial crisis.

“The positive performance of Dombrovski and the Union Coalition was due to the unique conditions of the Latvian political system and because... (they were) a new political force on the scene during the economic downturn,” said independent political analyst Agnia Baranauskaite.

In contrast, she predicted elections in neighboring Estonia and Lithuania in 2011 and 2012 would likely punish incumbent parties that implemented austerity measures unless their economies improved considerably.

Local polls in Hungary delivered a landslide victory for a government that has bucked Europe’s orthodoxy austerity, suggesting there might be mileage in that strategy too for less financially troubled countries that can get away with it.

The “fresh face” factor has implications for western Europe. The current governments in Greece and Britain, for example, took power in the last year and so, like Dombrovski, argue they are largely blameless for budget holes and ballooning deficits.

Greece has seen riots against the cuts but its Socialist government has remained ahead of its conservative rivals in opinion polls.

British Chancellor of the Exchequer George Osborne’s personal poll ratings have risen as he announced widespread cuts -- although whether they will remain high as details emerge with an October spending review is another question.

Whether those governments survive elections likely in 4-5 years time will depend on whether their austerity actions are seen as having worked -- or whether they are seen as having gone too far and ushered in new crises of their own.

Longer serving governments face a more uphill struggle.

In power since 1997, Ireland’s Fianna Fail at times saw a modest poll gain as it pushed through deficit reduction -- at least until the latest round of the banking crisis -- but is still seen being swept from office almost whatever it does, blamed for much of the “Celtic Tiger” boom and subsequent bust.

FIGHTING AUSTERITY CONSENSUS?

Spain’s government -- in power since 2004 -- has walked a more uneven path on cuts, sometimes pulling back, but has vowed to stick to an overall austerity programme. But it is continuing to lose ground to the opposition Popular party and would lose elections if held now [ID:nLDE69203V].

Hungarian voters also turned this year on the government they blamed for the financial crisis, ousting the Socialists and ushering in conservative Fidesz. But Fidesz has refused to slash spending to the degree demanded by the IMF and some investors.

Prime Minister Viktor Orban has said the government will let the existing IMF/EU deal run out in October and will not go for a new agreement, saying Hungary is strong enough to finance itself from the markets.

So far, markets have proved more forgiving than many predicted -- partly because Hungary is less financially troubled than Latvia and others and partly in the belief that the government’s line was a pre-election political gambit.

They will be watching a draft budget to be submitted by October 15 closely.

“Politically it is good that there is a strong government but if they continue to be vocal about not needing IMF/EC support they will need to show more market friendly policies and austerity measures,” said Esther Law, emerging market strategist at Societe Generale.

Additional reporting by Sujuta Rao 'b

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