IHS Global Insight Perspective

Significance:Yesterday (12 MAR 09), the Latvian parliament approved a new government to tackle the sharp economic downturn and large unpopularity of politicians in the country.

Implications: As with previous governments in the current tenure, the cabinet has high hopes and is determined to tackle very sensitive issues.

Outlook: Given the looming election in 2010, this cabinet should see its tenure through. Yet it will be far from a calm and orderly tenure.

Latvia has a new government. Yesterday, the Latvian parliament (Saeima) approved the list of ministers proposed by the Prime Minister-Designate Valdis Dombrovskis. The deputies backed the list by 67 votes to 21. Dombrovskis has promised a number of unpopular but necessary measures to get the economy back on track.

Breath of Fresh Air?

The government has identified a number of issues that it will promote during its tenure until 2010. At the top of the list are austerity measures, which will force governments to apply anti-cyclical policies, and thus have sufficient funds to see through economic downturns better. The cabinet aims to change the passed 2009 budget to allow for even more cuts in public expenditure. The ministers will negotiate with the IMF and the European Union (EU) for a 2% rise in the allowed budget deficit, to 7% of GDP in 2009. Dombrovskis also looks likely to cut tax rates, and introduce the euro in 2012. With regards to foreign policies, the government will push for a new partnership and co-operation agreement between neighbouring Russia and the EU; support the development of neighbouring Belarus, the Caucasian countries, Ukraine, and Moldova within the framework of the EU Partnership Programme; and support the entrance of Croatia and Turkey into the EU.

One cannot deny the similarity in events that led to the inauguration of the Dombrovskis cabinet and that of the previous prime minister Ivars Godmanis. Yet this cabinet has managed to portray a slightly fresher image than Godmanis's did, thanks to the inclusion of the opposition parties Civic Union and New Era (JL), which hold four ministries, including the Chancellery. New Era in fact replaces the party of Godmanis, Latvia's First Party/Latvia's Way; all other parties from the previous cabinet survived the government formation talks. The new five-party coalition government therefore consists of New Era, Civic Union, and the remainder of the Godmanis government—the senior People's Party (TP), the Union of Greens and Farmers (ZZS), and the nationalist party For Fatherland and Freedom/Latvian National Independence Movement (TB/LNNK).

The key posts will be held by New Era. The former prime minister and governor of the Central Bank of Latvia (1991-2001), Einars Repše, will head the Finance Ministry. His colleague Artis Kampars will run the Ministry of the Economy, the former Defence Minister Linda Murniece is the new Interior Minister, and Dombrovskis the new prime minister. Together, they will have to keep the senior TP ministers in check, who hold five ministries that combine "hard" and "soft" power; notably the Ministries of Foreign Affairs, Regional and Local Development, and Health. The ZZS will also have a considerable say in policy-making, as it holds the Ministry of Welfare, which is a crucial factor in winning back popular support.

In his interview with Business News Europe yesterday, Repše brushed aside any concerns about the capacity of the Latvian government to bounce back. In the short term, Repše plans to rebalance the public budget; in the long term, he aims for more investment in the three key areas of organic food produce, medical services, and timber products.

Outlook and Implications

This government looks very likely to survive the remainder of the current term. A general election is being held in 2010, and it looks unlikely that Dombrovskis would have the scope to call for a snap election beforehand in order to cement his position. Rather, the government will barely do more than engage in a major fire-fighting exercise, starting with the starkly weakened economy.

Given the reluctance of Latvian parliamentary parties to hold snap elections, discontented voters have a stream of reasons to attack most governments. Godmanis's cabinet was scolded for its similarity with the previous cabinet of unpopular Prime Minister Aigars Kalvitis. Dombrovskis certainly will be criticised heavily for the planned austere measures. By the looks of it, the tenure of the new government may be short and often rocky.

The Dombrovskis Cabinet

Prime Minister, Social Affairs and Families Minister: Valdis Dombrovskis (JL) *†

Agriculture Minister: Janis Duklavs (Independent; nominated by the ZZS) *†

Culture Minister: Ints Dalderis (TP) *†

Defence Minister: Imants Viesturs Liegis (Civic Union) *†

Economy Minister: Artis Kampars (JL) *†

Education and Science Minister: Tatjana Koke (ZZS)

Environment Minister: Raimonds Vejonis (ZZS)

Finance Minister: Einars Repše (JL) *†

Foreign Minister: Maris Riekstinš (TP)

Health Minister: Ivars Eglitis (TP)

Interior Minister: Linda Murniece (JL) *†

Justice Minister: Mareks Seglinš (TP)*

Regional Affairs and Local Government Minister: Edgars Zalans (TP)

Transport Minister: Kaspars Gerhards (TB/LNNK)*

Welfare Minister: Uldis Augulis (ZZS) *†

* denotes new to the post
† denotes not present in previous cabinet (2007-2009)