ESTONIA'S RULING COALITION STRONG, BUT CHALLENGES

C O N F I D E N T I A L SECTION 01 OF 03 TALLINN 000291 SIPDIS E.O. 12958: DECL: 08/12/2018 TAGS: PGOV PREL EN SUBJECT: ESTONIA'S RULING COALITION STRONG, BUT CHALLENGES AHEAD CLASSIFIED BY DCM Karen Decker for reasons 1.4 (b) & (d). REF A: TALLINN 200 REF B: TALLINN 102 ¶1. (C) SUMMARY: Formed in April 2007, Estonia's current center-right governing coalition, comprised of Reform, Pro Patria-Res Public Union (IRL) and Social Democrat (SDE) parties, has maintained stable relationships, and benefits in large part, from years of strong economic growth. However, an economic downturn and several contentious issues on the horizon (including Iraq),will test the true strength of the coalition in the coming months. After many years of surplus, the GOE will have to make significant cuts across the board in 2009. Coalition partners may push to re-open agreement on the GOE's income tax strategy ' a key issue for Prime Minister Ansip and the Reform party. Former Prime Minister and current IRL MP Mart Laar is reportedly interested in Estonia's European Commissioner position, a quest that would pit him against Estonian Prime Minister Andrus Ansip's party. END SUMMARY. ¶2. (U) Estonia's current governing coalition, comprised of the Reform Party (31 seats),Pro Patria-Res Publica Union (IRL) (19 seats) and the Social Democrats (SDE) (10 seats) was formed in April 2007 (Note: The Estonian Parliament consists of 101 seats. End Note). The coalition's primary objectives include a pro-active, pro-western foreign policy and liberal, pro-business economic agenda. In particular, the 2007 Coalition Agreement called for gradual cuts in personal and corporate income tax rates from 22 percent to 18 percent by 2011, an increase in the budget for education and R&D, improvements to energy security and a commitment to spend two percent of GDP on defense by 2010. (Note: In 2007, Estonia spent 1.84 percent of GDP on defense. End Note.) The agreement also affirmed the coalition's support for Estonia's contributions to international operations in Iraq and Afghanistan. Budget and Tax Policy ¶3. (U) The current coalition assumed power when Estonian economic growth was peaking. Real GDP growth was 11.4 percent in 2006, capping a six-year trend in which the Estonian economy experienced an average real GDP growth rate of 8 percent. However, starting in late 2007, growth began slowing significantly; early estimations for 2008 predicted annual economic growth could be as low as two percent this year. As a direct result of slowing growth, GOE tax receipts have fallen markedly. During the upcoming budget negotiations, which will reach parliament this October, the GOE will have to cut approximately 10 billion eek (USD 1 billion) from the 2009 budget to avoid running a deficit (Ref A). Local media outlets have focused significant attention this summer on squabbles between Reform, SDE and IRL over the budget. These reports criticize the parties for being more interested in blaming each other for the current situation than identifying necessary cuts. ¶4. (SBU) Despite optimistic estimates from Reform (officials predict growth of no less than 6 percent),IRL and SDE officials have publicly expressed concern that if the economy slows down faster than expected, the government will not be able to afford the necessary infrastructure or social and educational investment the country needs. In particular, IRL is concerned it will be forced to abandon promised tax cuts and programs providing favorable bank loans to families with children. SDE is concerned about protecting promised salary increases for civil service employees like rescue worker, firemen and police officers. ¶5. (U) Prime Minister Andres Ansip and his Reform Party have considerable clout in the coalition, the parliament, and with the public. A June 2008 poll conducted by TNS Emor, Estonian's largest marketing research firm, showed that the Estonian Reform Party remains the most popular party in Estonia with 33 percent of respondents stating that they would vote for Reform in the next parliamentary election. (Note: The opposition Center Party was second with 26 percent. Coalition partners IRL and SDE followed with 18 and 11 percent respectively. End Note). Reform has demonstrated in the past that it is willing to leverage this support when pushing its own priorities within the coalition. ¶6. (C) MPs from all three coalition partners told us that upcoming budget negotiations have the potential to seriously strain intra-coalition relations, but noted they did not see the issue bringing down the coalition. Reform's commitment to continuing annual income tax reductions is particularly contentious. Kristen Michal, TALLINN 00000291 002 OF 003 the Secretary General of the Reform Party, emphasized to us that Reform does not view raising taxes as a viable mechanism for dealing with budget issues. Rather, the GOE needs to focus on decreasing budget expenditures, something Reform has accused IRL of being unwilling to do. On the other hand, both IRL and SDE have criticized Reform's inflexibility on tax policy. Margus Tsahkna, an MP from IRL, highlighted Reform's key platform promise of lowering taxes and its commitment to increase defense spending as contentious issues. Randal Lants, Secretary General of SDE, characterized Reform's immovability on tax policy as 'unfortunate.' Vello Pettai, a professor of Comparative Politics at Estonia's renowned Tartu University, told us he believes Reform has painted itself into a corner. The Party's tax cuts are very popular with its supporters, leaving Reform little room for maneuver on the budget. Next Commissioner? -------------- ¶7. (C) One issue which has emerged as a source of friction among the coalition partners is the appointment of the next European Commissioner (currently held by Reform Party grandfather Siim Kallas, another former PM). Contacts across the political spectrum confirmed that IRL Chairman (and former PM) Mart Laar may want the position. Kyllike Siliste-Elling, Foreign Policy advisor to the Prime Minister called keeping the Commissioner position for Reform a 'red line issue,' particularly if Kallas wants to serve another term. Feelings are equally intransigent within IRL. Our contacts confirmed that if Laar wants to be Commissioner and Reform does not agree, it will cause a serious rift in the coalition. (Note: As noted above, Reform will not hesitate to put the party above the coalition: during coalition negotiations in March 2007, IRL pushed hard for Laar to be Foreign Minister. When Reform refused, IRL almost walked away from joining the coalition. End Note.) Iraq -------------- ¶8. (C) Estonia's mandate to participate in Operation Iraqi Freedom, currently predicated on UNSCR 1151, will expire at the end of 2008. Absent a new UNSCR, the GOE will have to create a new political and legal basis for its participation in international operations in Iraq (Ref B). Both Reform and IRL have strongly supported the Iraq mission in the past. The Social Democrats are more of a question mark. Randal Lants, Secretary General of SDE, speculated that debate within his party will play out much the same as it did in 2007, with the Party unable to reach an internal consensus and allowing MPs to vote their conscience. However, Lants did state that absent some sort of international agreement, such as a new UNSCR or accommodation within a U.S.-Iraq SOFA, it is possible Social Democrats will decide this year to oppose extension of the mandate. Andreas Kaju, a political advisor to the Minister of Defense, estimated there is a 95 percent chance of renewal. According to Kaju, the only way the coalition will disagree on Iraq is if it is falling apart on other issues (e.g. the budget and tax policy). LOOKING AHEAD -------------- ¶10. (C) The dark horse in coalition relations is the opposition Center Party. The Center Party, a centrist, social liberal party, advocates a strong middle class and small enterprise. Center has also supported several initiatives favorable to ethnic Russians residing in Estonia, such as automatic citizenship for all children born in Estonia, that have made them the most popular Estonian party among ethnic Russian voters. There are persistent credible rumors that Center Party Chairman Edgar Savisaar is jockeying to get back into national politics (he is currently mayor of Tallinn) and is willing to promise just about anything to do so - including offering IRL both the Prime Minister and the EU Commissioner position if IRL will go into coalition with Center. Some rumors even suggest that Savisaar is already recruiting staff for his next government. Several IRL officials confirmed Center's efforts to us, but noted that an IRL- Center coalition would be a difficult partnership to broker. It is widely known that relations between IRL's Laar and Savisaar are contentious. (Note: Laar was once photographed taking target practice with a picture of Savisaar. End Note.) IRL MP Tsahkna also asserted that his party would not want to form a coalition with Center because of its connections to Russia. (Note: In 2004, Center Party leaders entered into a 'contract of cooperation' agreement with former Russian President TALLINN 00000291 003 OF 003 Putin's United Russia Party. End Note.) ¶11. (C) Reform has demonstrated in the past that it is willing to go into coalition with almost anyone in order to stay in government. Most recently, Reform and Center were in coalition from 2005-2007. Silver Meikar, a Reform MP, commented that while PM Ansip would prefer to keep this center-right coalition until the next parliamentary elections in 2011, it would not be 'unthinkable' for a different Reform-led coalition to emerge before then. (Note: Since re-independence in 1991, no Estonian coalition has lasted a full 4-year parliamentary term.) At the same time, many of our contacts were adamant that given the current popularity of Reform and the steady support of IRL and SDE, there are no viable alternatives to the current coalition arrangement. Tartu University's Pettai also suggested that it may not be in Center's interest to go back into government right now as Savisaar does not want to be in government during times that call for difficult decisions. ¶12. (C) COMMENT: Although the coalition faces a number of challenges in the months ahead, it appears well-placed to weather the storm. It remains to be seen, however, if it has the stamina to become the first Estonian government to last a full 4-year term. END COMMENT. Phillips