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,

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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