THE CHALLENGES OF GOVERNMENT FORMATION IN LATVIA

C O N F I D E N T I A L SECTION 01 OF 02 RIGA 000102 NOFORN SIPDIS E.O. 12958: DECL: 02/23/2029 TAGS: PGOV PINR ECON LG SUBJECT: THE CHALLENGES OF GOVERNMENT FORMATION IN LATVIA REF: A) RIGA 74 AND PREVIOUS B) RIGA 75 Classified By: A/DCM Tamir G. Waser. Reason: 1.4 (D) ¶1. (C/NF) Summary: The resignation of the Godmanis government leaves Latvia without a leadership team as the country faces a number of difficult decisions related to its economic situation, although it had already been doing only the minimum to get by. If a government is formed quickly, it would likely mean deferring decision on additional budget cuts for a few weeks, when they will not be any easier. If those issues are tackled upfront, it will complicate the process of forming a new government. Some in the current opposition are suggesting that if they get in to a new government, they would be willing to forgo new parliamentary elections, but the public is likely to have a strongly negative reaction if that were to occur. The key player in coming weeks is President Zatlers, both in whom he chooses to form government and what he decides to do with his March 31 deadline for action on certain issues. End summary. ¶2. (C/NF) PM Godmanis' February 20 resignation creates a vacuum at the top at a time when the country needs to be working on implementation of fiscal austerity and economic assistance measures. At the same time, the smoldering political crisis of the past few weeks meant that tough decisions were being avoided and cuts were being made without any real analysis of the best way to implement the necessary reforms. But until a new government is confirmed, the caretaker administration cannot take any new, substantive decisions and lacks the ability to ensure legislative approval of any controversial measures already in progress. ¶3. (C/NF) This problem is most acute in the area of the budget, where Latvia has a March 31 deadline for adopting budget cuts to meet updated economic forecasts. Last week, the government revised its predictions of economic contraction for the year from 5 percent to 12 percent. That requires an additional cut of 10 to 14 percent in the budget, beyond the painful cuts already made. Those new cuts will likely hit social programs hard, further fueling public anger. For example, PM Godmanis had already been predicting a cut in unemployment benefits given the reduced funds and continued growth in unemployment. ¶4. (C/NF) Various politicians have boldly predicted that a new government can be formed within a week. We are skeptical. If the new coalition attempts to form a government without addressing first how it plans to manage these upcoming budget cuts, it will be an unstable government from the start. If parties try to come to agreement on these issues prior to taking office, coalition formation will take more time. ¶5. (C/NF) There are also questions about the size of the new cabinet since the Godmanis government fell ostensibly over an inability to agree on how to reduce the number of ministries. Legally, the new government must consist of the same number of ministries as the old one, unless parliament first changes the law on the cabinet. If there is an attempt to do this, it will further complicate coalition talks. ¶6. (C/NF) Hanging over all of this is the possibility of early elections, spurred on by the President's January 14 ultimatum that certain things be done by March 31 or he will initiate a dissolution of Saeima. It is nearly impossible to see those tasks being completed on time, but if everyone knows that elections are coming soon, it will be hard to form a stable and effective government. Sources tell us that politicians in the current coalition as well as in the current opposition are prepared to argue that the fall of the Godmanis government changes the equation and renders the President's ultimatum moot. One opposition politician bluntly told us that his party was fine either with or without early elections, especially if his party got into the new government. The public, however, is unlikely to share that view. The fall of the Godmanis government has only increased the public's support for new elections. If they feel that politicians scheme their way out of accountability, the reaction could be quite ugly. ¶7. (C/NF) In this situation, the key player is President Zatlers. Under the constitution, he has the sole right to name a candidate for Prime Minister. He is consulting parties on February 23 and 24 to hear their views. So far, he has strongly rejected the idea of selecting a PM from outside the parties, saying that the parties need to be accountable for their past actions. And in a February 22 interview, he said that how the parties plan to address the budgetary issues, especially in social sectors, will be key in making his decision. His rather erratic decisions of the past six weeks offer little guidance as to whether he will RIGA 00000102 002 OF 002 stick to his principles in this process, or simply accept a person that the parties say can secure 51 or more votes in Saeima. He has also offered no insight about how he plans to deal with his March 31 deadline. If he backs off of it, we could face a situation in Latvia in which no institution of government has the public's trust and that would be a real disaster. ROGERS