KNEE JERK REACTIONS EXACERBATING LATVIA'S PROBLEMS

C O N F I D E N T I A L SECTION 01 OF 02 RIGA 000033

SIPDIS
NOFORN

E.O. 12958: DECL: 01/15/2019
TAGS: PGOV ECON SOCI LG
SUBJECT: KNEE JERK REACTIONS EXACERBATING LATVIA'S PROBLEMS

REF: A) 08 RIGA 726 B) 08 RIGA 803 C) 08 RIGA 815 D)
RIGA 17 E) RIGA 29

Classified By: Ambassador Charles W. Larson, Jr. Reason: 1.4 (d)


1. (C/NF) Summary: The failure of the Latvian government to
engage the people in the realities of the economic situation
and to explain what will be needed to move the country
forward has sent trust in government to historic lows. This
tension boiled over into violence following an
anti-government rally on January 13, something unheard of in
Latvia. Political discourse in Latvia has been reduced to a
series of knee jerk reactions characterized by a flurry of
finger pointing and denunciations. President Zatlers entered
the fray by announcing that he will propose a dissolution of
parliament if legislators do not pass certain legislation by
March 31. Zatlers' populist proposals could actually make
the situation worse. Additionally, the government's calm
face on implementation of the austerity measures covers up a
haphazard process in which government agencies are operating
on weekly budget allotments, unable to do any kind of
planning. If Latvia continues to suffer knee jerk political
and economic solutions to its growing problems, the situation
could get much worse. There are no simple solutions and,
unfortunately, it may take going to the brink of total
collapse to bring some sense to the process. The problem
with going to the brink is that it does not take much to go
over. End summary.


2. (C/NF) The first few weeks of 2009 in Latvia have been
full of bad news resulting from the implementation of the
fiscal austerity package adopted at the end of 2008 (ref b).
Latvians are paying more with increased VAT, while also
seeing the value of their homes drop, and learning of cuts in
social services. Government employees are beginning to learn
of the cuts in pay or losses of jobs that are coming (ref c)
while private sector employees are bracing for similar pain
and layoffs. Latvia's leaders have not attempted to engage
the public meaningfully and explain what is happening and
what is to come. The President and Prime Minister have
spoken on television but neither has gone out to meet with
people, hear their concerns, and attempt to explain the way
forward. PM Godmanis made an analogy to how penguins huddle
together for warmth as a way to appeal for national unity but
his remarks instead became a symbol of the government being
out of touch.


3. (C/NF) Other government actions have exacerbated the
problem. The Finance Minister gave an interview to Bloomberg
TV in which he demonstrated a lack of knowledge of finance
and limited English skills. The interview became a running
joke as well as spurred genuine concern that he was not up to
negotiating with the IMF and other donors. Then came
evidence that politicians were continuing in their usual
ways, notably the December 30 "hidden" signing of a $12
million contract for construction of a new concert hall long
associated with the People's Party and the news that the son
of Transport Minister's Slesers' chauffer had been given a
high level job within the ministry at eight times the average
monthly salary. Recent polls show less than ten percent of
people have confidence in Saeima and only a few more trust
the government.


4. (C/NF) It was inevitable that people would turn their
economic frustration to political protest. On January 13,
roughly 10,000 people gathered in the center of Riga's old
city to protest. But the event brought together over 30
groups with disparate goals. While the main organizers, the
party Society for Different Politics (SCP),wanted a
dismissal of Saeima, others only wanted changes in
government. Those who came frustrated by economic decline
and political stagnation left with no clear idea of what
should happen next. Unfortunately, some of them turned to
violence, something unheard of in Latvian politics (ref e).
The next day, most people seemed to blame the government and
its lack of response to the people's concerns for the
violence.


5. (C/NF) President Zatlers joined the fray on January 14 by
announcing three tasks for parliament and three tasks for
government. He said that if Saeima did not complete its
tasks - amending the constitution to allow the public to
initiate a dismissal of Saeima, reforming the electoral law,
and creating an oversight board for the international
financial assistance - by March 31, he would initiate a
dissolution of parliament. The three tasks for government -
develop a clear plan for government restructuring in 2-3
weeks, bring new faces into government, perhaps with an
expanded government of national unity, and choose a new head
for the anti-corruption agency - do not come with a timeline
as the president has no authority to dismiss the government.
Many average Latvians applauded the President's strong

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stance, although most said he should not wait until March,
but dismiss the Saeima immediately. Editorial opinion has
been more nuanced, with the leading Latvian language paper
saying he seems to be rewarding violence and cautioning that
the all or nothing approach could lead to nothing. The
leading Russian daily lamented that Zatlers "only came to the
stage once the others had left it."


6. (C/NF) The President's proposals are problematic and
appear to us to be an immediate reaction to the events of the
13th rather than a considered plan. The constitutional
amendments are complicated and have real consequences for the
balance of power in Latvia (ref a). Public debate on the
issue has largely been superficial and no one has really
tried to explain the consequences. His proposed electoral
reforms would actually strengthen the role of the parties,
which in our view is the wrong direction to go. The public
wants more accountability from Saeima. A much better reform
would be to introduce single member districts for at least
half the seats in parliament. These are fundamental issues
about how Latvians want to govern themselves and they need
more debate than either the President's rushed schedule or
the silence that the coalition has imposed to date provides.
Similarly, his demand for a wider coalition is unlikely to
satisfy a public that wants change, not more of the same,
just with some "new faces." Most importantly, the President
does not appear to have spoken directly to any of the parties
in the 24 hours since making his announcement. In a
parliamentary system, that is not a tactic for ensuring
legislative success.


7. (C/NF) Many Latvians believe that dissolving the Saeima is
the solution to their problems. The President seems inclined
to agree. However, the constitutional and practical aspects
of the process mean that a dissolution shortly after March 31
would not yield a new parliament until September and a new
government could take longer to form. The resulting period
of political uncertainty throughout this process would also
have consequences for the confidence of financial markets in
Latvia, which is already low. Meanwhile, Latvia has a number
of politically difficult commitments to meet under its
agreement with the IMF, most notably comprehensive reform of
the education and health care system. The current government
was already going to delay these until after June
parliamentary elections (ref d) and no one would take these
on in the run-up to national elections.


8. (C/NF) To make matters more challenging, the same kinds of
knee jerk reactions we see in politics are happening in the
economic field. Since passing the fiscal austerity package
in December, the government has mandated a number of across
the board cuts for ministries and government services and
ordered that 10% of the budget be held in reserve. So far,
however, no political guidance on spending priorities has
been provided and many ministries are forced to work week to
week, with no ability to plan more than a few days ahead.
People do not know if they will have a job in a few days and
ministries have taken to issuing public warnings of their
situations - the border guard says it will lack fuel for its
vehicles after July and the passport agency says it will be
unable to issue travel documents after September. We also
understand that agencies can successfully appeal to the PM
for additional resources or release of their reserve, but
this is being done with no coordination or strategic plan
about how to use the budget or what the state's overall
priorities should be. We hope that establishment of a
fulltime IMF presence here will help bring some discipline
and oversight to the process, but that will take time.


9. (C/NF) Probably the best solution for Latvia in the coming
months would be some sort of government of national unity,
headed by a non-political Prime Minister and staffed largely
by technocratic ministers. This would allow the swiftest
implementation of the needed economic reforms and have all
parties share equally in the pain, while avoiding the cost
and distraction of a national political campaign. But this
is highly unlikely to occur. The politicians, even some in
opposition, will not willingly surrender their authority for
such a plan and, of course, many personal financial interests
will be threatened. Finding people willing to serve will be
tough. The public will not find their pain lessened and will
continue to agitate for relief. It is likely that the
country will have to go to the brink of collapse - more
rallies with violence, an inability to defend the currency,
failure to meet the terms of the IMF agreement - before there
could be agreement on such a move. The problem with going to
the brink, though, is that once you get to the edge, it
becomes very easy to go over.
LARSON