On Tuesday Latvian PM convened best economists, representatives from the employers confederation as well as trade union reps. for the emergency session at the Council of Ministers. The double digit inflation (10,1%), current account deficit (27,8%), GDP growth (11.4%), zero productivity in combination with average 30% increase in annual real wages, and outpouring workforce show that Latvian economy is out of balance. Such state of business gradually reflects also in downgraded credit rating by most of the international pundits (Moodys, Bloomberg, Danske Bank, Fitch a.o.). For more information see at (http://balticeconomy.blogspot.com/2007/08/fitch-downgrades-latvia-to-bbb.html). Estonian economy is also overheated and Estonian credit ratings also were downgraded (http://www.balticbusinessnews.com/newsletter/070412_bbn_newsletter.pdf), but Estonian inflation rate is half of the Latvian one, Estonian budget runs healthy surplus (circa 1% of the annual GDP) for many years in the row while Latvia for the first time plans to have budget surplus this year (estimated to be 0,41% of the annual GDP, that is lower that 1% proposed by experts). Estonian current account was reigned in around 20% and exodus of Estonian workforce is not comparable with the Latvian one. Thus much about the comparison between two neighboring countries who re-started their sovereign lifestyle in 1991. Why are there such differences in economic performance between two countries?
Answer is hidden in the sphere of political culture. While Estonian leadership in the early 1990's mostly represented the graduates from faculty of humanities those were and still are technocrats who govern Latvia. Such difference is best reflected in the intial decisions two governments made. While Mart Laar & Co emulated best practices of Reyganomics, those were Latvian technocrats arguing about the best economic model for their small country and trying to satisfy thus many different interest groups. The mandatory tax reporting system introduced in Estonia in 1991-1992 is still something Latvia aspires to achieve in January 2008. Alas it would become possible, if one trusts words of the incumbent PM.
Latvian PM, Aigars Kalvitis announced on Tuesday evening Latvian TV First programme news, and reiterated that yesterday in an interview to the most media channels, that Latvia shall face dire economic consequences if government would not immediately cut expanding expenses of the government. Basically PM announced that wages of MP' s and all the civil servants are planned to be frozen, because "the international economy faces tectonic tremours". While having said that, PM gave a signal to doctors, teachers and other members of state sector, that they should stop expecting wage increseas that government had promised to their trade unions prior the summer. As a consequence, we should expect doctors and teachers going on strike.
Economists, liberal media and bloggers were warning about the conspicuous consumption of the state sector and recless governance style of the governing coalition already in late 2006. Now the 2007 autumn sets in, and very soon common folks shall see effects of increased rate on excise tax on electricity, gas and petrol (the EU directive governments cannot overrule). Inflation expectations override Latvian public, and without drastic measures in downsizing the size of government it is impossible to achieve normalization of the Latvian economy.
Minister of economics is crucially needed now, after Jurijs Strods (TB/LNNK) resigned due to personal reasons, but PM answered that he would think about such a need after government would agree on the budget for the 2008 fiscal year (probably till the first week of October). It has caused rumours about cracks in the governing coalition and replacement of the conservative Fatherland Union (TB/LNNK) with the leftist Reconciliation Centre party (SC). The leader of the SC, Jānis Urbanovičs denied such possiblity and in his interview to the public radio (http://www.latvijasradio.lv/), where he announced, that: " the mess in the economy should be solved by the government who created it, and thus the People' s Party (PP) must pay for their arrogant governance style". Some pundits speculate that PM is actually tired of the continuous haggling within the coalition. His happy face and physical outlook does not show signs of tiredness, although in the first half of the year he was constantly caught by paparazzis sleeping in different venues. Therefore, columnists in NRA.lv and Apollo.lv argue that he wants to actually secure the position of the Economics Minister (that is the position he started his political career from, prior getting to the PM position thanks to the grace of the former PM Andris Skele) for himself, and thus allowing the head of the PM' s bureau Mr Maris Riekstins to become the new prime minister.
Regardless of the rumours cracks in the governing coalition become more visible every day. Yesterday it was proven also by the head of the Union of Greens and Farmers (ZZS) Mr Augusts Brigmanis, when he resolutely announced in the Panorama TV evening news, "that he would not sacrifize his ministers and speaker of the parliement for the sake of some PP member making his political career". Aye, Latvian political theatre is the same cynical playfield. Positions of pre-pension age politicians are deemed to be extremely dear, and it causes them to act most of the time irrationally.
Just look on the speaker of the parliament Indulis Emsis. His statements and undecisiveness is not only legendary, but it is increasingly turning out to be a sad joke for the Republic of Latvia. The commission for investigating problems in the Latvian legal system after publishing the "Home made Adjudication" was set up by the Saeima, and the commission is going to be led by the populist maveric Juris Dobelis (TB/LNNK). Even members of governing coalition, including incumbent PM, question rationale of such commission which simply creates a taskforce for spending more taxpayers monies, nonetheless the same members of governing coalition approved such commission:-) Prosecutors Office probably waits to see the final numbers for the 2008 fiscal year budget. So, after receiving final numbers for their operating expenses for the next fiscal year, Latvian public could finally expect the long waited news about stipend receivers of the maire of Ventspils, and whether former PM Andris Šķēle is going to stand trial in the digitilization affair (Kempmayer Ltd. vs. Latvia)? Experts and academics are waiting for the news, ratings of the government are extremely low, and PM is not sure of himself, and economic downturn on top of it.
Thus, would it be simply remodelling or collapse of the Latvian government? I would argue that it would be a collapse, because existing members of the coalition never wanted to play according to the previously agreed rules and disagreements are just too large among them (disagreement between ZZS & PP on adminisitrative reform of local munipalities, PP and LPP disagreements about the rate of property tax, PP & TB/LNNK diagreements about the minister of economics etc.). When reality for the burgeoning class of civil servants shall set in about their salaries being frozen, it would finally end the bubble of "seven fat years". Also striking doctors and teachers would make the careless style of governing coalition unbearable.
Thus it is hard for Mr Kalvitis to juggle like he had been before. Merits were never considered as essential for the job performance in the Latvian government, but ohh boy, knowledgable governance is thus needed now. Shortly, you can not solve present problems in Latvian economy with half measures (as it was with the half baked anti-inflationary plan). The PM has no qualities of leadership and his retinue is just ludicrous. Government bases its performance on very dangerous and naive assumption, that even if the Latvian economy would sunk due to their inactivity or lack of knowledge, the EU would save Latvia somehow. There is no such precedent in the short EU history, thus would rescuing Latvia by Brussels administration create a precedent?