Latvia's Government Resigns

Latvia’s four-party coalition government resigned today after two of the coalition partners called for Prime Minister Ivars Godmanis to step down. President Valdis Zatlers told a news conference in Riga today that he had accepted the resignation and that talks on forming a new government would begin next week, a timing that coincides perfectly with the forthcoming visit of an International Monetary Fund mission.

“I told the parties this was the moment of truth,” Godmanis, 57, said adding that a government that has resigned may not have the authority to sign international documents. The IMF has some requests for the government and the “it’s very important for them to know our position,” he said, declining to say what the requests were.

Zatlers said on Feb. 13 that Godmanis had “lost his trust” after the government abandoned plans to cut the number of ministries. Zatlers then said on Feb. 16 that Godmanis had admitted he made a “mistake” and agreed to continue with plans to reorganize the government.

The IMF in its report on the Standby Arrangement for Latvia said the following:

Maintaining the peg also requires substantial political commitment.

If this commitment were to falter, there is a risk that the execution of the difficult but necessary policies required under the authorities’ program could also weaken. However, all political parties are strongly committed to the exchange rate peg. Thus the revised 2009 budget was passed by a 57-21 majority, despite the exceptional fiscal tightening measures it contained. Maintaining this commitment through an anticipated prolonged recession could be challenging.

and
The authorities’ unequivocal commitment to the exchange rate peg has determined their choice of program strategy.

Though this commitment augurs well for program ownership, the authorities also recognize that their choice brings difficult consequences, including the need for fiscal tightening and the possibility that recession could be protracted, perhaps more so than if an alternative strategy had been adopted.

Of course this program ownership disappeared almost as quickly as the ink dried on the paper they all signed. Basically the problem of maintaining political will during what was always bound to be a very harsh economic correction lay at the heart of my critique of the decision to attempt to maintain the peg. See my:

Why Latvia Needs To Devalue Soon - A Reply To Christoph Rosenberg

and

The Long And Difficult Road To Wage Cuts As An Alternative To Devaluation

and Manuel Alvarez Rivera (Election Resources On The Internet) writes:

I wrote at the beginning of this month that "Governments in Latvia are usually short-lived - since regaining independence in 1991, the Baltic republic has had more than a dozen cabinets - in no small measure because of its constantly changing and fractious party system. From that perspective, the question may be not so much whether Prime Minister Godmanis will remain in power, but for how long".

As it was, the "how long" turned out to be an unexpectedly short reprieve: on February 20, Latvia's coalition government became the second casualty of the global financial crisis, after the People's Party and the Union of Greens and Farmers - the two largest parties in the government and the Saeima (Parliament) - announced they had lost confidence in Prime Minister Ivars Godmanis, and forced him to step down.

President Valdis Zatlers will start consultations with leaders from all political parties in Parliament on the formation of a new cabinet. However, the upcoming government will have to implement further unpopular measures to cope with the worsening economic situation, and an early election remains a distinct possibility.

The full text of Manuel's background on the current political crisis can be found here.