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SEB sees change of government in Latvia, but no policy change

The current Latvian parliament of 100 seats is dominated by three parties: Unity holds 33 seats; the leftist Harmony Centre 29 seats and Union of Green & Farmers 22 seats.

The government of Valdis Dombrovskis has consistently fulfilled EU/IMF budget consolidation requirements. Despite the impact of his tough belt-tightening policy on households, the government strengthened its position in the October 2010 parliamentary election. More recently, however, parliamentary uncertainty has increased. Until May 2011 the Union of Green & Farmers was a part of the Unity-government, but since then it is in opposition. Roughly at the same time, former president Valdis Zatlers pushed through a new election scheduled for 17 September via a referendum in July. A full 94 per cent voted to dissolve parliament, which had been criticised by Zatlers for not taking enough measures to fight corruption.

After losing the presidential election on 2 June, Zatlers' newly-created Reform Party is challenging Unity. After the referendum, opinion polls indicated an upswing for Zatlers' Reform Party and the Harmony Centre (to 18 per cent each) while Unity lost support (to only 12 per cent). In one of the fresh polls, Harmony Centre received 20 per cent support, Unity 14 per cent, Zatlers' Reform Party 11 per cent,Union of Green & Farmers 8 per cent and All for Latvia 7 per cent.

“Clearly, after Saturday's election there will be some realignment in the Latvian political landscape. We believe that a broad coalition will be formed, consisting of Unity, Zatlers' Reform Party and All for Latvia. They will continue to prioritise budget-tightening and qualifying for the euro zone in 2014,” Mikael Johansson, head of SEB’s Eastern European research, says.

For euro zone membership more cost-cutting measures will be needed in 2012 to meet the 3 per cent fiscal deficit Maastricht criterion, ahead of an evaluation in the spring 2013 (we predict that the deficit will shrink from 7.7 per cent of GDP last year to below 5 per cent this year). Zatlers' Reform Party has actually not sent such signals in an initial programme declaration, but it may consider such issues too sensitive to discuss before the election, especially in the light of the deepening euro zone crisis.

The euro-sceptical Harmony Centre will probably not get enough support in the election to be influential enough to change the Latvian political course, including the euro membership target.