EU budgets come under lens

LONDON: Markets might have breathed a sigh of relief after Latvia's parliament passed savage austerity measures this week, but investors across Europe will have to get used to such nervous moments over budget cut votes.

The resignation of Latvian Health Minister Ivars Eglitis - who refused to oversee budget reductions he said would deny healthcare to many people - is a clue to how much opposition and potential unrest such moves could spark.

Irish Prime Minister Brian Cowen won a vote of confidence this month despite pushing through tough budget cuts. But he only won with the support of the Greens - who say they might not support a new round of austerity moves.

"It is something to keep more than an eye on," said Eurasia Group regional analyst Jon Levy. "Fiscal policy and politics have become much more important."

Whether they are dependent on financial support from the International Monetary Fund (IMF) and European Union or raising money on international capital markets - or a mixture of both - many countries will face tough decisions.

From Britain to Spain, from Greece to the Baltics, budgets will be much more carefully watched than usual as they pass through national parliaments - and while it is too soon to say where, analysts say some may fail to pass.

"This is a broader issue than just Latvia," said Lars Christensen, head of emerging markets research at Danske Bank. "You are going to see the need for serious austerity moves in Hungary, all of the Baltics, Serbia, Romania, also Western Europe. They may be able to pass austerity measures the first time but what about the second, third time?"

Latvia's budget contains cuts of 500 million lats ($993.6 million) this year alone, with teachers facing pay cuts of 40 percent, the economy contracting by as much as 20 percent and social unrest and tensions expected to rise.

Without the cuts, analysts and Latvian political leaders said the country would not qualify for further tranches of International Monetary Fund (IMF) and European Union support, risking insolvency and currency devaluation.

Neighbouring Lithuania - facing similar strains after years of growth funded by cheap credit - said last Wednesday it would cut public sector pay by 10 percent. It has not approached the IMF for aid but has not ruled out such a move.

Even those countries that do not need the IMF - such as developed Western economies - may face similar strains as international bond markets effectively force them to cut spending or face unappealing borrowing rates.

Last week, Britain's opposition Conservative Party - which polls suggest will win elections due between now and June 2010 by a landslide - announced cuts were essential having previously stood back from making such statements.

"We, like (ruling) Labour politicians, have fought shy of using the "c" word - cuts," Shadow Finance Minister George Osborne wrote in the Times newspaper. "We've all been tiptoeing around... for far too long."

Exactly what and how much might be cut remains vague - one senior Conservative lawmaker said that while health and international development aid would be ring-fenced, everything else would be cut by 10 percent.

In reality, the severity of the measures - and therefore their political and social impact - will depend almost entirely on how deep and long the global downturn turns out to be.

Reuters

(China Daily 06/22/2009 page11)