Lithuania set for tough coalition talks amid tougher economic times

By bne IntelliNews October 14, 2008

Robert Anderson in Vilnius -

Lithuania turned decisively away from the ruling Social Democrats at Sunday's general election, but the victorious centre-right Homeland Union will struggle to form a stable majority government after a strong showing by populist parties. The result could also make it more difficult to tackle the country's worrying economic imbalances and slowing growth during a global financial crisis that some analysts believe is poised to hit Central and Eastern Europe next.

"We really need some unpopular decisions, but they can only be adopted at the beginning of the new term," said Reinoldijus Sarkinas, the central bank governor, before the vote.

The Homeland Union won 19% of the vote, well ahead of the Social Democrats of Prime Minister Gediminas Kirkilas, which ran in fourth on 12% behind two populist parties. "We had a massive protest vote in which all members of the ruling coalition were punished," says Virgis Valentinavicius, head of the Alfa Media news portal.

This vote will give the Homeland Union 17 of the 70 party list seats compared with 11 for the Social Democrats, with full results from the 71 constituency seats - in which the Homeland Union is also ahead - only available after run-offs in two weeks time.

The result demonstrates the erosion of support for the Social Democrats, the successor party to the Communists, who have governed since 2001. Rapid inflation, a high current account deficit and slowing growth have raised fears that Lithuania could follow neighbouring Estonia and Latvia into recession. The vote also illustrates growing disillusionment with the political establishment since the last election because of frequent infighting and corruption scandals. Turnout was just 48%, a new low for the country, and populist parties were able to draw on this public's disillusionment and economic worries to make strong gains.

The new National Resurrection party of TV host Arunas Valinskas came in a surprise second place with 15%. Its comical election campaign mocked the political establishment, making it an unlikely coalition partner. One of its slogans was: "The ship is sinking, at least with us it will be more fun." The Law and Order party of Rolandas Paksas, the impeached president and former stunt pilot, made a comeback at 13%. Meanwhile the Labour party of Viktor Uspaskich, a Russian-born gherkin entrepreneur, won 9%, sharply down from the 2004 election after a funding scandal split the party and led Uspaskich to temporarily flee to Moscow.

Torturous talks

Negotiations between Andrius Kubilius, the Homeland Union leader, and the populist parties are likely to be long and tortuous and are unlikely to yield a strong government able to implement the party's reformist manifesto.

The Homeland Union, heir to the Sajudis pro-independence movement, wants to cut public spending and close tax loopholes in order to reduce the budget deficit. It also plans to introduce student tuition fees and make patients contribute more to their health costs. "It's an opportunity to make the reforms that are really needed in Lithuania," says Kubilius, who was last prime minister during the aftermath of the 1998 Russian financial crisis when he slashed the budget deficit.

However, both Law and Order and the Labour party want more public spending, making them more natural partners for the Social Democrats. The government plans a budget deficit next year of 2.35% of gross domestic product, despite a warning from Joaquin Almunia, European Monetary Affairs Commissioner, that Lithuania risks breaching the EU's 3% limit. The government argues that to try to balance the budget would hurt the economy when growth is already slowing. "It's very important just now to programme some further fast growth in the next 2-3 years or we will have stagnation," says Finance Minister Rimantas Sadzius.

Homeland Union has also long taken the toughest position towards Russia, the country's former overlord, while the two populist parties want Lithuania to tone down its rhetoric. Both Paksas and Uspaskich have also been embroiled in scandals over their alleged links to Moscow. Paksas was impeached as president in 2004 over his relationship to a Russian businessman who funded his political campaign. The former stunt pilot is likely to demand that his ban on public office is overturned as the price for forming any coalition.

If Homeland Union cannot reach agreement with the populist parties, it will have to form a "rainbow coalition" with the Social Democrats or let the left and the populist try to construct their own government. President Valdas Adamkus expressed his preference for a rainbow coalition before the election and he has significant powers in the nomination of the next premier.

The Social Democrats remain confident that they will survive in power as part of any coalition. "Without the Social Democrats there is no possibility of having a new government," Kirkilas said before the vote. He said he expects long negotiations, which will become entwined with the question of who will succeed Adamkus next year.

Lithuanians also voted in a non-binding referendum on whether to delay the closure of the Ignalina nuclear power plant, whose reactor is similar to that which caught fire at Ukraine's Chernobyl plant in 1986. Some 92% voted in favour of delay but turnout was just below the 50% required to make the referendum valid, weakening the country's case to persuade the EU to allow a postponement beyond the end of next year.

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Lithuania set for tough coalition talks amid tougher economic times

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