Crises test stability of new EU states

Financial Times
Quentin Peel

January 15 2009 When the European Union expanded in 2004, and again in 2007, to take in 10 new member states from central and eastern Europe, it was seen as a great success in exporting political stability and economic prosperity to fragile emerging democracies.
Although all of those countries have undergone frequent government changes, both before and after accession, the EU has provided an umbrella to ensure their democratic choices were respected, their bureaucracies and legal systems slowly but steadily improved, and corruption was curbed. The reward has been a rapid inflow of foreign investment, and improving economic growth.

The global economic downturn, compounded by the gas dispute between Russia and Ukraine, is proving the greatest test of political institutions that remain distinctly fragile.

The worst affected have been Latvia, where the centre-right coalition government is facing a crisis of confidence, and Bulgaria, where the gas dispute has shut supplies in a country that has been one of Russia’s most loyal customers.

Both countries saw riots on the streets this week, as popular anger with their respective governments surfaced. Concerns are growing in Brussels that such popular protests could spread in the region, where several governments are operating with narrow majorities, or in fragile coalition partnerships.

The more serious disturbances were in Latvia, where the government last month agreed a painful economic austerity programme with the International Monetary Fund to defend the exchange rate peg that ties the lat, the domestic currency, to the euro.

The rioting broke out on Tuesday when 10,000 people gathered in the city centre, and the demonstration ended chaotically, with protesters throwing snowballs, and even some petrol bombs, according to the interior ministry. Police used teargas to disperse the crowds, and arrested 126, while 28 were treated for injuries in hospital.

The Latvian government, headed by Ivars Godmanis, who came to power after similar protests in 2007, has seen its popularity plummet after allegations of corruption, the excessive influence of ethnic Russian businessmen and interference in judicial investigations. Now it is also accused of economic incompetence, with the economy set to contract by as much as 5 per cent this year, and unemployment to rise to at least 10 per cent.

Valdis Zatlers, the state president, said trust in the government had “collapsed catastrophically”, and threatened to use his constitutional power to call a referendum demanding early elections.

Both neighbouring Baltic republics – Estonia and Lithuania – are facing a sharp economic slowdown, although their governments are more solidly established. In both countries, opinion polls show more than 30 per cent of the workforce fear they could lose their jobs.
The Lithuanian government may be forced to turn to the IMF in March, according to the head of the parliamentary budget committee, after a sharp drop in tax revenues. “The situation is very difficult,” Kestutis Glaveckas said on Thursday.

The demonstrations in Bulgaria do not immediately threaten the government, which has a clear majority. But they are an early indicator of a possible popular backlash at the next elections, due in June. The most likely beneficiary would be the populist Gerb party, led by the mayor of Sofia, Boyko Borisov, a former security guard whose new group came top of the polls in elections for the European parliament in 2007.

Bulgaria has been hardest hit by the gas crisis, in spite of close ties between the government and Gazprom, the Russian state gas monopoly, causing popular resentment against both Ukraine and Russia on the streets.

Neighbouring Romania does not depend on Russian gas for its energy supplies, as a big producer in its own right, but its exporting industries have been severely hit by the economic downturn.

The huge Dacia car plant, owned by France’s Renault, has only operated for three days this month, having been closed since December.