New crew on the bridge of the Titanic

The government put together by Valdis Dombrovskis of the New Era (Jaunais Laiks/JL) has been affirmed by a large majority of the Saeima (parliament). It has published a declaration of policy that can only be described as a long list of largely commendable and reasonable tasks, for which no funding exists. Indeed, the fatal error of the present government is that it has proposed (including a 20 % pay cut for all public employees except in health care) budget reductions that fall far short of the 700 million LVL that must be reduced in order to narrow the budget deficit to the limits required by the International Monetary Fund (IMF) and the European Commission. Hopes of negotiating an exception are illusory -- the wealthier and older EU member states are already spooked by the possible bill for the present stage of bailing out Eastern Europe (see a recent issue of The Economist with a cover story on this).

Unfortunately, the Dombrovskis government is but a crew change on the bridge of the sharply listing Titanic. If the full 700 million LVL cuts are made, public services as presently organized and delivered in Latvia (efficiency and productivity, of course, have been alien concepts) will disintegrate. There will be strikes by schoolteachers as well as labor market actions by police. If Edward Hugh's prediction of a V-shaped recession for "Old Europe" and a U-shaped recession for Latvia comes true, it means that as soon as recovery starts in Western Europe,  labor emigration will pick up. Teachers and police whose standard of living was drastically reduced will seek unskilled and semi-skilled work abroad, because the pay will significantly exceed anything they can hope to make in Latvia.

However, before that happens, there will probably be significant social unrest and disintegration -- more street disorders -- police trying to control mobs of  "there but for luck, go I" unemployed and desperate demonstrators and rioters, increased street crime and massive "economic crime" as entrepreneurs simply drop out of the "legitimate" economy and pay their remaining productive employees in envelopes.

None of this can be avoided because it is the result of governments prior to Dombrovskis'  merrily crashing into the iceberg and fatally damaging the Latvian ship of state and society. This government, it almost seems, was lured into being at the helm for the final stage of the sinking. Historians will blame earlier governments, to be sure, but the record will show that when the Latvian state was bankrupted, when the lat had to finally be devalued, and when unemployment (later emigration) soared into double-digit amounts, it was Valdis Dombrovskis and his team who were formally in charge.