Implications of Latvia Government Collapse

The Prime Minister of Latvia resigned late yesterday.  Dombrovskis stepped down to take responsibility for the country's largest disaster since independence from the Soviet Union.  The collapse of the supermarket roof in Riga killed more than 50 people, according to press reports.  

The president can push for a snap election or try to form a new government with the sitting parliament.  The latter seems more likely, especially given that Latvia holds the rotating EU presidency.   This is especially important next week as it works toward a compromise between the EC's push for it have the final authority of closing down a troubled financial institution and the German insistence that such a decision should be made by  the euro area finance ministers.    An agreement before the end of the year has been anticipated to give the European Parliament an opportunity to debate and vote on it before the spring election. 

Latvia is also at an important juncture.  While there has been much speculation about who will exit the euro area (we did not think Greece would and, while saw a greater chance for Cyprus, this too was not our base case), Latvia is set to join the monetary union on Jan 1.  After a deep financial crisis in 2008, Latvia, under Dombrovskis, re-structured the economy through spending cuts and tax increases.   It adopted many of the structural reforms that the IMF demanded.   

Latvia will join Estonia in the euro area, leaving Lithuania as the only of one of the three Baltic countries outside of EMU.  In 2006, Lithuania had the dubious honor of being the only country whose candidacy was rejected.  It is now aiming to reduce its deficit and join EMU in 2015.   The deficit is projected to fall from aroudnd3% this year to 2.5% in 2014 and below 2% in 2015. 

Implications of Latvia Government Collapse Implications of Latvia Government Collapse Reviewed by Marc Chandler on November 27, 2013 Rating: 5
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