Latvia's prime minister began talks yesterday (3 October) on forming a new majority government after a strong election win kept the country on its IMF-led austerity path to eventual eurozone entry.
Besides reassuring investors, the result was likely to be a relief for regional neighbours fearful of political instability in the country of 2.2 million people. Sweden immediately congratulated Prime Minister Valdis Dombrovskis.
Despite 18 months of tough spending cuts and tax increase to meet the terms of a 7.5 billion euro ($10.34 billion) bailout, Dombrovskis, 39, led his Unity bloc to victory in Saturday's vote with 33 seats in parliament, official figures showed.
His two partners won a combined 30 seats for a coalition total of 63 in the 100-seat parliament. The government was previously in a minority when it carried out the terms of the bailout led by the International Monetary Fund and the European Union.
Dombrovskis said his partners had agreed to continue working in a coalition and further talks would be held. He spoke after meeting the Union of Greens and Farmers, which won 22 seats, and the nationalist Everything For Latvia/For Fatherland and Freedom bloc, which won eight.
He said the aim should be to seek parliament's seal of approval in a vote on 2 November.
"We also agreed that Latvia's economic stabilisation programme and agreement with lenders must be further implemented," he added after meeting the Greens and Farmers.
Swedish Finance Minister Anders Borg, whose country contributed to Latvia's bailout in 2008 with other Nordic states, congratulated Dombrovskis.
"Latvia has taken important steps to ensure long-term, sustainable finances and the weekend's election shows clear support for to continue that line," he said in a statement.
Swedish Foreign Minister Carl Bildt said on his blog that Dombrovskis had done "surprising well".
Danske Bank analyst Lars Christensen said the clear result would ease investors' worries. "I would expect this to be received rather positively," he said, adding that it could provide further support for the Swedish crown.
It could help Latvia in its efforts to raise funds from international markets, rather than relying on the IMF and EU.
"It is clear to me that Latvian voters have voted for austerity and reform rather than populism," he said.
More austerity lies in store to reduce the budget deficit on the path to euro entry, which under the IMF and EU deal is due in 2014. Dombrovskis said he would meet the opposition Russian minority party Harmony Centre, which had been hoping to win the election but finished in second place with 29 seats, to see if there was a way the government could cooperate with it.
Despite the cuts, Latvians have regarded Dombrovskis as an honest crisis manager of the mess left by other governments. The economy has begun to show a slow recovery from the 18% economic drop of 2009, the worst in the European Union.
People have accepted the budget measures, which have included public sector pay cuts of 50%, with forbearance.
The only public display of anger was a riot in Riga in January 2009, before Dombrovskis took office.
Harmony Centre, whose traditional base of support is Latvia's large Russian minority, had been hoping to woo ethnic Latvians to vote for it after the crisis and promote it to first place in the election and a possible place in government for the first time since the fall of the Soviet Union in 1991.
(EURACTIV with Reuters.)
European Parliament President Jerzy Buzek said Dombrovskis' re-election had shown that "courage and determination pay off in hard times".
"Latvia needs stability and continuity on the path of reforms," he added, wishing the country successful fulfillment of the Maastricht criteria so it would be able to join the euro zone "during this term of parliament".
"This will be an important signal for both Latvia and the European Union," he said.
"I congratulate them on this great success", declared French MEP Joseph Daul, chairman of the European People's Party group, the largest political group in the European Parliament.
"The Latvian prime minister, Valdis Dombrovskis, has proved to be an exceptional crisis manager and an outstanding political leader. Latvian citizens have expressed full acknowledgement and solid support for his efforts to lead Latvia out of the economic crisis. I believe that the new government of Valdis Dombrovskis will continue its commitment to building a strong and sustainable economy. This is essential for the strength of Europe. By handling tough austerity measures in a successful way, Latvia is a good example to the other countries of the European Union," said Daul.
"Since the appointment of Prime Minister Valdis Dombrovskis, a former MEP and member of the EPP group, Latvia has shown that it can adapt to new economic realities and prepare the return to growth. There are many lessons we can learn from Latvia's history and especially from its contemporary experience," he concluded.
The Baltic states have been destabilised by growing social unrest triggered by the worsening economic crisis. On 16 January 2009, police in Lithuanian capital Vilnius fired tear gas to disperse demonstrators, who pelted parliament with stones in protest against cuts in social spending. More than 80 people were detained and 20 injured.
The economic crisis has hit neighbouring Latvia hard. In January 2009, protests in Riga over the worsening economic situation degenerated into riots (EURACTIV 14/01/09). The country was forced to seek a 7.5 billion euro bailout by a group led by the International Monetary Fund.
In February 2009, EU Budget Commissioner Dalia Grybauskait? (from Lithuania) and MEP Valdis Dombrovskis (from Latvia) left their European seats to return home to countries troubled by the financial and economic crises, running for the highest office in Lithuania and becoming prime minister of Latvia respectively (EURACTIV 27/02/09). Dombrovskis's government was approved on 12 March 2009.