Political Risk in the Baltics

Background:

Baltic governments are coming under increasing pressure.  As economic growth contracts and tax revenue plummets, the governments of Latvia, Estonia and Lithuania are struggling to keep their budget deficits in check. The goal is to bring down the deficits under 3% of GDP – the budget deficit limit for euro adoption – in order to enter the eurozone as soon as possible. Given the scale of economic downturns in these countries, the current eurozone entry target dates are widely seen as overly optimistic. Estonia – the best positioned of the three – is aiming for a 2011 eurozone entry date.

Meanwhile, spending cuts are stirring public discontent, particularly in an environment of rising unemployment, and risk sparking splits within governing coalitions. Baltic governments are fragile and the risk of early elections is high. Government changes could bring economic policy shifts and fiscal loosening, which might push euro adoption targets even farther into the future.