After Latvia, austerity in focus across Europe

LONDON (Reuters) - Markets might have breathed a sigh of relief after Latvia's parliament passed savage austerity measures this week, but investors across Europe will have to get used to such nervous moments over budget cut votes.

The resignation of Latvian Health Minister Ivars Eglitis -- who refused to oversee budget reductions he said would deny healthcare to many people -- is a clue to how much opposition and potential unrest such moves could spark.

Irish Prime Minister Brian Cowen won a vote of confidence this month despite pushing through tough budget cuts. But he only won with the support of the Greens -- who say they might not support a new round of austerity moves.

"It is something to keep more than an eye on," said Eurasia Group regional analyst Jon Levy. "Fiscal policy and politics have become much more important."

Whether they are dependent on financial support from the International Monetary Fund and European Union or raising money on international capital markets -- or a mixture of both -- many countries will face tough decisions.

From Britain to Spain, from Greece to the Baltics, budgets will be much more carefully watched than usual as they pass through national parliaments -- and while it is too soon to say where, analysts say some may fail to pass.

"This is a broader issue than just Latvia," said Lars Christensen, head of emerging markets research at Danske Bank.

"You are going to see the need for serious austerity moves in Hungary, all of the Baltics, Serbia, Romania, also Western Europe. They may be able to pass austerity measures the first time but what about the second, third time?"

POLITICAL STRAINS

Latvia's budget contains cuts of 500 million lats this year alone, with teachers facing pay cuts of 40 percent, the economy contracting by as much as 20 percent and social unrest and tensions expected to rise.

Without the cuts, analysts and Latvian political leaders said the country would not qualify for further tranches of International Monetary Fund IMF.L and European Union support, risking insolvency and currency devaluation.

Neighbouring Lithuania -- facing similar strains after years of growth funded by cheap credit -- said on Wednesday it would cut public sector pay by 10 percent. It has not approached the IMF for aid but has not ruled out such a move.

Even those countries that do not need the IMF -- such as developed Western economies -- may face similar strains as international bond markets effectively force them to cut spending or face unappealing borrowing rates.

Relatively weak opposition parties in Slovakia, Poland, France and Italy will give those governments more freedom to manoeuvre. But most other countries in Europe are experiencing mounting political strains as a result of the financial crisis that might make making cuts tough.

Relatively fragile coalition governments such as Romania will be in focus, as well as countries like Britain and Hungary which expect a change of ruling party as soon as elections come.

Some fear trouble on the streets.

"Severe unrest is likely if the government has to implement serious austerity measures," said Exclusive Analysis Western Europe expert Pepe Egger. "This risk is bigger for a government that is unpopular anyway, especially with its young people."

He said he saw particular risks in Greece, where violent protests had already been going on for different reasons before the crisis. In other countries, discussion of austerity may become more mainstream.

TIPTOEING AROUND

This week, Britain's opposition Conservative Party -- which polls suggest will win elections due between now and June 2010 by a landslide -- announced cuts were essential having previously stood back from making such statements.

"We, like (ruling) Labour politicians, a have fought shy of using the "c" word -- cuts," Shadow Finance Minister George Osborne wrote in the Times newspaper. "We've all been tiptoeing around... for far too long."

Exactly what and how much might be cut remains vague -- one senior Conservative lawmaker said that while health and international development aid would be ring-fenced, everything else would be cut by 10 percent.

In reality, the severity of the measures -- and therefore their political and social impact -- will depend almost entirely on how deep and long the global downturn turns out to be.

Spain, for example, has a relatively generous social welfare system which has cushioned the impact of the highest unemployment rate in the European Union -- 18.1 percent in April, according to European Commission data.

The question, not just for Spain but for the rest of Europe, is therefore whether the crisis will end before they run out of money or access to international capital, forcing the government to attempt cuts that might destabilise.

"What really matters... is how long the downturn lasts," said Exclusive Analysis's Egger. "If we have a Japanese-style multi-year recession, then unrest will increase considerably."

(Editing by Jon Boyle)