Lithuania: Peasant and Greens Union coalition deal with Social Democrats points to policy continuity
November 21, 2016
Lithuania’s center-right opposition Peasant and Greens Union (LVZS) party sealed a coalition agreement with the incumbent Social Democratic Party (SDP) on 9 November to secure a 73-seat majority in the 141-member parliament. Under the agreement, the SDP will suggest candidates for three ministries: foreign policy, justice and economy. The inclusion of the SDP in the government will also ensure a high degree of continuity in the policy reform agenda, after the surprise victory of the LVZS in the October election. The SDP were relegated to third place in the vote as widespread disaffection with the government’s handling of the economy and several high profile corruption scandals rocked the party’s campaign. Conversely, the LVZS, often described as a technocratic and marginal party prior to last month’s election, managed to secure its highest number of seats in the Lithuanian parliament since 1996.
The economic implications of the new coalition are already becoming clear. A contentious new Labor Code, envisaged in the previous government’s 2017 budget draft, will likely be delayed by the LVZS for at least half a year. Although the reform aims at improving labor market flexibility in a country afflicted by acute shortages of skilled workers, the haste with which it was approved in parliament sparked widespread dissent during the election campaign. The Labor Code is part of a New Social Model package that includes measures to tackle poverty levels and a structural reform designed to ensure the long-term sustainability of the pension system. It attempts to address the exodus of young skilled Lithuanians, who emigrate due to low wages at home and better opportunities in other EU member states. Against this backdrop, postponing the Labor Code will slow the pace of reform implementation in Lithuania, but the relevance of the New Social Model and the LVZS’ technocratic profile are likely to ensure it is eventually enacted. The inclusion of the SDP in the coalition, the party which originally proposed the reform package, only reinforces this view.
In the longer term the new coalition poses more uncertainty, mainly due to the LVZS’ lack of experience in government and potential disagreements on policy direction due to the party’s diverse support base. Nonetheless, the SDP and LVZS hold similar views on Lithuania’s role in the European Union and NATO and both parties are committed to boosting growth in a bid to halt mass emigration, which will benefit the country’s economy and reduce policy uncertainty. This will be reinforced by robust public finances and institutional strengths, which will continue to support Lithuania’s credibility abroad and the country’s domestic policy framework.
Author: David Ampudia, Economist