September 2, 2021

Europe

EUROPE: CEE PULSE

BY Andrius Tursa

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( 5 mins)

Political and epidemiological crises are deepening in Bulgaria. In Romania, a dispute within the three-party coalition government over the local infrastructure investment program will likely lead to the replacement of the Prime Minister Florin Citu. Rising political tensions with Belarus and China could negatively affect Lithuania‘s economic growth. Finally, a long-awaited US- Ukraine summit laid the foundation for a deepening of bilateral relations, particularly in the areas of defense and energy.

Bulgaria

The country is headed for another snap general election in late autumn. The final attempt by the Bulgarian Socialist Party (BSP) to form a coalition government is facing strong headwinds in parliament. BSP plans to return its mandate to president Rumen Radev once parliament adopts amendments to the 2021 budget – including pension hikes and potentially other pre-election handouts – anticipated by mid-September. Then, Radev will be obliged to dissolve parliament and call early elections within 60 days. It remains unclear whether the parliamentary elections will be scheduled along with the presidential ones (14 November) or separately. However, the latest opinion polls suggest that major changes in the composition of parliament are not expected, even after three elections this year. In the meantime, the caretaker cabinet will reintroduce restrictions on restaurants, night clubs, sports facilities, retail venues and mass events beginning 7 September due to the swiftly deteriorating epidemiological situation. While fully immunized residents will be exempt from restrictions, only 17% of the country’s population has been fully vaccinated to date.

Lithuania

The country’s tense relations with Belarus and China could have tangible economic implications. Western sanctions on Belarus will effectively halt the transit of Belarusian fertilizer products via Lithuania starting in December. As a result, the Klaipeda port is projected to see around a 30% drop in its annual cargo volumes, while the state-owned railway company could lose up to EUR 120mn in revenue. Persistent political tensions with Minsk could prompt a further decline in bilateral trade. According to the country’s central bank (LB) projections, a complete halt of exports to Belarus would cut GDP growth by 0.2% in 2021 and by 0.6% in 2022.

Lithuanian businesses also have reported deteriorating relations with China after Vilnius pulled out from the China-CEE initiative (previously known as 17+1) earlier this year and hosted the Taiwanese representative office in Lithuania. However, even a complete halt of the country’s exports to China would reduce Lithuania’s GDP growth by only 0.2% in 2022, according to LB. While the worst-case scenarios are unlikely to materialize, the combined effect of political and economic tensions with Belarus and China could weigh on economic growth for the remainder of this year and 2022.

Romania

As anticipated, disagreements within Prime Minister Florin Citu’s (National Liberal Party, PNL) government over the proposed five-year RON 50bn (USD 11.9bn) investment program have evolved into a serious coalition crisis. After Citu continued to push ahead with the investment program this week, the PNL’s junior coalition partner USR-PLUS withdrew its support for the prime minister on 1 September and has called for talks among the three governing parties on 3 September. Unless internal disagreements are resolved in the upcoming negotiations, Citu will face considerable pressure to step down voluntarily or risk being removed from office via a potential no-confidence vote. In this case, President Klaus Iohannis would have a right to propose a new prime ministerial candidate – most likely another member of the ruling center-right PNL. The replacement of Citu with another PNL politician would likely keep the existing three-party coalition government intact (50% probability). Alternatively, PNL could lead a minority government by seeking support from other parties in parliament on a case-by-case basis (25% probability). If the political crisis extends into late autumn/early winter, a technocratic government could be proposed by Iohannis (15% probability). For now, the probability of early elections remains low (10%) due to limited political support in parliament and the protracted constitutional procedures.

Ukraine

A first bilateral meeting between President Volodymyr Zelensky and his US counterpart President Joe Biden on 1 September laid the foundation for a deepening of bilateral relations in multiple areas. The two countries agreed to renew the bilateral Strategic Partnership Commission to coordinate on reforms, economic issues, humanitarian assistance, and defense and energy cooperation. The latter two areas were the focus of the visit, resulting in a new strategic defense framework agreement, a USD 60mn security assistance package for Ukraine, and two additional cooperation agreements in the field of energy. At the same time, the US side reiterated the significance of reform continuity in Ukraine’s judiciary, establishment of an independent anti- corruption framework, strengthening financial sector supervision as well as reforming state-owned enterprises.

Kyiv’s commitment to reforms will be tested in September, when parliament plans to continue the consideration of amendments related to the National Anti-Corruption Bureau of Ukraine (NABU). The adoption of the NABU bill – a first draft of which was positively assessed by domestic and international stakeholders – is an important signpost to watch ahead of the arrival of the International Monetary Fund’s mission to Kyiv later this month.

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