Jan. 16 (Bloomberg) -- The Baltic countries of Latvia, Lithuania and Estonia are facing unrest and street protests over government austerity measures that may make political leaders casualties of the worst economic collapse in the European Union.

Protesters hurled stones and broke windows at the Parliament building during an anti-government demonstration in the capital of Vilnius today, leading to at least 86 arrests. It followed a larger riot on Jan. 13 in Riga, Latvia’s biggest city, in which 106 people were detained. Lithuanian Prime Minister Andrius Kubilius held an emergency Cabinet meeting as police pushed protesters back with rubber bullets and tear gas.

Disruptions in the former communist nations just west of Russia contrast with 2006, when the economies of the three grew faster than any others in the 27-member EU. Now, leaders are facing calls to step down over painful spending and wage cuts, enacted more than a year after the International Monetary Fund warned that an economic meltdown was looming.

“The frustration of people can have political ramifications for all the Baltic countries,” said Lars Christensen, chief analyst at Danske Bank AS, in a phone interview from Copenhagen. “Politicians are very restricted in what they can do now and that is very hard to explain to people.”

After 40 years as Soviet satellites, the three Baltic states founded free-market democracies that culminated in their entry into the EU in 2004. The resulting aid and foreign direct investment of more than $21.5 billion helped housing prices and wages to more than double and economic growth to soar.

‘Shame on You’

About 7,000 people took part in today’s Vilnius demonstration, which was organized by the Lithuanian Trade Union Confederation to protest government tax reforms and public wage cuts. People marched along Vilnius’s main shopping and business boulevard chanting “Shame on You” and carrying signs “Stop Impoverishment and Unemployment” to the government building

“We want firm, but well-considered, decisions that aren’t done overnight,” protester Aldona Balsiene said before rioting began. “We demand a stop to the nation’s impoverishment policy, a reduction in the tax burden.”

By afternoon, parts of downtown were filled with tear gas and paving stones, as riot police and dog chased crowds across the river.

The frustration of citizens was felt the most in Latvia, which has had the biggest economic reversal. In 2006, gross domestic product expanded 12.2 percent, the highest rate in the EU. In the third quarter, GDP contracted 4.6 percent, the EU’s steepest dive.

Estonian, Lithuanian GDP

Estonia followed, with a 3.5 percent contraction, and Lithuania is expected to slip into recession this year, with the Finance Ministry predicting the economy to shrink 4.8 percent. Third-quarter growth for the 16-member euro region was 0.6 percent and the European Central Bank forecasts a 2009 contraction of 0.5 percent.

The troubles may infect the economies of other former eastern-bloc nations and the Nordic states, whose companies, including banks Swedbank AB and SEB AB and phone operator TeliaSonera AB, are the biggest in the three countries.

“There is a risk that a financial crisis in Latvia could spread and create unease on the financial markets in Sweden and our neighboring countries,” Swedish central bank Governor Stefan Ingves said in a statement on Dec. 16.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, like the IMF, have been issuing warnings about the Baltic economies since 2006.

In Latvia, resentment toward the government of Prime Minister Ivars Godmanis prompted a Riga street demonstration on Jan. 13 that drew as many as 10,000 protesters.

New Elections Sought

They called on President Valdis Zatlers to allow a referendum for new elections. The Riga demonstration became the first protest to turn violent since the country gained independence from the Soviet Union in 1991, after some in the crowd began throwing stones.

“If we want to get out this crisis, we need different people who didn’t get us to this place,” said Eriks Dreibans, a 36-year- old Riga chef. He said his New Year’s business fell by half from the year before. “I’ll participate in other protests in the future.”

On Smilsu Street in Riga’s old city, a protester wearing a hooded sweatshirt threw a brick through the window of a liquor store as looters stole alcohol. Windows in the nearby Finance Ministry were also broken before riot police responded with pepper spray and batons and officers dragged away offenders.

Lost Trust

Zatlers, 53, said the next day that trust in the government and lawmakers had “catastrophically fallen.” He gave leaders until March 31 to shuffle the Cabinet and address criticisms, threatening to allow the referendum to dissolve Parliament, needed under Latvian law.

In Lithuania, Kubilius’s Cabinet, which won in October elections, is under similar pressure. Even before taking office in December, he announced budget spending cuts and wage freezes designed to shore up public finances as the slowdown reduces revenue.

Vilnius police said on its Web site it’s investigating online betting on whether today’s protest will turn violent. The authorities said people placing bets may have “a financial interest in affecting the outcome of the protest.”

Algis Krupavicius, a political science professor at the Kaunas University of Technology, said Kubilius, 52, wasn’t open enough about his plans and failed to persuade citizens that sacrifices now will reap a stronger economy later.

Broken Promise

Teachers and university professors who were promised by the previous government wage increases of 20 percent this year received only 5.6 percent.

“Communication with the public hasn’t occurred, and it is still nonexistent,” said Krupavicius. “People are disappointed that decisions are made quickly.”

Still, Lithuanian Finance Minister Algirdas Semeta said in an interview yesterday he saw no “possibilities to reverse the decisions made.

“I understand the hardships of people in the face of the economic downturn,” Semeta said. “These measures were necessary but may be socially painful individually. The essence of the system that’s been introduced as a medicine in this situation must remain.”

In Estonia, support for the government of Prime Minister Andrus Ansip fell to 4.3 on a 1-to-10 scale in December. It was the lowest since March 2005, according to a Dec. 29 survey by EMOR polling company, commissioned by the public broadcaster. No margin of error was provided.

“The chances for the survival of the government are not great,” said Juhan Kiviraehk, a sociologist with the International Center for Defense Studies in Tallinn, the Estonian capital.

To contact the reporters on this story: Milda Seputyte in Vilnius at mseputyte@bloomberg.netJames M. Gomez in Prague at jagomez@bloomberg.net

Last Updated: January 16, 2009 11:35 EST