Estonian Premier Ansip Seeks New Coalition Partner

Estonian Prime Minister Andrus Ansip chose to run a minority government today after ditching a junior coalition partner, the Social Democrats, from the two year-old Cabinet following a dispute over freezing jobless benefits.

President Toomas Ilves approved Ansip’s request to dismiss the Social Democrat Finance Minister Ivari Padar, Interior Minister Juri Pihl and the Minister for Population and Ethnic Affairs Urve Palo.

“I’m sad the government crisis had to arise because it removes focus from the main issue, sows instability and reduces our credibility abroad,” Ilves said. A possible new government coalition will need to present a plan on further austerity measures, including 2010 and 2011, he said.

Ansip’s ruling Reform Party and senior coalition partner Isamaa ja Res Publica Liit will ask the opposition Rahvaliit Party to join the government, Ansip said, adding it wasn’t clear when a new coalition would be formed. The two Cabinet parties have said they consider euro entry in 2011 crucial to attract new investment and spark a recovery from the deepest recession since Estonia abandoned communism almost two decades ago.

Reform and Isamaa want to freeze state jobless support, a proposal rejected by the Social Democrats unless it’s balanced by a freeze on planned cuts in severance pay. Ansip has said curbing benefits is necessary to shore up the budget deficit as the contracting economy depletes state coffers.

“It is only honest to admit that the current coalition cannot function effectively anymore,” Ansip told a news conference in Tallinn today.

Severance Pay

A pact with Rahvaliit would include an agreement on labor laws, including lower severance pay to make it easier for employers to shed jobs. The higher unemployment benefits were designed to compensate for reductions in severance pay.

Rahvaliit, which has mainly rural supporters and six seats in parliament compared with ten for the Social Democrats, says it favors greater social equality. The government and Rahvaliit together hold 56 seats in the 101-member parliament, four fewer than the coalition that included the Social Democrats.

“The big issue is whether the minority government will be able to keep fiscal policies in check,” Neil Shearing, an emerging Europe economist at Capital Economics Ltd., said in an e-mail. “I think euro adoption in 2011 is off the agenda, while there are still risks that Estonia may need to turn to the IMF at some point.”

To contact the reporters on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editor responsible for this story: Chris Kirkham at ckirkham@bloomberg.net.

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