The Constitutional Court in Latvia ruled Dec. 21 that the government's austerity measures to cut pension payments are unconstitutional. This means that a fifth of Riga's fiscal austerity measures will have to be reversed, potentially compromising Latvia's ability to keep to the terms of its International Monetary Fund (IMF) and EU bailout plan. Keeping to the austerity terms of the bailout package could put the country's social stability at risk — something likely to recur in Greece, which does not want to get an IMF loan precisely because of the required austerity measures. After contracting 4.6 percent in 2008, Latvia's gross domestic product (GDP) is expected to shrink by about 18 percent in 2009 and another 4 percent in 2010. This massive contraction effectively erases the last five years of Latvia's growth. To help prevent the Latvian economy's collapse, the IMF is financing 1.7 billion euro ($2.43 billion) of Latvia's 7.5 billion euro ($10.74 billion; 33 percent of GDP) financial stabilization package. As part of the package, which was initially approved in December 2008, the Latvian government is required to reduce its budget deficit by 500 million lati ($1 billion) this year, shed a further 500 million lati from its 2010 budget and raise taxes. To achieve these required reductions, Latvia cut public sector wages by 20 percent and reduced payments for pensioners and working retirees by 10 and 70 percent, respectively. The savings from these measures are estimated to total about 100 million lati ($203 million). The Constitutional Court's decision, however, requires the pension funds to be repaid in full by July 1, 2015. The demands placed on Latvia for the bailout package only last until 2012. So while the court ruling is final and cannot be appealed, Latvia would have three years to maneuver and repay the pensioners without breaching the bailout terms. However, if Latvia is going to meet those terms, it will have search for 100 million lati of additional savings elsewhere. Further wage cuts, which could raise the public sector's ire, are very likely. During the boom years, wages in the Baltic states increased far beyond gains in productivity, and at the end of 2007, unit labor costs in Latvia were 26 percent above the eurozone average. Now, in the absence of the abundant inflows of foreign capital that had encouraged the wage increases, Latvia is simply uncompetitive, relative to the rest of Europe. Not only did Latvia's economy lose five years of growth, it also became less competitive now than it was then. The struggle in Latvia is not unique. Budgetary austerity measures will create social tensions across Europe, particularly in countries that have used recent years of expansionary credit and extraordinary growth to put off structural reforms of their social spending programs. This puts into focus Greece, which is struggling with a large deficit and loss of investor confidence in its ability to service its growing stock of public debt. Greece is in a bind: To get the funding for its deficit, it could turn to the IMF, but the slashed social spending would be unacceptable to most of its population. STRATFOR sources in Greece have already hinted that IMF assistance would be out of the question precisely because of the distasteful structural reforms it would impose on Greece. STRATFOR will be watching for developments. Between the spiraling debts, wide deficits, resistance to austerity measures, increasing pressure from monetary authorities and simmering social tensions, something will have to give, especially as the Greek budget's austerity measures begin to take effect at the beginning of February.