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Portugal’s economic revival brings ‘crisis of good news’
Growth accelerates twice as quickly as eurozone average in first quarter
JUNE 5, 2017
António Costa may soon discover that success brings its own problems.
Portugal’s proudly anti-austerity prime minister is ebullient after returning the former bailout country to fiscal health and presiding over a robust economic recovery. Lisbon is no longer in breach of the EU’s budget rules — a decision he calls a “turning point” for the country’s international reputation — and the economy looks set for its strongest expansion in almost two decades. Unemployment is falling at one of the fastest rates in Europe.
Figures released in recent days showed Portugal’s growth accelerating twice as quickly as the eurozone average in the first quarter, while the yield on 10-year government debt dropped to the lowest level in 10 months.
Público, the Portuguese daily, described the improvement as “a crisis ofgood news” for Mr Costa — putting him under more pressure to relax fiscal discipline from the leftwing parties on whose parliamentary votes his minority Socialist government depends.
The anti-capitalist Left Bloc and the Communist party are pressing for income tax reductions and pension increases that significantly exceed the government’s medium-term budget commitments. “Every financial margin the country gains must be used to rebuild what was destroyed [during the bailout],” says Mariana Mortágua, a Left Bloc MP.
It means a further test of Mr Costa’s skill in managing the leftwing pact that brought him to power in late 2015, which has surprised opponents with its stability.
“The extreme-left parties will undoubtedly continue to push for more spending,” said Antonio Barroso, an analyst at the Teneo risk consultancy. “But they have an incentive not to rock the boat too much and be blamed for creating instability.”
In terms of popularity, Mr Costa’s centre-left Socialists (PS) have been the clear winners among the anti-austerity pact partners. The PS has gained almost 10 opinion poll points since the 2015 election and has a 13-point lead over the main centre-right opposition party. Meanwhile, the poll ratings of his leftwing partners have flatlined.
Mr Costa owes much of his popularity to his rolling back of tough measures implemented during the 2011-2014 adjustment programme that Portugal negotiated with the EU and the International Monetary Fund in return for a €78bn bailout. Public sector wages, working hours and holidays have been restored to pre-bailout levels along with state pensions.
Finance minister Mário Centeno attributes much of Portugal’s recovery to this “real restoration of earnings” as part of an anti-austerity platform. In the face of the EU’s “wrong response to the crisis” and an “excessive insistence on structural reforms”, he wrote in a recent opinion column, “Portugal should not be ashamed of setting an example” of the right way forward.
To opponents, however, the sharp cut in the 2016 budget deficit, which led to the European Commission recommending that Portugal be allowed to leave the eurozone’s “excessive deficit procedure”, has little to do with an anti-austerity agenda. The drop in the deficit to 2 percent of GDP, the lowest level in Portugal’s 43-year-old democracy, was largely achieved through swingeing cuts in public investment and current spending.
“This has gone somewhat unnoticed by the general public, who have been more focused on high-visibility measures to roll back austerity,” said Federico Santi, an analyst at the Eurasia Group consultancy.
Maria Luís Albuquerque, finance minister in the previous centre-right government, says cuts to public services were “never so blind and so deep” as under Mr Costa. The government she served saw the deficit drop from 11.2 of GDP in 2011 to 4.4 per cent in 2015.
Nor will Portugal’s transition out of the EU’s corrective budget measures ease the pressure on Mr Costa. Instead, the focus will pass to the country’s high debt-to-GDP ratio and its structural deficit, with Brussels already forecasting “significant deviation” in the latter.
Political tension is likely to come to a head in negotiations over the 2018 budget. Those talks will coincide with the build-up to local elections in October, when Mr Costa’s leftwing partners will want to play to their core voters.
The commission warns that Portugal will have to make “a substantial fiscal effort” to remain on track — but balancing this goal with increasing demands for budgetary largesse from his leftwing partners could require new heights of political finesse from Mr Costa.
Original Story: Financial Times – Peter Wise