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Portugal: a European path out of austerity?
The economy has rebounded since the centre-left government
reversed post-crisis budget cuts

© AFP

April 10, 2019 3:56 am by Peter Wise and Ben Hall in Lisbon

Europe is still struggling to find a label for the new brand of

socialism that has lifted Portugal’s fortunes over the past
three and a half years. In the Portuguese media, the term
“geringonça”, meaning “an odd contraption”, has stuck.
Peter Mandelson, the British Labour peer, has suggested
“the fourth way”. António Costa, the prime minister who
gained office by forging a surprising partnership between
the moderate and hard left, simply calls it “turning the page
on austerity”.

One of the few successful centre-left politicians in Europe,

Mr Costa is on course for re-election this year, having
presided over an economic turnround that has restored
confidence to Portugal, a country that the European debt
crisis brought to its knees. Unemployment has halved to 6.7
per cent and the budget deficit could be eliminated this year
for the first time in over 40 years.

Across the continent governing centre-left parties have been

crushed by austerity policies. France and Italy were unable
to kickstart their weak economies as they stuck to the EU’s
tough public deficit limits. Greece’s far-left Syriza
government won power by railing against the detailed
austerity measures required under its bailouts fromthe EU
and International Monetary Fund — only to implement
many of them once in office.

Mário Centeno, Portugal's finance minister, stands at the centre of EU economic

policymaking as president of the Eurogroup of finance ministers © Bloomberg

Portugal’s centre-left government took a different course. It

initially clashed with Brussels by reversing public spending
cuts and allowing the deficit to swell well above agreed
objectives, before ultimately proving to EU officials that by
putting more money in people’s pockets it could lift growth,
and make it easier to meet budget targets.
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“People were highly sceptical about our economic policies,”
Mr Costa tells the Financial Times. “But we have shown that
it is possible to raise incomes, lift private investment, cut
unemployment and still have sound public finances.”

As he heads towards an October general election with a

double-digit poll lead, some European politicians now see
Mr Costa as something of a model for Europe’s beleaguered
social democrats.

Wolfgang Schäuble, former German finance minister, left, and his then Portuguese
counterpart Vítor Gaspar © AFP

“Public spending has stayed under control, unit labour costs

have been reduced, hence they have been able to attract
more foreign direct investment and increase their exports,”
says Ivan Scalfarotto, a former Italian trade minister and
centre-left MP. “Costa, also, is a good communicator: he
stressed the idea that ‘sacrifice was over’ and has been
effective at keeping his leftwing coalition together.”

Portugal will also be an important voice in a highly charged

debate about overhauling the eurozone’s fiscal rules. Most
eurozone members believe the rules have become too
complex and critics see them as either too rigid or weak. Mr
Costa believes he has shown there is another way.

In Brussels, Mário Centeno, Mr Costa’s finance minister,

stands at the centre of EU economic policymaking as
president of the eurogroup of finance ministers. His election
to the role, seen as recognition of his fiscal success, came
after Wolfgang Schäuble, then German finance minister,
described him as the “Cristiano Ronaldo” of his EU peers,
after the Portuguese football star.

For many on the European left, Mr Costa is the prime

minister who showed that the financial crisis could be
tackled without destroying jobs and living standards. As he
himself puts it: “It’s no longer a matter of political
discussion, it’s a matter of fact”.
For others, Mr Costa has merely had the good fortune of
being lifted on the tide of a global recovery, falling oil prices,
a tourism boom and a sharp fall in the cost of servicing one
of Europe’s heaviest debt burdens — a turnround, they say,
that would have been impossible without the European
Central Bank’s government bond-buying.

“While Costa’s political acumen cannot be denied, it should

not be forgotten that his government has faced very
favourable macroeconomic conditions over the past three
years,” says Antonio Barroso, deputy director of research at
Teneo Intelligence.

Portugal's debt crisis has stabilised following years of economic pain and anti-austerity
protests © AFP

Daniel Traça, dean of Lisbon’s Nova School of Business and

Economics, whose gleaming new campus is itself testament
to Portugal’s recovery, believes Mr Costa’s main
accomplishment lies in ensuring that the recovery has
benefited the most vulnerable people. This, he says, has
convinced the country that “sound public accounts are
compatible with social cohesion”.

For his political opponents, however, Mr Costa’s claim to

have overturned austerity is mere rhetoric for what is, at
best, “austerity lite”. They charge him with fiscal sleight of
hand, offsetting income tax cuts with higher indirect taxes
and balancing the books by restraining public investment.
Pedro Passos Coelho, the former centre-right prime
minister, recently accused the PS government of cutting
health and education spending even more than he did
during the bailout.

“Things have improved, but life was much better before the
crisis than it is today,” says Filipa Bivar, an insurance
worker. “The PS is managing the economy well, but has
benefited enormously from the difficult decisions made by
the previous government.” She fears popular measures
could lead to “big problems down the road”.

In the public sector, workers are pressing Mr Costa to go

much further in overturning austerity. Hundred of
thousands of state workers, from nurses and teachers to
police inspectors and prison guards, have been staging
strikes and protests to recover earnings lost during the
crisis. “It’s normal that after a period of great pressure
everybody wants everything right now,” says Mr Costa. “A
good government has to manage social needs [in keeping]
with its fiscal capacity and political priorities.”

Although not as traumatic as the experience of Greece,

Portugal’s rescue was bruising. In an effort to control
ballooning debt, stabilise precarious banks and introduce
growth-friendly reforms, Lisbon negotiated a 2011-2014
austerity programme with the Euorpean Commission, IMF
and the ECB — the so-called troika — in return for a €78bn
bailout.

Years of economic pain followed. The then centre-right

government under Mr Passos Coelho made drastic cuts to
health, education and welfare spending, along with state
pensions and bank holidays. Taxes were increased. In the
public sector, working hours were extended while the
minimum wage, salaries, recruitment and career
progressions were frozen.

Under the troika’s “fiscal consolidation strategy”,

Portugal’s budget deficit fell from 11.2 per cent of gross
domestic product in 2011 to 4.5 per cent per cent in 2014,
excluding one-offs. The current account moved into surplus
as domestic demand collapsed and companies were forced
to export. Public debt, however, continued to increase,
reaching 130.6 per cent GDP, an all-time high, in 2014.

Assunção Cristas, leader of the conservative Popular Party, has lambasted Mr Costa for
delivering 'the highest tax burden ever' © AFP

Tens of thousands of businesses went to the wall in the

country’s worst recession in almost 40 years. The welfare
net was stretched to breaking point as unemployment
soared above 17 per cent, leaving more than 40 per cent of
under-25s out of work. Hundreds of thousands of mainly
young, skilled workers, emigrated — a loss of more than 4
per cent of the working age population between 2008 and
2016.

Mr Costa, who was Lisbon’s mayor during the crisis years,

accused the Passos Coelho government of using the bailout
as “cover” for a neoliberal agenda of rolling back state
services, cutting labour costs and privatising public assets.
The bailout had impoverished the nation, he railed in 2015,
“creating jobs for nurses, but in the UK, not Portugal”.

Once in office, he set about turning back the clock. “The

troika cut public sector wages and state pensions by 30 per
cent, we gave that 30 per cent back,” he says. He also
reversed austerity measures affecting working hours,
holidays and taxes, at the same time lifting the minimum
wage by 20 per cent over two years.

Brussels was deeply sceptical and came close to fining

Portugal for allowing the deficit to hit 4.4 per cent rather
than the agreed 2.7 per cent. But in May 2016, the
Commission granted it a reprieve in the form of an extra
year to comply. Since then Portugal has consistently beat its
deficit targets; the deficit of 0.5 per cent of GDP recorded
for 2018 being the country’s smallest shortfall since
democracy was restored 45 years ago.

As Portugal heads towards a zero deficit this year, Italy is

struggling to keep its deficit under 2 per cent of GDP — far
higher than the EU-mandated target of 0.8 per cent — and
that only after Rome’s populist coalition agreed to delay
expansionary measures. While Matteo Salvini, Italy’s deputy
prime minister, lashes out against EU-driven austerity, Mr
Centeno urges restraint, saying earlier this year that “there
is no room for easy or populist solutions”.

Compared with Greece, Portugal — even under Mr Costa’s

anti-austerity government — has adopted a far more
conciliatory approach to Brussels. Despite pressure from the
leftwing parties supporting the PS government, it has never
proposed any write-off of public debt, arguing instead for
better terms as part of a wider EU agreement. Public debt is
on a downward path — Mr Costa is targeting a reduction to
118 per cent of GDP this year. On his watch, the three big
rating agencies have also lifted Portugal above junk status.

However, Mr Costa faces attacks from both rightwing

opponents and leftwing supporters. Assunção Cristas, leader
of the conservative Popular Party, lambasts Mr Costa for
delivering “the highest tax burden ever”. Catarina Martins,
national co-ordinator of the Left Bloc, which supports the
government, says the PS could have invested €4bn more in
public services since 2015 and still have complied with the
EU rules.
Portuguese Prime Minister António Costa claims the country has 'turned the page on
austerity'

The prime minister rejects the criticisms, citing

improvements in the national health service, including the
recruitment of 9,000 more employees since 2015. He has
also announced a 10-year national investment programme
designed to pump €20bn into transport, energy and
environmental projects.

Ms Martins says the government has “stopped the

destruction” of public services “but has not proved capable
of making them strong again”. But even the “baby steps” are
an achievement.

“The little changes we made have brought about a big

change in people’s lives,” she says, helping to revive the
domestic economy.

Mr Centeno himself admits that the degree to which the PS

has overturned austerity is “not dramatic”. Economic
growth in late 2015 was “very poor” and “decelerating”, he
says. “A change had to be implemented, [but] not a big
change. I am very suspicious of visionaries who think they
know enough to deal with big machines. I fear big
machines.” He attributes the faster-than-planned reduction
of the deficit to a sharp fall in the interest Portugal pays on
its debt.
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Small policy changes were enough to restore confidence and

lift growth, he says. “The trick was to commit to a path and
stick to it.” The consequence, he says, was a “tremendous
jump in confidence and economic activity” beginning in the
second half of 2016.

The combination of fiscal discipline and a fair distribution

of the economic benefits is what Mr Traça of Nova SBE sees
as Mr Costa’s lasting legacy. “Any [Portuguese] government
that cannot deliver this in the future will not be in power for
long,” he says.

But he criticises what he describes as the government’s

inertia on reforms to make the public administration more
efficient and effective. “We have heard nothing about plans
for where Portugal should be in 10 years.”

Mr Costa believes everyone, including the European

Commission, which oversees the fiscal rules, has learnt
important lessons from the debt crisis. “I think we now have
a stronger consensus, not only on respecting common rules
on deficits and public debt, but on the importance of
economic growth to reduce unemployment and on
increasing people’s incomes to strengthen confidence.
Confidence is the great driver of economic recovery.”

The costs of the crisis are still being felt

Portugal’s Socialist government was quickly made aware of
the fragility of the country’s banking sector. Weeks after
taking office in November 2015, it agreed a €2.3bn state
rescue for Banco Internacional do Funchal (Banif).

Given that Banif was only the country’s seventh largest

lender, this was “probably the most expensive banking
bailout in Europe”, says Mário Centeno, the finance
minister. In 2016, the government paid a further €3.9bn
into state-owned Caixa Geral de Depósitos, the country’s
largest bank, as part of a €5bn recapitalisation plan.

“There was an absolute bottleneck,” says Mr Centeno, who

says three-quarters of banking assets were held in lenders
that were “in disarray”. He adds, “You can’t have economic
growth in a country that does not have a stable financial
sector”.

In a sharp reminder of the continuing costs of the banking

crisis, Novo Banco, the so-called “good bank” rescued from
the 2014 collapse of Banco Espírito Santo, posted a net loss
of €1.4bn for 2018 on top of a €2.3bn loss the previous year.
This has forced Mr Centeno to set aside €1.1bn this year to
prop it up, instead of a budgeted €400m.

The government supports Novo Banco, acquired in 2017 by

Lone Star, the US equity fund, by making state loans to the
country’s bank resolution fund, which is owned by all
Portugal’s banks. These loans will not cost the taxpayer a
cent, Mr Centeno promises, nor will the additional support
required prevent the budget deficit from falling to “close to
zero” this year.

Critics on the both the left and right, however, say taxpayers
will be hit indirectly by the contributions that state-owned
CGD has to make towards shoring up Novo Banco.

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