Portugal: a European path out of austerity? – Financial Times


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.

“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.

Chart showing Portugal – Borrowing costs have eased

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”.

Chart showing Portugal – recovery is well entrenched

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.

Chart showing Portugal – public debt remains high

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 populists 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 party 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.

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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