Portugal under Supervision

Back on (Austerity) Track

Last November, the new Portuguese government, under Prime Minister António Costa, assumed office with a promise to end the EU's "impoverishment strategy and austerity policy." The Socialist Party, enjoying the parliamentary support of the Left Bloc, the Greens and the Communist Party, raised the minimum wage, cut the value-added tax and passed a law against evictions. It also announced further measures to increase pensions and social security benefits, lower social insurance contributions for low-wage employees and re-introduce the 35-hour week in the public sector. The plans have now been made conditional, because the EU has forced Portugal to make changes in its budget for the current year. "The European Commission considers that the Portuguese government's 2016 Draft Budgetary Plan is at risk of non-compliance with the provisions of the Stability and Growth Pact," and is demanding that Lisbon "correct" its alleged "excessive deficit," according to a statement published last Friday.[1] The Costa government had submitted its draft budget to Lisbon's parliament shortly before the EU Commission's decision, because it did not want to have it devalued by Brussels. However, with its decision, the Commission has placed the budget under supervision and announced a reassessment already for the spring.

845 Million Additional Charges

Brussels has even considered rejecting the Portuguese draft budget. Portugal was able to prevent a veto only through tough negotiations. The European Commission has called on Portugal to generate 950 million Euros in additional savings, to further reduce its debt. Finance Minister Mário Centeno then submitted proposals with a volume of 450 million Euros. He was ultimately forced to accept a volume of 845 million. To fulfill these conditions, the country will increase the value-added tax on oil and tobacco, taxes for a new car, bank levies, and charges for finance market transactions.

Pressure from Berlin

Prime Minister António Costa defended his draft budget all the way to the announcement of the Commission's decision. "We have submitted a responsible budget," he emphasized at a joint press conference last Friday with Chancellor Angela Merkel.[2] In a conversation with the Frankfurter Allgemeinen Zeitung on the eve of his trip to Berlin, the Socialist explained the motives behind his policy. Costa outlined the problems his country was facing with the increase in competition from other low-wage countries. "Practically, since the introduction of the Euro, our economy has stagnated. In the new framework of competition since China and Eastern Europe opened up, we have had many adjustment difficulties." The preceding government has not found a way to correct this situation. "It was a mistake to think that something like this would be possible if you impoverish everyone."[3] However, Costa's program has not impressed Angela Merkel. She urged the Prime Minister to continue to pursue the austerity course. "The reform path was not easy, but we have made remarkable achievements. We talked about that and of course everything must be done to continue on this successful path."[4]

Acid Test for the Left Alliance

The austerity dictate, primarily initiated by Berlin, is putting strains on the fragile Portuguese minority government. Already the liquidation of the highly indebted Banif Bank - executed with EU assistance - causing an increase of the national deficit from approximately 3 percent of the GNP to 4.2, had been opposed by the Left Bloc, the Greens and the Communist Party. The confrontation with demands by the European Union, the Troika as well as those of the EU's Portuguese allies, threatens to become an acid test for the Costa government. The spokesperson for the Left Bloc, Catarina Martins, said that "this time, the Portuguese State will have a different relationship with the European institutions."[5] Referring to the Left Alliance's program during last week's lengthy negotiations with Brussels, she said, "we have to be absolutely firm at this moment and say that there is no warning from anywhere that can question the signed agreement to stop the impoverishment in Portugal, and the State Budget for 2016 will naturally mirror that agreement."[6]

Portugal as a Precedent

According to the Left Block's publication, "Esquerda," Brussels, with its hard-line position towards the government of Prime Minister Costa, seeks to send a message to Portugal's neighbor: "The ultimate goal is to get the Spanish Socialist Party to refrain from opting for a 'Portuguese style' solution."[7] Should also a left alliance form the government in Madrid, the EU's objective of again pushing Spain's deficit below the three percent limit, would be in jeopardy. Therefore, according to the Commission's calculations, the future government in Madrid must generate eight billion Euros. The left wing Podemos Party, however, has already declared that it will not continue the austerity policy. Even though the EU's Commissioner for Economic and Financial Affairs, Pierre Moscovici, made no comment on negotiations between Spain's socialists and Podemos, last Thursday, he left no doubts that Brussels will insist on compliance with the Stability Pact, calling for a major effort to be made.[8]

Commerzbank Intervenes

According to "Esquerda," Portugal, however is not only submitted to pressure from Brussels. "The European blackmail goes further than the European Commission," explains the internet journal and refers to a Commerzbank report.[9] That German financial institute sharply criticized Costas policies in a report dated January 19. "Evidently, the new government is not relying on liberalization and deregulation, to revive the economy. Instead, it would rather look toward an expansive financial policy and a return to greater government influence on the economy," affirms the financial institute, which was only able to withstand the financial crisis, thanks to government support to the tune of ten billion Euros.[10] This analysis, quoted widely in domestic and foreign media, alleges that the Costas government is making a fundamental change in policy and evokes the specter of similarities to Greece. "Over the next few weeks, the big question will be, to what extent the government, in fact, will be able to put through its program," predicted Ralph Solveen.[11]

Finance Markets' Reaction

In the meantime, the actors of financial markets are unfurling their threat capabilities. The sector was very upset with the fact that Costa had halted privatizations and refused to bailout the Portuguese Central Bank, as had been previously done with the Branif Bank. Not least of all, however, interests on Portuguese government bonds rose by more than three percent at the end of January and the assessment by the sole rating agency not considering Portuguese bonds speculative investments - the Canadian DBRS - is scheduled for the end of April. Should this agency also devaluate, this would have serious consequences. The European Central Bank no longer would be able to buy Portuguese government bonds. This is precisely the situation the Commerzbank is hoping for. "Since the new government will surely not apply for a new bailout package [...], it could attempt to avoid this danger by taking a moderate course in economic policy. However, this would provoke conflicts with its extreme-leftwing supporters, thereby running the risk of losing the parliamentary majority. This, in turn, would ultimately mean new elections." This is how the Commerzbank concludes its report "Portugal: The New Old Problem Child."[12]

[1] European Commission adopts Opinion on Portugal's 2016 Draft Budgetary Plan. europa.eu 05.02.2016.
[2] Pressekonferenz von Premierminister António Costa und Bundeskanzlerin Angela Merkel. Berlin, 05.02.2016.
[3] Costa lobt sein erstes portugiesisches Budget. Frankfurter Allgemeine Zeitung 05.02.2016.
[4] Pressekonferenz von Premierminister António Costa und Bundeskanzlerin Angela Merkel. Berlin, 05.02.2016.
[5], [6] European blackmail begins before the State Budget for 2016 is even released. www.esquerda.net 26.01.2016.
[7] European Commission presses Portugal to prevent left-wing agreement in Spain. www.esquerda.net 04.02.2016.
[8] EU-Kommission: Südeuropäische Länder gefährden Wachstum der EU. www.euractiv.de 05.02.2016.
[9] European blackmail begins before the State Budget for 2016 is even released. www.esquerda.net 26.01.2016.
[10], [11], [12] Economic insight. www.commerzbank.com.