Portugal – The EU’s Second Greece

| May 22, 2015

Europe is facing the huge risk of a second EU financial revolt, mainly by the left wing political forces in the south of Europe. The Socialist party in Portugal has vowed to defy the austerity demands from the country’s creditors and promise to block further sackings of any public officials. The Socialist leader Antonio Costa stated the party would carry out a reverse policy.

Portuguese Socialist Party Antonio Costa

Portuguese Socialist Party Antonio Costa

Portuguese Socialist Party

The majority of the Socialist party wants to halt the obsession with austerity. Mr Costa spoke to journalists in Lisbon, just as his country prepares for elections in October. He stated that Portugal must start the rebuilding of key parts of it’s public sector, following the dramatic cuts of public finance under the previous EU and IMF Troika regime. He wants to see the country turn the page on austerity and instead revive the economy and create jobs, while still complying with Euro rules.

The Socialist party of Portugal claim they are a different party fundamentally from the radical Syriza movement that gained momentum in Greece. There is however, a strikingly similar language, tone and pre-election proposals. Syriza has also claimed they will stick to the Economic and Monetary Union (EMU) rules, while also at the same time campaigning for policies that are bound to provoke confrontation with creditors.

Socialist Party Measures

Antonio Costa has already accused the Portuguese government of launching a host of privatizations in its final days, giving a signal to the Socialists who will either block or review the sale of the country’s national airline TAP Portugal, the public water works, as well as the public transport hubs. Costa unveiled a package that consisted of 55 mesures in March, which were led by a wave of spending on both the education and healthcare sectors, that amounted to a fiscal reflation package of measures. The party has also claimed it will roll back the reforms implemented by labour to make it tougher for companies to sack workers.

The proposed plan would appear incompatible with the Fiscal Compact presented by the EU, as it requires Portugal to start running a massive primary surplus to help cut its public debt from 130% to 60% of the Gross Domestic Product (GDP) which would span 20 years. The attacks on austerity in Lisbon are likely to become more fierce, heightening fears in Germany that the fiscal and reform disciplines will break down completely in Southern Europe, especially if the Greek rebels win concessions.

Greek Comparison

Currently, Greece has the center stage, and everybody is watching its approach. This is the reason that the Portuguese and Spanish prime ministers have already taken a hawkish approach to their negotiations. There is no deal in sight for Greece yet. Syriza is continuing to live hand to mouth, while narrowly avoiding default week after week, by raiding its buffer funds.

Yanis Varoufakis, who is the country’s finance minister, ha told the Greek media on Monday pensions and salaries are sacred. Claiming these will take priority if the money runs out. He is preferring to take the approach of a default to the IMP rather than on the salaries. Varoufakis sent out a mixed message saying that Greece had no plans to create a rupture with the European Union or even a change of currency.

Portugal’s Financial Controls

Portugal is now no longer under European Troika control. They existed the €78bn bailout programme in 2014 and instead returned to the markets. They are able to borrow funds for 10 years at an interest rate of 2.35%. Although the EU has no direct leverage on Portugal, they do have in place a post programme surveillance operation. This includes 2 monitoring missions each year, until they have repid 75% of the money they still owe. It will take Portugal many years for them to clear this debt, with their higher aggregate debt levels, and much lower levels of education than Greece.

Portugal’s Reality

The total combined public and private debt in Portugal is more than 370% of the GDP, which is the highest in europe. This is leaving the country badly exposed to stagnant nominal GDP, and the effects of debt deflation. Citigroup has already calculated that Portugal’s debt ratios have passed the point of no return, warning that it will be absolutely necessary for the country to undergo some sort of debt restructuring to wipe their slate clean. The IMF have warned that although the country’s bailout has been a success, they remain highly vulnerable.

Portugal faces numerous challenges with its growth. The measured productivity of the country has been declining over the past half century. The age population of portugal is also projected to fall, along with the contraction of the country’s capital stock because of under investment. Portugal is set to be caught in the stagnation trap, which makes it hard for the country to grow it’s way out of debt. The rescue of the country won’t come from the banks, as they still hold too much bad credit on their books, so it’s not clear how Portugal will rescue itself from this bad spiral.

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