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Portugal and the eurozone crisis: the well-behaved pupil plays truant

The people have finally realised that the troika-imposed austerity is not working in Portugal. In fact, the austerity packages are not working in Ireland (another good pupil of the troika), or in Greece, or Spain, or Italy.

Eunice Goes
27 September 2012

Just a few weeks ago Portugal’s Foreign Secretary Paulo Portas used his meeting with his German counterpart to praise the exemplary way Portuguese citizens have accepted the sacrifices demanded by the “troika” (International Monetary Fund/European Central Bank/European Commission) in exchange for the EUR 78 billion bailout. In other words, Germany and the rest of Europe had nothing to fear because the Portuguese were neither difficult nor prone to anarchy like the Greeks.

At the time, Paulo Portas had reasons to offer reassurances to Europe’s paymasters. After all, in the past 12 months (not to mention the three austerity packages that preceded the bailout) Portuguese citizens have accepted with astonishing stoicism significant cuts to their wages and pension, together with the significant rises in indirect taxation, in utility bills (just a 23% rise in electricity costs), in public transports, and in the access to public health.

Overall the population accepted with barely a shrug the significant deterioration in their living and working conditions. Many accepted the truism that the harsh austerity medicine prescribed by the troika was necessary to cure the country from its “overspending vice” (note that to include a moral dimension in discussions about debt is always effective, especially in Catholic countries). Even the Socialist Party and the trade unions accepted that public spending cuts and tax rises were inevitable. And, indeed, many citizens (though not the majority) voted in 2011 for the party that promised to “go beyond the troika” in order to liberate Portugal from “the statist paradigm” that had been prevalent in Portuguese society since times immemorial (more or less the words uttered by the Prime Minister Pedro Passos Coelho at the time of the 2011 legislative elections).

But the centre-right coalition government headed by Pedro Passos Coelho, who has implemented the troika programme with a remarkable ideological zeal, took the stoicism of the Portuguese for granted when on September 7 he announced new austerity measures.

As a result of a significant shortfall in tax revenue (for the first seven months of this year tax revenue has fallen EUR 2.6 billion short of projections to EUR 17.8 billion) there is a massive hole in the public coffers. And because shrinking tax revenues outweigh gains from public spending cuts, the government has failed to meet the public deficit target of 4.5% set by the “troika” for 2012 (public deficit is estimated to reach 6.2% at the end of the year). In its determination to meet the targets of the bailout programme the centre-right government decided to increase by 7% the social security contributions of all workers, a rise which in effect amounted to a loss of one month’s salary a year for every worker.

The government claimed that the rise in workers’ social security contributions would inject a new dynamism into the moribund economy, in particular in the labour market. Indeed, this new measure was presented as a job-creation policy. However, this policy was not demanded by any employer in Portugal. On the contrary, the majority of Portuguese businesses cannot see how a policy that will drastically reduce consumer demand will result in more jobs.

In its ideological blindness, the government went ahead with this proposal which went beyond the threshold of economic pain that the population could endure. As soon as the Prime Minister announced the new austerity measures on TV a movement of popular resistance emerged. In a matter of days a big demonstration was organised on Facebook under the slogan “Que se Lixe a Troika! Queremos as Nossas Vidas de Volta!” (We don’t give a damn about the troika! We want our lives back!). On September 15 half a million people filled the main streets of Lisbon in the largest demonstration since the Carnation Revolution in 1974. In 20 cities across the country, citizens representing all generations and all political creeds took to the streets to shout “basta” and to demand the resignation of the government. A week later, hundreds gathered outside the presidential palace hoping to convince the head of state to persuade the government to abandon the new austerity measures. 

The people had finally realised that the troika-imposed austerity is not working in Portugal. In fact, the troika inspired austerity packages are not working in Ireland (another good pupil of the troika), or in Greece, or Spain, or Italy. Many Portuguese realised that the austerity measures will not eliminate the public deficit because their main aim is to destroy the European social model hated by the “Chicago boys” and their European disciples.

The facts speak for themselves. Despite the savage public sector cuts implemented since 2011, the government has failed to meet the public deficit targets set by the troika. Portugal was supposed to cut its deficit to 4.5% this year, but the deficit is expected to remain at 6.1%, as a result of shrinking tax revenues. Moreover public debt as a percentage of gross domestic product continues to rise as the economy contracts. Currently public debt is set at 124 per cent of the GDP (clearly above the levels acceptable to the European Central Bank) and is expected to rise to 134 per cent of GDP by next year. This macroeconomic scenario means that a second bailout is most likely.

More serious is the impact of austerity on economic growth and on employment. The economy is expected to contract three per cent by the end of this year - 4,200 companies have filed for bankruptcy this year alone - unemployment is close to 16% of the population (youth unemployment is estimated by analysts to be as high as 40%), food banks have opened all over the country as more and more families are thrown into poverty, whereas the young and talented have decided to follow the advice of the Prime Minister and are now leaving the country in droves. 

Rising political instability

Echoing the anger on the streets, economists, trade unions, industrialists and politicians from all parties have been busy denouncing the government’s measures. The main opposition party, the Socialist Party, which so far has supported the austerity approach, threatened a motion of no-confidence and announced that it would not support the forthcoming budget. The smaller party of the coalition, the conservative Popular Party, tried to play simultaneously the role of government and opposition when it expressed publicly its opposition to the rise in workers’ social security contributions. Paulo Portas, the leader of the party and the Foreign Secretary, went as far as saying that he had not been consulted about the new tax rise and that he was against it.

Within the main party of the coalition government, the centre-right PSD, there was also dissent. Several of its barons were vehement in their condemnation. For example, Manuela Ferreira Leite, the predecessor of Pedro Passos Coelho and a former Finance Minister, denounced the “brutality” of the new austerity measures and accused the government of doing social experiments with the country. She also invited her parliamentary colleagues to vote against the measures.

Even the “troika” tried to opportunistically distance itself from the government. “This is the programme of the government; it’s not the troika’s programme” said the grey-suited international bureaucrats.

After a week of popular protests, denunciations and critics from all sectors of Portuguese society the Prime Minister announced a U-turn. The planned seven per cent rise in workers’ social security contributions was abandoned. However, this U-turn is purely cosmetic. After pretending to have listened to the people, trade unions and employers, the government announced that other tax rises – including income tax – are in the pipeline. The deadline for the presentation of the new proposals is quite short, as the budget has to be approved in Parliament before it is approved by the European Commission in mid-October.

The calculation of the government is quite easy to guess. The Prime Minister hopes that the demonstrations of the past days have had a cathartic effect on the population and that now the Portuguese are ready to go back to their traditional attitudes of apathy, resignation and fatalism. But judging from the sense of pride in the rediscovered civic awakening that now reigns in the streets of Lisbon and of many other Portuguese cities, he might be very wrong. 

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