In October, the Social Democrats (the main center-right party) won the most votes of any party, and Portugal’s president reappointed Prime Minister Pedro Passos Coelho. It soon became clear, however, that the Social Democrats couldn’t form a stable government. Meanwhile, the Socialists, who received the next-largest share of votes, made a deal with the Communist Party and the Left Bloc, the latter of which has been compared to Greece’s populist Syriza party, to form a coalition with enough votes to govern. On November 10, the left-wing alliance pushed through a no-confidence vote to topple Coelho’s government. Portuguese President Aníbal Cavaco Silva can now either appoint a caretaker government headed by Coelho, which would need to find common ground with the Socialists and others to get anything done, or allow the left-wing alliance to take power. A third possibility: the Socialists accept Coelho’s challenge to allow early elections that might produce a more stable configuration in the Assembly.
No matter which short-term outcome prevails, political instability is most likely ahead. The three left-wing parties have major policy differences, and Credit Suisse believes a coalition government would only last a few months. The Left Bloc and Communist Parties are anti-austerity Euroskeptics. The Communists campaigned on nationalizing Portuguese banks, dropping out of NATO, and restructuring foreign debt. The Socialists are more moderate. Antonio Costa, the leader of the Socialists and presumptive prime minister in a left-wing coalition government, has said the new government would not follow Greece’s example by forcing a confrontation with European creditors over debt restructuring.
The Socialists do want to ease off austerity, however. Over the last few years, the government has hiked taxes, overhauled state-owned enterprises, privatized assets, laid off 10 percent of government workers, cut public-sector salaries, and passed a slew of private-sector reforms, including changes to bankruptcy and labor laws.
The results have been impressive. Portugal exited its €78 billion European bailout in May 2014, though the so-called troika of the European Central Bank, European Commission, and International Monetary Fund continues to monitor the country’s finances and economic policies. Setting aside some one-time spending on big-ticket items over the past year, including a bailout for a failing bank, Portugal’s budget deficit is at 3.4 percent, down from 4.8 percent two years ago. Borrowing costs have also fallen dramatically. Though government debt yields climbed close to 3 percent following the elections, they’re nowhere close to the double-digit rates of 2012.
The country’s economy has been growing steadily since 2013, and Credit Suisse’s predicts higher growth in Portugal than the euro zone in 2016, 2 percent to 1.8 percent. Portuguese labor costs have fallen sharply since the European debt crisis, and exports have soared. By the end of 2013, exports accounted for more than 40 percent of the economy, up from less than 30 percent before the crisis. But the recovery isn’t only externally-driven. Growth in private consumption accelerated to 3.2 percent, year-over-year, in the third quarter of 2015, the largest increase since 2010. Consumer confidence has been climbing since 2013, with unemployment falling from a peak of 17.5 percent in January of that year to 12.2 percent in September – still high, but a marked improvement no less.
A left-wing government might raise government workers’ salaries and reduce those taxes that the previous administration raised in an effort to reduce the deficit, but European monitoring and the Socialists’ stated desire to avoid a Greece-style crisis make a complete reversal of austerity measures unlikely. Portugal’s private-sector reforms are also likely to stay. “Even if a leftist coalition were to govern, we believe the Portuguese Socialist has a sufficiently strong European DNA to avoid more fundamental uncertainties that were present in the Greek crisis earlier this year,” say Credit Suisse analysts in a recent report. Finally, the European Central Bank’s quantitative easing program is likely to keep borrowing costs relatively low. Portugal has done a considerable job digging itself out of an economic and fiscal crisis, and a change in government isn’t likely to derail that progress.
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