May 16, 2021

Rift Over Austerity Plans Is Seen in Ailing Portugal

While the government of Prime Minister Pedro Passos Coelho has fended off collapse, for now, Portugal joins other crisis-hit euro countries left badly weakened by sharp divisions over the austerity approach and angry debates over how much more pain weary citizens can take.

The unexpected political turmoil in Lisbon, where two ministers resigned in two days, has rattled stock markets — Portugal’s main stock market index closed down 5.3 percent on Wednesday — and provided “another nail in the coffin of the current austerity approach,” said Simon Tilford, chief economist at the Center for European Reform in London.

“Portugal was one of the poster children for it, with a government that sounded even more wedded to austerity and supply-side reforms than the policy makers sitting in Brussels, Berlin and Frankfurt,” he said.

Though the Portuguese have followed the austerity path assiduously, they have not been alone in enacting the deep cuts to spending and public programs that proponents say are needed to get government books in order, and that opponents blame for stalling any semblance of recovery.

In Italy, the two-month-old coalition government of Prime Minister Enrico Letta, the product of a deadlocked Parliament, is badly split over the austerity issue, and is being kept alive less by consensus and more by its members’ fear of political extinction — as well as by Europe’s grudging acknowledgment that Italy is too big to fail and too big to bail out.

In Greece, the governing coalition of Prime Minister Antonis Samaras, the country’s third government since 2009, was significantly weakened last month when its third and smallest party, Democratic Left, withdrew its ministers to protest Mr. Samaras’s unilateral decision to shut down the state broadcaster as part of the cuts demanded by the nation’s creditors.

Even though this week’s upheaval in Lisbon can be seen as “a victory for the anti-austerity camp,” said Luis Cabral, a Portuguese economist who teaches at New York University, he suggested that the European policy debate would continue, as countries like France that have sought to steer away from drastic spending cuts fail to demonstrate that they have the capacity for the kind of government spending — what Mr. Cabral called “a Keynesian magic wand” — that will solve Europe’s economic problems.

The uncertainty in Portugal comes as officials from the so-called troika of international creditors, the European Commission, the European Central Bank and the International Monetary Fund, were scheduled to start a review of the country’s economic progress on July 15.

In May 2011, Lisbon negotiated a bailout with the creditors worth $101 billion, linked to an overhaul program that was meant to improve its economic competitiveness and end in June of next year.

Instead, Portugal has been stuck in one of Europe’s deepest and longest recessions, with an unemployment rate that has soared to almost 18 percent compared with 12 percent when Mr. Passos Coelho came to power two years ago.

While Mr. Passos Coelho has won considerable praise from the creditors for sticking to the terms of the bailout program, “the results have been seen in the financial markets, but not in the real economy,” said Pedro Santos Guerreiro, editor in chief of Jornal de Negócios, a Portuguese business newspaper.

As a result of the political chaos, Mr. Santos Guerreiro warned that there was a genuine possibility that Portugal would end up requiring another bailout, which “would be very hard for the Portuguese people who have been facing so much austerity, but would also mean defeat for the European Union and its rescue plans.”

Rachel Donadio contributed reporting from Rome, and Melissa Eddy from Berlin.

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