Only a week ago, Portugal received the welcome news that it had narrowed its budget deficit with millions in hand and was on track for more fiscal success. But is it really time to celebrate? Are we finally on the road from austerity? And, more importantly, is Europe at last rounding that corner that will secure the competitive edge it needs to keep up in the global economy? In a nutshell, answers point to a measured “yes, but…”.
As they say in politics: it has been a long week.
On the day the government released figures to show it had comfortably met its budget deficit goal with €1.75 billion in hand, news from the World Economic Forum in Davos, Switzerland, suggested a number of eurozone banks will fail their so-called ‘stress tests’ in 2014 and reignite panic throughout the region.
Axel Weber, chairman of UBS and former head of the Bundesbank, Germany’s powerful central bank, said: “The European recovery is lacklustre and uneven across European countries.
“Things feel better, but they feel better than they are. Europe is not yet back. There is a risk that people are too complacent about the future.”
Unemployment remains the most worrying Achilles heel, with world-class economist Kenneth Rogoff calling it “really horrific” in certain countries.
But this was only a “news flash” from the Davos conference reported by the Daily Mail and headlining with Rogoff’s much-publicised contention that the ‘one-size-fits-all’ euro was a “giant historic mistake”.
The next day, words were much less scratchy, with European heavyweights like Mario Draghi, President of the European Central Bank, and Wolfgang Schäuble, Federal Minister of Finance of Germany, both being upbeat about Europe’s prospects.
“We have regained confidence in the euro,” said Schäuble. “The euro will remain a reliable and important currency and no one wants to change that. I have confidence that we can stabilise the eurozone.”
And back in Portugal, Tuesday this week saw the Financial Times suggesting that the country is well and truly on track to exit its €78-billion bailout without the safety net of an EU credit line.
The picture was very different only a couple of months ago, writes FT financial correspondent Peter Wise. Senior Brussels’ policymakers were convinced the country would need a second full bailout, “but the combination of growing investor confidence that the eurozone crisis is over” and Portugal’s stronger-than-expected economic recovery have turned the tide.
As Adrian Hook from financial consultants Blevins Franks pointed out on Tuesday: “A couple of years ago, we would receive calls every day asking us when the euro would fall. No one is asking that anymore. In fact, everyone seems more than happy to be part of it.”
Nonetheless, the country is still full of social and economic problems, with unemployment particularly high among the young.
Former PSD leader Manuela Ferreira Leite – a keen critic of her own party’s current policies – considered last week’s budget deficit triumph to be “only a number”.
“I am not contesting the number,” she told news channel TVi24, “but I am contesting the measures that were taken to get there.
“The austerity imposed by the government weighs heavily and will continue to weigh heavily on the Portuguese. Measures have had huge social consequences,” she added, saying she believes much of the austerity brought in by the current coalition government has been “excessive relative to what was necessary”.
As if on cue, economy minister Pires de Lima told Spain’s El País newspaper that he “hoped” more sacrifices within the public sector would not be necessary this year – but he couldn’t rule them out.
“It isn’t possible to attain the objective of lowering taxes in 2015 without controlling public expenditure,” he said.
And while Prime Minister Pedro Passos Coelho has consistently declared that many austerity measures – particularly cuts to public sector salaries and pensions – are temporary, neither he nor his finance minister Maria Luís Albuquerque will be drawn as to when government pressure might ease-up.
As to taxation levels taking a backward step, this will depend very much on how successful the State is at collecting the money it needs.
As the government explained last week, much of its success in closing 2013 ahead of budget deficit targets was due to the “enormous increase in taxes” brought in in 2012 by the former finance minister Vítor Gaspar.
If the coalition is to continue meeting policymakers’ targets – and indeed outstrip them – it’s unlikely they will be letting up on taxes any day soon.
But as Adrian Hook of Blevins Franks pointed out, the government is getting “very clever” at finding ways of taxing even those who try to wriggle round the system.
“The Portuguese government has become very much better at collecting what is due,” he told the Algarve Resident. “IVA, electricity bills – all these tax the whole population, regardless of whether people are paying their taxes or not.
“And state-of-the-art computer systems mean there is a much more pan-European exchange of information. Opportunities to avoid paying tax are significantly less now.”
Needless to say, Portugal still has a way to go. Its “greatest economic vulnerability remains a public debt burden amounting to more than 128% of GDP, as well as high levels of both corporate and household debt”, concludes Peter Wise of the Financial Times.
“The country also continues to be rated below investment grade by the main rating agencies,” although Standard & Poor’s have removed Lisbon from “credit-watch”.
In other words, economically at least, things could finally be looking up. It remains to be seen whether the social consequences allow Portugal’s fragile recovery to gain strength.
As Manuela Ferreira Leite said on television at the weekend, “if I was in the government’s position right now, I wouldn’t be lighting any fireworks.”
Re-elected Passos Coelho says
‘Deceptive wealth gone for good’
Portuguese Prime Minister Pedro Passos Coelho has said that many of the cuts the government has implemented are temporary, though the “deceptive wealth” the Portuguese enjoyed before the crisis in 2011 is gone for good.
Passos Coelho was speaking at the PSD headquarters after being re-elected for his third consecutive term as president of the right-wing political party, with 88% of the votes and no alternative contenders.
Although admitting that the government cannot set a date for when austerity can be reversed, the prime minister guaranteed that it will all depend on how the Portuguese economy recovers.
“We will not face the future thinking that all the cuts that had to be made will continue,” Passos Coelho stated.
But Portugal will still never achieve the levels of what he dubs “deceptive wealth” registered before 2011, and anyone campaigning on the basis of returning to those kinds of income levels is simply spouting “vote-seeking claptrap”.
“Our recovery will depend on the wealth that we can create,” he said, predicting a “gradual recovery” in both the public and private sectors.
Bankers and EU chiefs push for post-troika ‘credit line’
Portugal || As Europe vacillates over whether Portugal can make a ‘clean’ exit from its bailout programme without a ‘precautionary’ credit line, the country’s bankers have been blunt. Portugal will need post-troika controls, they say, as it couldn’t run without them.
Jornal das Notícias carries the damning quote from a leading banker who says that “as Portugal is a country that doesn’t know how to govern itself, it has to have obligations”.
Elsewhere, policymakers are sitting firmly on fences. As one diplomat told Público newspaper: “There are countries which would prefer Portugal to exit with a belt and braces” – meaning all financial safeguards possible. Certainly EU chiefs Durão Barroso and Olli Rehn seem to lean this way.
“I believe in the principle of better safe than sorry…. and the precautionary line is precisely for the purpose to be rather safe than sorry,” European Commissioner for Economic and Monetary Affairs Olli Rehn told the Wall Street Journal at the recent Davos conference.
But the bottom line, writes Público, is that Portugal needs national consensus over its financial strategy. If it has that – all political parties agreeing on the country’s direction –then it could well make the clean exit that Ireland managed, with success, in December.
By NATASHA DONN [email protected]