Economy
rains on Portugal’s victory parade
Iberian
neighbors seek to avoid EU fines, but Lisbon worries go beyond
sanctions.
By PAUL AMES
7/11/16, 8:22 PM CET Updated 7/12/16, 8:06 AM CET
LISBON — Amid the
joyous multitude swirling around Lisbon after Sunday night’s Euro
2016 triumph, a young man wrapped in red and green was overheard
telling friends: “F–k it, this is one night when we won’t worry
about our shitty wages.”
The football victory
may have also allowed António Costa to push Portugal’s wider
economic woes from his mind as he celebrated with the team in Paris.
Any respite for the
prime minister will be short lived.
On Tuesday, European
Union finance ministers will debate “the absence of effective
action” by Portugal and Spain to cut their outsized budget deficits
in line with eurozone rules. The outcome of their meeting could lead
to the Iberian neighbors facing unprecedented sanctions from the EU.
Although Spain’s
economy is over six times larger and its deficit higher, Portugal is
the bigger headache for Brussels.
The punishment —
potential fines of up to €2.1 billion for Spain and €360 million
for Portugal, plus billions in cuts to EU aid funding — could have
a major impact in both countries.
In Spain,
conservative Prime Minister Mariano Rajoy is in the midst of delicate
negotiations to stitch together a government after the second
inconclusive general election in six months.
Costa’s minority
Socialist government rules with the support of two far-left parties
who are demanding resistance to any pressure from Brussels for
additional deficit-cutting measures.
“Applying
sanctions to Portugal would be inappropriate and unjust … I hope
that good sense exists in the Ecofin,” Costa said over the weekend,
as he sought to rally support among other EU leaders on the sidelines
of the NATO summit in Warsaw.
Although Spain’s
economy is over six times larger and its deficit higher, Portugal is
the bigger headache for Brussels.
“The only country
I am worried about is Portugal, independently of Brexit,” Klaus
Regling, head of the European Stability Mechanism (the eurozone’s
permanent bailout fund), recently told the German business weekly
WirtschaftsWoche. “The government there is rolling back reforms …
Portugal is becoming less competitive.”
Spain’s banks are
looking relatively healthy. It’s recovering from the housing crisis
that almost ruined the economy in 2009 — the stock of unsold new
homes was reported back at pre-crisis levels Monday.
Its economy grew at
3.2 percent last year, the fastest of any major eurozone country and
more than double anemic Portuguese levels.
“It would make no
sense to impose any kind of sanction on Spain,” Economy Minister
Luis de Guindos said last week. “Spain has made significant efforts
to reduce the deficit. It’s the economy that’s growing the most
and which has made the most reforms.”
Promises, no
promises
Rajoy has promised
the European Commission he will take extra measures to reduce the
deficit in the second half of this year, if his conservative Popular
Party is able to form a government with a working majority.
Costa on the other
hand rejects calls to revise his efforts to “turn the page on
austerity” since the Socialists came to power in November.
In a
state-of-the-nation address Friday, he told parliament the government
would stick to its financial plans “without additional measures,
without plan Bs.”
The Portuguese
leader has been lobbying European leaders to avoid sanctions or at
least have the punishment reduced to a symbolic level. Supporters
point out imposing sanctions on a struggling economy makes little
sense and risks a political backlash at time of shaky support for
Europe.
Costa blames the
deficit on the austerity policies of the previous center-right
administration, ousted in November. He insists cuts in taxes and
healthcare contributions, a rise in the minimum wage, the reversal of
pension cuts and other expansionist policies adopted by his
government will spur growth and enable the country to meet eurozone
deficit reduction targets this year.
His numbers,
however, fail to convince everybody in Brussels and Berlin. Growth is
slowing, exports are down, the banking system is fragile.
A €3 billion
rescue of the troubled Banif bank in December scuppered hopes of
bringing the 2015 deficit below the eurozone target of 3 percent of
GDP. More public money will likely be needed to prop up other
financial institutions. The biggest bank, state-owned Caixa Geral de
Depósitos, faces recapitalization needs estimated at over €4
billion.
Schäuble’s
warning
Even if Costa
succeeds in dodging tough sanctions, concern over the risks in
Portugal will remain.
“Beyond the
political formalities in the [Ecofin] council, the reality is that
Portugal does not have the financial conditions to follow those
policies which the government has adopted,” said Helena Garrido, a
leading economic commentator and former editor of the Jornal de
Negócios business daily. “It does not have the conditions to widen
public spending in the way that is being done.”
German Finance
Minister Wolfgang Schäuble has warned Portugal could be forced into
a painful new bailout program if it doesn’t stick to the eurozone
targets.
Yet Costa’s room
for maneuver is limited. Even if he was inclined to give the country
another dose of austerity, the radical parties on which his
government depends for survival are virulently opposed.
Catarina Martins,
leader of the Left Bloc, says sanctions would represent a
“declaration of war” on Portugal. She’s calling for a
referendum on the EU should they be applied — although has
carefully avoided calls for a Brexit-style In/Out vote, talking
instead of a referendum on the “direction” the EU is taking.
The Portuguese
Communist Party has filled Lisbon with posters calling for an end to
“submission to the euro.”
Portugal’s Euro
2016 victory party continued into the small hours Monday and revived
in the afternoon when crowds packed the streets with a delirious
welcome for Cristiano Ronaldo and the rest of team that gave this
soccer-loving nation its first major championship win. Unfortunately,
the hard economic news won’t make the hangover easier to bear.
Authors:
Paul Ames
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