Taking a closer look at Portugal’s socialist “success” story

This appeared as a contribution to the Young Fabians European Elections 2019 project

In sharp contrast to the rest of the Eurozone, Portugal has enjoyed a run of economic growth. Wages are growing and unemployment is falling. Seeing this happen under an openly anti-austerity government has given many European socialists a cause célèbre.

It could be argued that Portugal represents a “fourth way” for European social democrats. In sharp contrast to the approaches taken in the early-2000s by left-wing governments, Portugal’s government has aimed to fund pro-growth policies, rigorously pursuing wage hikes and investment in public services as needed.

Prime Minister António Costa, the former Mayor of Lisbon, leads a Socialist (PS) minority government in a confidence and supply agreement with Left Bloc (BE), The Communist Party (PCP) and The Greens (PEV). Despite the conservative So- 62 cial Democratic Party (PSD) winning more seats, Pedro Coelho’s government was voted down in parliament by the alliance of left-wing parties. Costa’s government pursued an anti-austerity programme that has resulted in steady economic growth that has already paid off at the ballot box. Costa’s party won convincingly at the 2017 local elections and his Socialists stand well placed to increase their MEPs in May and to win a general election in October, a feat not many Socialists parties in Europe will be able to achieve.

Portugal had to endure nearly a decade of slashes to public spending before Costa became Prime Minister. Since gaining power, the PS government has taken several necessary advances in the battle to combat the worst effects of austerity. However, after nearly three and a half years the government has not been able to completely alleviate austerity. In sharp contrast to the type of growth-spurring stimulus that Costa promised in 2015, his party has focussed on limiting the worst effects of austerity by managing the effects of the EU’s strict budget regulations. Increased public sector wages and lowered income taxes have all meant that infrastructure and healthcare have not had the kind of investment a Portuguese voter could expect under a socialist-led coalition. These issues top the list of priorities for Costa’s socialists heading into the election season. A recently announced 10-year National Investment Program is intended to be financed in part by EU funding which Costa hopes to secure through a clear consensus in his leadership.

Portugal’s case highlights the degree to which smaller European nations are limited in their ability to manage their own economies. Sitting MEPs are trying to ensure expected cuts to the EU budget have a smaller impact on Portugal, which they want negotiated before the elections. Attempting to avoid a 10% cut to their funding, PSD MEP José Manuel Fernandes says the goal is “to improve that.”

To begin, it is important to understand how exactly Portugal serves as a counterexample to the austerity policies that has been the dominant solution to problems posed to European policymakers for the past several decades. The Eurozone excludes two critical policy tools used to combat economic recessions. The first of these is currency devaluation, which is rendered impossible because members of the Eurozone share a currency, so individual member countries cannot print their own money during a time of crisis to make their exports more competitive. What’s more, the European Central Bank (ECB) — the institution responsible for printing euros — is, according to its charter, tasked solely with keeping inflation rates low. This mandate is in sharp contrast to the Federal Reserve in the United States, for instance, which is tasked with balancing inflation and unemployment. This means that the ECB will not devalue the Euro during crises, even if it would benefit individual member nations to do so.

The second policy tool, fiscal stimulus, is effectively neutered by the Eurozone’s Stability and Growth Pact. According to the Pact, Eurozone countries must cap their deficit-to-GDP ratios at 3% and debt-to-GDP at 60%. This leaves very little wiggle room for fiscal stimulus, and in fact, required many periphery states during the Eurozone crisis to take counterproductive measures like cutting spending and raising taxes significantly during recession. Bailouts by core states like Germany have come with strict conditions that typically involve cutting public services and wages drastically. Many economists argue that this practice merely creates a vicious cycle where spending cuts during recession shrink the GDP, which increases the deficitto-GDP ratio, and consequently necessitates deeper cuts in a perpetual economic contraction.

It is an oversimplification of Portugal’s state of affairs to argue that the policies introduced by the PS government constitute a repudiation of austerity politics. In fact, by holding up the Portuguese as a model of anti-austerity, one obfuscates what anti-austerity politics mean in the first place. In this telling of the story, it seems anything short of the government lying supine while Germans in suits write the budget constitutes anti-austerity. More importantly, though, to hold up the Portuguese as a model for future anti-austerity governments in Europe may prove to be a severe political error. Its recovery can be more accurately attributed to external factors that are largely independent of the government’s limited policies. Implementing halfway measures in other Eurozone countries that do not share the conditions driving Portugal’s recent recovery may not produce such impressive results. In fact, these cases could even provide proponents of austerity exactly the examples they need to show that “there is no alternative” after all.

While Portugal’s growth is good news for the average voter heading into the European elections, it is not the consequence of a Costa’s “stimulus”. The cuts implemented by his government are not enough to create the moral cycle of growth envisioned by the Prime Minister and his government. Instead, Costa’s Socialists are trying to put in place a Keynesian recovery within the narrow confines of the EU’s deficit laws. Rather than serving as an example of how outlying states in the Eurozone can buck harsh austerity measures and their social costs, perhaps the case of Portugal demonstrates that the fate of smaller European nations — unable to devalue their own currency due to a shared euro or spend to sufficiently stimulate their economies thanks to Eurozone budgetary rules — is very much still controlled by the EU.

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