Location Portugal Portugal

Portuguese miracle

In November 2015 the Socialist party in Portugal form a coalition with other left parties and its leader Antonio Costa became a prime minister promising to put down with austerity policy. That time a serious doubt was spread both on success of proclaimed policy and ruling coalition durability. Despite all doubts Costa’s government reached its aims.

In 2016, according to figures released on March 24th, his government cut the budget deficit by more than half to just under 2.1% of GDP (see chart), the lowest since Portugal’s April revolution in 1974. His administration restored state pensions, wages and working hours to pre-bail-out levels. The economy has grown for 13 quarters, expanding at an annualised rate of 2% in the fourth quarter of last year. The ruling coalition has not split and polls demonstrate high level of support to the Socialists. The ultimate prize would be an investment-grade credit rating.

The Economist devoted a special article to the Portuguese surprising result. Describing Costa’s achievements the journal in the same time stresses on problems Portugal economy faces to.

“Rating upgrades, however, may not be imminent. The European Commission warned this week that Portugal’s banks remain fragile. The government plans to inject €2.5bn ($2.7bn) to recapitalise state-owned Caixa Geral de Depósitos, the country’s largest bank, which could increase this year’s budget deficit. The sale of Novo Banco, the lender salvaged from the collapse of Banco Espírito Santo in 2014, is expected to be concluded shortly, but may also entail additional state liabilities. Mr Costa blames the EU and the IMF for failing to provide enough aid to the financial sector during the bail-out, leaving his government, which has spent €4.4bn on bank rescues, to clear up the mess. But economists also remain concerned about public debt, which inched up to 131% of GDP last year despite the shrinking deficit.

“The country’s high debt levels remain the elephant in the room,” says Mr Barroso of Teneo Intelligence, a risk consultancy. Should the euro zone face a shock, such as Marine Le Pen winning France’s presidential election, Portugal is the country most likely to face a debt crisis, he thinks. The Portuguese tout the shrinking deficit as proof that their Keynesian approach to growth works. But until Mr Costa shows that he can repeat last year’s budget success, many will remain sceptical.”

Neoliberal critics oppose as usual their favorite structural reforms to the socialists’ policies, but even the Economist citing Portuguese governors recognizes Keynesian policies are working.

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