By Tom Gill
Wednesday 04 May 2011
For many years Portugal was a showcase if European integration – a poor country emerging from decades of dictatorship and enjoying rising prosperity thanks to increased foreign trade, investment and central European funds.
But 25 years after joining the European Community Portugal is among the basket cases.
The caretaker government has just negotiated a €79 billion (£69bn) bailout with the IMF, the European Central Bank and the EU.
Yet another austerity plan promises the elimination of decades of hard-won social gains and improved public services and welfare.
This almighty mess was a long time brewing. If there were some early gains to Portugal from European integration, by the early 2000s these were giving way to a much more worrying picture.
For one thing EU funds earmarked for the poorest member states, which had allowed Lisbon to build new roads, dams, ports and railways, were being diverted to the newest member states in eastern Europe.
For another the financial straitjacket of of the single european currency, launched in 1999, forced the government to adhere to tight public-spending limits and give up the right to adjust its interest rates and the value of its currency – freedoms that could have allowed it to boost trade and economic development.
Furthermore, cuts in internal and external EU tariffs and the banning of state subsidies meant no defence against cut-throat competition from lower-cost China and the new eastern EU members. Large swathes of Portuguese industry were wiped out.
Finance became the new king of the economy as low European interest rates brought cheap credit and soaring household and corporate debt.
Wealth needed to fund education, health and other vital services was leaking away via tax evasion to the tune of €14.4bn (£13bn) a year and a black economy accounting for 24 per cent of GDP.
Inequalities of wealth which had narrowed in the early years of EU membership widened again and are now among the highest of Eu countries.
Already in 2007 the Economist magazine was describing Portugal as “the sick man of Europe.”
Then the global financial crisis hit. The economy nosedived. Public spending rose in the form of bank bailouts – billions went down the swanny to stop the collapse of Portugal’s BPN and BPP banks, which had accumulated huge losses through embezzlement, accounting fraud and bad investments. The swelling ranks of the unemployed also led to a rise in welfare payments.
Government bond yields – the rate of return to be paid to owners of public debt – started rising sharply.
This was driven by market speculators betting on Portugal’s inability to service its debts in what has become a vicious circle – every new rise in bond yields adds to the debt burden, prompting a new wave of speculation and a further rise in yields.
In March this year the financial and economic crisis became a political drama as Socialist Prime Minister Jose Socrates was forced to call early elections, the opposition having rejected the latest in a string of austerity measures designed to calm the markets.
Talks began with the EU and IMF over a rescue package.
On May 3 Mr Socrates – now heading a caretaker government – did a deal worth €79bn, two-thirds of which is to be provided by the EU.
Details of the strings attached to this deal are still sketchy.
Quite when this package will be approved – indeed, whether it will be implemented at all – is open to question.
Portugal is reportedly under pressure to reach and agreement so as to receive funds in time to meet debt payments due on June 15. But delays are expected because some Finnish political parties who are in the process of trying to form a coalition government are very reluctant to shell out.
Speculators in the financial markets are betting that austerity-hit Portugal will not be able to create enough wealth to service its debts. They expect the country to default, as is likely for Greece and Ireland whose EU/IMF “rescue” packages have been complete failures.
And even if the main opposition Social Democrat Party backs the deal ahead of June 5’s parliamentary elections it will have to be passed into law after the poll, and an election upset cannot be ruled out.
For now, the Socialists and Social Democrats have the public’s backing. Despite implementing three rounds of spending cuts and tax rises in just over a year, the latest opinion poll by Marktest gives the Socialists 36.1 per cent, a nudge ahead of the Social Democrats with 35.3 per cent.
In contrast the two parties that have most vociferously opposed the austerity measures – the Communist Party-led red-green coalition (CDU) and the Trotskyist Left Bloc – are making little headway. The CDU is currently in third place with 8.1 per cent support, in line with its share of the vote in previous elections, and the Left Bloc is at 6 per cent, down from a high of 10 per cent in the 2009 poll.
Communist Party leader Jeronimo de Sousa has described the EU/IMF deal as an “act of abdication” that will “bury the country,” adding: “It is a very worrying day for Portuguese workers and the people.”
In comments last month on the “rescue” negotiations he accused the Socialists, the Social Democrats and the right-wing Popular Party of “submitting to foreign influence and domination.
“They are doing everything to dodge the causes of the crisis and their responsibilities in order to persist with the same policies that destroy the productive national industries, so they can privatise, land us with more debt and encourage financial speculation.”
The communists – historically the largest party left of the socialists – want policies that encourage growth and job creation. They also argue for a renegotiation of Portugal’s foreign debt.
This would see foreign creditors – primarily German, French and Spanish banks who profited handsomely from lending to the Portuguese government – sharing the “adjustment” pain while Portugal would get part of its debt written off and a breather to resuscitate its economy, which would in turn improve the public finances.
This is a position taken by many Portuguese and foreign economists.
Left Bloc leader Francisco Louca has also rejected any IMF-inspired solution for Portugal, pointing to its recent failures in Greece and Ireland.
He calls time on the Socialist Party’s “bankrupt policies” of job and wage cuts and the move to introduce hire-and-fire labour laws.
For both parties this is a matter of national sovereignty. It is time, they say, for “uma alternativa.”
The communists and the Left Bloc recognise just how high the stakes are in the coming election. Last month they held the first ever national-level discussions exploring co-operation between their parties.
From a historical perspective some see this as auspicious: divisions in the radical, popular Movimento das Forcas Armas between the Communist Party, then led by Alvaro Cunhal and Vasco Goncalves, and various smaller revolutionary currents led by figures such as Major Otelo Saraiva de Carvalho helped cut short the bloodless “carnation” revolution of 1974-75, which cast out the Salazar-founded dictatorship and ushered in a dramatic if brief period when nationalisations, radical land reform and new forms of popular democracy captured the imaginations of socialists around the world.
These are very different times. But the scale of the assault on working people, whether measured by record unemployment (now over 600,000, or 11 per cent of the working-age population), by cuts to public services and welfare or by attacks on employment protection rights is dramatic.
The popular response has been no less so. The usually competitive trade union confederations, the UGT and the CGTP, jointly called a general strike in November involving over three million workers out of a workforce of 5.6 million. Protests since have seen hundreds of thousands marching in cities across Portugal. And another general strike is on the cards.
Many on the streets are clearly still voting for parties which are acting against their interests, but many – especially the young – are not voting at all. Turnout in national elections since the return to democracy has dropped from 91.7 per cent to 59.7 per cent.
If the radical left can tap into this disaffection with politics and the anger on the streets then “uma alternativa” will become a real possibility.