Portugal’s Costa cruises into budget battle

Portugal’s Costa cruises into budget battle

Portugal’s PM defends economic plans under pressure from Brussels and the left.

By PAUL AMES 1/28/16, 4:45 PM CET Updated 1/28/16, 8:07 PM CET

LISBON — Portugal’s Socialist government is facing mounting pressure over its 2016 budget plans. The European Commission is highlighting risks of “particularly serious non-compliance” with eurozone deficit-reduction obligations and ratings agencies warn of downgrades.

Prime Minister António Costa appears determined to tough it out.

He insists the draft budget sent to the Commission in Brussels last Friday respects eurozone commitments to financial discipline while promoting growth and rolling back austerity measures introduced by the center-right government he ousted in November.

“We have sound economic arguments to defend our position,” Costa told reporters Wednesday. “We’re engaged in a re-orientation of policies introduced over the past few years (but) within the framework of our European commitments.”

Nevertheless, Portugal is becoming a battleground in a tussle between countries like France and Italy, who are promoting more expansionary policies to nurture fragile eurozone recovery, and those in northern Europe insisting on strict fiscal discipline.

Costa spoke in response to a letter sent Wednesday by European commissioners Valdis Dombrovskis and Pierre Moscovici asking why Portugal’s plans for slicing its underlying budget deficit are “well below” agreed targets.

“It’s very important that we work together so that the final Portuguese budget is coherent with rules of the pact and the commitments Portugal has taken on,” Moscovici told reporters Thursday in Brussels.

Doubts about the austerity roll-back plans are also stoking market concerns.

Germany’s Commerzbank last week cautioned that Portugal was once again a “problem child.” It pointed to a “fundamental change” in policy under Costa, who is unpicking painful reforms by the previous government that earned high marks from the eurozone’s guardians of fiscal prudence.

All three leading U.S. ratings agencies expressed concern this week that the budget is based on over-optimistic growth forecasts, with potentially negative implications for public finances and investment.

Costa is also being squeezed by domestic pressure from his left-wing allies to move faster with anti-austerity measures.

His minority government depends for survival on votes from the Portuguese Communist Party and the radical Left Bloc party. Both are warning their support will be jeopardized if Costa caves in to Brussels.

“Everybody who voted for parties in this new government agreement did so for our country to have a different relationship with the European Commission and for an end to austerity,” Left Bloc leader Catarina Martins said last week. “We knew this path would be difficult and would not really please the EU.”

Portugal’s main trade union federation, the Communist-linked CGTP, has called a nationwide public sector strike Friday to protest a delay in re-imposing a 35-hour maximum working week for civil servants, which was abolished by the previous government.

Costa has agreed to the work-week limit, but wants to wait until July.

He has already moved to reverse several deficit-cutting measures. That includes raising pensions and public sector salaries; cutting emergency taxes introduced during the debt crisis; re-instating four days of suspended public holiday; and halting planned privatizations of bus and subway operators.

Despite that, the government insists it will meet eurozone commitments.

The draft budget foresees cutting the deficit to 2.6 percent of gross domestic product this year — down from an estimated 3 percent in 2015 (or 4.2 percent if a bank bailout in December is included).

However the planned reduction of the structural deficit — which leaves out cyclical or one-off measures — is just 0.2 percent of GDP, well below the 0.6 percent demanded by Portugal’s eurozone partners.

Many also doubt the government’s figures, which are based on an optimistic growth forecast.

The Commission and the ratings agencies see growth at around 1.7 percent. Costa’s budget is based on the economy expanding by 2.1 percent, boosted, he estimates, by increased domestic demand generated by the tax cuts and wage hikes.

Government supporters point out that the Commission has sent similar warnings to other countries, notably Socialist-led France and Italy, and then not forced significant changes in their budgets. They want similar treatment for smaller countries like Portugal.

Even if Portugal wins leniency from Brussels, it will still have to convince the markets.

So far there has been no panic, but in April, Canada’s DBRS ratings agency is scheduled to review its outlook. DBRS is currently the only major agency that rates Portugal’s debt above junk status. Should it downgrade, the European Central Bank will be unable to continue buying Portuguese bonds, Portuguese banks could be shut out of ECB funding and Lisbon could be forced to beg for a new bailout.

“Portugal would then risk finding itself in a similar position to Greece last summer,” warns last week’s Commerzbank report.

Costa — who was meeting Thursday with his Dutch counterpart, austerity hawk Mark Rutte — is between a rock and a hard place.

If he introduces deficit-cutting measures to calm markets and the Commission, he risks the far-left bringing down the government.

Online wags in Lisbon are already nicknaming the prime minister “Costa Concordia” after the cruise ship that hit rocks and sunk off Italy in 2012. He’ll need to steer a steady course if his government — and the Portuguese economy — is to avoid a similar fate.

Authors:

Paul Ames