Everyone knows it: Europe is still going through a severe financial crisis since 2008. Even though on the 1st of July everyone celebrated the integration, after years of negotiation, of Croatia into the European Union, it was also a gloomy day on the other side of the continent: Portugal. Indeed, the very same day, its Minister of Finance, Vitor Gaspar, submitted its resignation to the government after the austerity politicies he pushed forward proved to be a complete failure. This event represents a raising and ongoing concern for the future and stability of the country.
Little by little, the economies of Europe are plunging into financial crises. After Greece, Italy, Ireland and Spain, Portugal is one of the most affected. Its issues got so important (continuous quarters of recession, mounting debt) that it required the help of the Troika (the European Commission, the European Central Bank, the International Monetary Fund) in May 2011 in order to avoid bankruptcy. The creditors granted the country a $102 billion bailout.
Portugal has until June 2014 to complete the requirements of this plan, and has already achieved two thirds of the fiscal consolidation required. However, the results are stagnant, even worst sometimes: Portugal is still going through its third year of recession, its growth has been revised at only 2.3%, its jobless rate for next year is estimated at 18.5% (when in 2011 it was at 12%), its deficit represents 6.4% of annual GDP and its debt, which now stands at almost 124% of its GDP (the third-highest in the EU after Greece and Italy) could well peak at above 130% by 2015 according to the Organization for Economic Co-operation and Development . Moreover, last 25th of June it showed an increase of the 10 years bond at 6,9%, its highest level of this year, when in May the rate was at its lowest (5,23%). This example demonstrates what most investors fear: Will Portugal be able to recover its full access to the market and secure its financial capacities on its own?
As a consequence of this poor profile, people got tired of the tax hikes and public sector pay cuts required by the bailout which didn’t show positive results. The exasperation among the nation against austerity has started to grow up particularly since January 2013, when the Constitutional Court invalided several drastic austerity measures judged discriminatory, affecting the bonuses of officers and retired persons as well as underemployment and health benefits. In February, even the leader of the Socialist Party asked for a renegotiation of the international bailout, even though it was his party on top of the government who agreed the help of the Troika at that time.
More social categories are tired of this policy dictated by the EU and gathered around general manifestations to “save the country from the recession and from the abyss”. As a matter of fact, already 4 general strikes have occurred in only 2 years. Furthermore, this crisis deepened the anti-euro feeling of the Portuguese, usually more in favor of Europe, as shows it the success of Joao Ferreira do Amaral’s book, “Why do we have to leave the euro”, which is one of the most popular in the country.
All this resentment and other elements explain then the resignation of two key ministers in July: Vitor Gaspar, Minister of Finance on the 1st, followed a day later by Paulo Portas, Minister of Exterior Affairs. On one hand, the first made his choice because of the poor performances that austerity measures showed even though he himself was the orchestrator of these policies inside the country, as well as because of the growing resistance to his actions. On the other hand, the second one resigned to protest not only against plans for more deep cuts but as well against the nomination of Maria Luis Albuquerque, former Secretary of State for the Treasury, to take control of finance. However, the resignation of Paulo Portas, also leader of the conservative party, the Center-Right Coalition government and the Popular Party (CDS-PP), was not accepted this time by the Prime Minister, Mr. Pedro Passos Coelho.
However, at first, those announcements certainly weakened the right-center coalition in power and put the country as a target for speculative attacks. For instance, on July 3rd, the Lisbon Stock Exchange had fallen at more than 6% at its opening, whereas the 10 years bond rates had risen up to 8%. Furthermore, the Socialist Party called for anticipated elections for a new government, in which, with 36% of the votes, it would be the winner thanks to its willingness to renegotiate the reforms.
As a consequence, the conservative party in power, the CDS-PP, along with the Social Democratic Party, announced they would seek negotiations in order to maintain its government in place. It is particularly important for the Prime Minister to keep its collaboration with the CDS-PP; if not, he will not have anymore the majority in the Parliament, which means that he will not be able to keep going with the austerity reforms. And what would it happen if Portugal cannot meet with the requirements from its international creditors? At the biggest disarray of the population, the government could be forced to ask for a second international bailout. One thing is certain: at least, those talks calmed investors: the benchmark 10-year bond rate slowly got down at 6,8%, as well as in the Stock Exchange everything started to get back to normality. As a result, to make sure that he still has the majority, Prime Minister Coelho promoted Mr. Portas as his Deputy.
The coalition “national salvation” pact made it to the President of the nation, Mr. Anibal Cavaco Silva, who decided to go along with it, thus rejecting the snap election from the opposition parties. Indeed, he affirmed that “the best choice to make was to keep the current government in power” to prove to its European colleagues that “Portugal is a governable country”.
On one part, this political crisis worries European leaders. To José Manuel Barroso, ex Prime Minister of Portugal and currently President of the European Commission, “continued instability risks unraveling Lisbon’s progress in regaining financial credibility and could prove especially damaging for the Portuguese people”. According to Jeroen Dijsselbloem, leader of the Eurogroup finance ministers, “political stability, continuity, are essential, particularly in the current situation”. On the other hand, it also worries rating agencies such as Standard&Poor’s which said that “political uncertainty could derail Portugal’s forthcoming debt issuance and its hoped-for exit in 2014 from the bailout program”.
The President’s choice to maintain the current government in place put then an end to the political scandal that occurred these last weeks. The priority is now to recover economically speaking, looking ahead of 2014 and regain access to the markets. But one major issue remains: the government has to deal with the underemployment rate for the young which was at 42,1% in May. Many Portuguese, recently graduated, are looking for new opportunities around the world: Pedro Salvador, 25, a Portuguese currently doing an internship at Bosh in Mexico, says few job opportunities exist for him in Portugal, the life-standards considerably decreased these last years, politicians do not do enough and he does not think the situation will improve anytime soon. As a result, if he had the chance to stay in Mexico and work here, he would do it without hesitation. And thousands of others are willing to do the same.
Thus, stopping this hemorrhage will be one the main challenges for the government, if it wants to increase its economy again.
*Mathilde Tisserand es estudiante francesa en Sciences Po Lille, especializada en Relaciones Internacionales-Estrategia y gestion de los riesgos