Europe Letter: Austerity wounds push Portuguese politics left

Positioned majestically on the edge of the Atlantic Ocean, Lisbon is one of Europe’s oldest and most westerly cities.

The temperate climate and soft winds that lick the rugged coastline seem a world away from the grim realities facing other parts of the European Union this December, as tens of thousands of refugees make their way northwards through the freezing western Balkans route. But Portugal has had difficulties of its own.

Like Ireland, the country of 10 million people was one of five euro zone countries forced to seek an International Monetary Fund-EU bailout when soaring borrowing costs pushed it to the brink of bankruptcy in 2011. The ensuing €78 billion rescue package unleashed three years of unprecedented austerity.

Wages and pensions were cut, taxes raised and the economy contracted by approximately 6 per cent between 2011 and 2013.

For many, the real story of the Portuguese bailout was emigration.

A country built on exploration and conquest once more found itself looking outwards, as hundreds of thousands of young people moved abroad to seek work.

Since then the economic picture has brightened. Gross domestic product grew by 1.6 per cent in the first half of this year, with both domestic demand and exports higher. Though unemployment remains well above the EU average at 13 per cent, it is still lower than the bailout high of 18 per cent.

Blight of austerity

But, 18 months after the country exited its bailout, the political consequences of austerity are being felt. This week’s State visit by President

Michael D Higgins

, though months in the planning, comes at an interesting time politically.

In October, the centre-right government of Pedro Passos Coelho, which steered the country through the bailout package, faced the electorate.

While Coelho’s centre-right Social Democratic party (PSD) secured the most votes in the general election, it was unable to form a majority. Portugal’s president charged Coelho with forming a minority government, but it was short-lived. After an 11-day stint – and a brief social media campaign galvanised around the hashtag #Thisisacoup – the government collapsed after the opposition voted against its policy programme.

The country's main centre-left party, the Socialist Party (PS), subsequently formed a minority government with the Portuguese Communist Party (PCP) and the Left Bloc (BE) .

The prospect of a left-wing government inflected by a strong radical-left contingent sounded alarm bells in Brussels, and on international markets – Portuguese borrowing costs rose on the back of the election result.

New prime minister António Costa has sought to assure Portugal's euro zone partners that the country is committed to staying in the euro – like Ireland, Portugal is subject to an added level of budgetary scrutiny by the European Commission, entering post-programme surveillance when the country exited its bailout.

The country’s new finance minister, Mário Centeno, a Harvard-trained economist who previously worked for the Bank of Portugal, attended his first eurogroup finance ministers’ meeting in Brussels on Monday.

Centeno has been keen to point out that he is no Yanis Varoufakis – the mercurial Greek finance minister who was eventually sidelined by Syriza. He has promised to tackle the debt and deficit challenges but at a slower pace. So far, Portugal’s lenders appear to be unperturbed by the change in government, with Lisbon due to submit its 2016 budget to the commission for sign-off in early January.

Nonetheless, the twists and turns of the Portuguese general election, which ultimately led to the formation of a left-wing government, hold lessons for other incumbent governments. Most notable is Spain, which holds a general election in 10 days' time.

Like his centre-right counterpart Coelho, Spanish prime minister Mariano Rajoy has been pushing the government's economic credentials and success in shepherding the country through its bank bailout. But the recent surge in support for the centrist Ciudadanos party means Rajoy's Popular Party may struggle to secure a majority.

Rajoy's narrative is a familiar one. Less than two months ago, Enda Kenny was conveying a similar story at the European People's Party (EPP) congress at Madrid to an audience that included Coelho and Rajoy, as he warned of the "dangers of populism".

Greek crisis

Although the outcome of this year’s Greek crisis, which saw Syriza consign the Greek people to a much greater level of austerity than the party had originally opposed, may have helped to discredit the far-left in many voters’ eyes, the outcome of the Portuguese general election shows that the wounds of austerity can still linger at the ballot box.

Kenny will be hoping he can buck the trend displayed in the Greek and Portuguese elections and convince voters that a Fine Gael-led government is their best political option.