Only True Reformers Make It Into the History Books
(Bloomberg Opinion) -- It is often feared that voters will punish a government that tries to balance the books instead of buying consensus. The case of Portugal should assuage at least some of these concerns.
The ruling Socialist Party is cruising high in the polls less than a week from the Oct. 6 general election. The lucky dilemma facing Prime Minister Antonio Costa is whether he will be able to govern alone — or need to rely on more radical allies, as he did upon taking office in 2015.
The former mayor of Lisbon has won over the skeptics who feared that his left-wing bloc would bust the European Union’s fiscal rules and reverse progress made during the country’s international rescue program of the early 2010s. In fact, Portugal is targeting a budget deficit of just 0.2% of gross domestic product this year, down from 4.4% four years ago. The public debt is also on a downward trajectory and is expected to fall below 120% of GDP this year, down from 128.8% in 2015.
Portugal’s spectacular fiscal performance has been accompanied by strong growth. Between 2016 and 2018, the economy grew by around 7%, outpacing both France and Germany. Investors have cheered on: On the eve of the last general election in October 2015, a 10-year Portuguese bond yielded 2.3%, with a spread of nearly 180 basis points to a similar German bund. Interest rates now stand at a mere 0.18%, while the spread is less than half of what it was back then.
Costa’s undoubted success does hide some disturbing truths, however. The program of fiscal consolidation has come at the expense of public investment, which stands at around 2% of gross domestic product, below the euro-area average. The government has allowed compensation in the public sector to increase again, but, as the International Monetary Fund has warned, this is putting pressure on the overall wage bill. The pension system is now on a more stable footing, but the cost has been largely shifted onto younger generations.
It is also likely that the government has benefited from earlier reforms pushed through by the previous center-right administration. Between 2003 and 2013, Portugal saw the second-largest decline among members of the OECD in the indicator measuring the regulation of a country’s market for goods and services. The progress remains uneven as sectors such as transport and the legal professions could be opened further to competition. In the labor market, there remain gaps between the treatment of workers on permanent and temporary contracts. Productivity growth is sluggish, which will continue to weigh on the country’s competitiveness in spite of the recent surge of exports.
Costa is now trying to portray himself as a fiscal conservative, in the hope of winning votes at the center, which would help him secure an absolute majority. But in the case of victory, he should focus on becoming a reformer. The euro zone’s current slowdown is bound to test Portugal’s recent upturn. It will take a successful second term to secure the prime minister’s legacy.
To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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