Is Portugal’s recovery truly sustainable?

As the debate on Eurozone reforms is running at full tilt – torn between ambitious proposals from France and reluctance from Germany (mostly from the Liberals) – the agenda of the Eurogroup meeting matched with current events: the future of the European Stability Mechanism (ESM) and, more generally, of the Economic and Monetary Union (EMU). Many European leaders have been advocating for replacing the ESM with a European Monetary Fund, which would act as the European lender of last resort.

The “Portuguese miracle” and its hidden face

Another crucial point that was discussed during this meeting dealt with the findings of the post-programme surveillance mission to Portugal, carried out between 26 June and 4 July 2017. This monitoring process is mandatory for all countries which successfully asked for a financial rescue package. The process includes biannual missions until the country repays 75% of the package. The main condition to benefiting from this rescue plan is, of course, the setting up of a package of structural reforms to rectify budgetary imbalances. [1]

In Portugal, these reforms implemented by the conservative Prime Minister Pedro Passos Coelho did not produce the expected effects and even worse, they have exacerbated the state’s economic downturn. In 2015, one year after the end of the financial aid program, Pedro Passos Coelho was replaced as Prime Minister by the socialist António Costa, supported by various left-wing parties. As the left-wing has been in power, the growth has picked up (1.5% in 2016); the budget deficit currently amounts to 2% of the GDP and fiscal balance is awaited by 2020. Unemployment has come back down to 10% and the minimum wage has substantially climbed back up to 557 euros per month at the beginning of the year. On 15 September 2017, the rating agency Standard and Poor’s raised Portugal’s sovereign rating to BBB-, allowing Portugal to get out of the “risky investments” category.

While all these happy news could be envied by numerous European states, one cannot forget that this strong economic health stands on fragile basis. First, Portugal’s public debt remains high: 130% of the GDP in 2016, stable for 5 years. Moreover, 65% of the public debt is held by non-Portuguese stakeholders, which further weakens the debt structure. Private debt is also very high (143% of the GDP in 2015). The growth is mostly based on the flourishing tourist sector and on exports (dragged by the strong Spanish growth), i.e. on external factors.

Recognised progress but reservations from European bodies

In their declaration following the post-programme surveillance mission, the European Commission and the European Central Bank recognised the progress achieved by the country, while underlining what still needs to be done, namely regarding debt reduction and cleaning up the banking system. An assessment shared by the former ECB President, Jean-Claude Trichet, during an interview given for both the Portuguese daily financial newspaper Dinheiro Vivo and radio TSF [2]. In his statement following the Eurogroup meeting, the President of the institution, Jeroen Dijsselbloem, commended again the progress achieved by Lisbon, while encouraging to keep implementing structural reforms at the same pace. [3]

Fear that Portugal is left behind when implementing Eurozone reforms

In March 2017, relations between Portugal and the Eurogroup tensed as Jeroen Dijsselbloem uttered comments that were deemed racist against the Southern states of the Eurozone. Matteo Renzi, joined by António Costa, demanded the resignation of the Dutch Finance Minister. Today, worries are quite different for the small Iberian state. As Eurozone reforms are filling European topical news, Portugal fears it will not be invited to take part in the debates whose selected proposals could even go against Lisbon’s interests.

In any case, this is the opinion shared by a journalist working for one of the most important Portuguese newspapers, Público, in an opinion column that mentions the contemplated proposals to reform the monetary union and denounces either the negative impact that would arise from creating a European Monetary Fund, the lack of budgetary solidarity, or the deepening of a “multi-speed Europe” that could affect Portugal in the long run. [4]

Even though Portugal has achieved much progress over the last years in order to return to the path of economic growth and budgetary stability – thanks to or despite the implemented austerity measures – public debt and growth sustainability are currently causes for concern. A new financial crisis could be devastating for Portugal’s macroeconomic situation – which is precisely the fear of Wolfgang Schäuble, who just participated in his last Eurogroup meeting.