The Endangered Asian Century
America, China, and the Perils of Confrontation
Portugal’s general elections on June 5 moved the country sharply to the political right. The elections took place against the background of economic crisis that rendered the country yet another Eurozone casualty of unsustainable public debt. Despite months of denial, Portugal has been forced, like Greece and Ireland, to seek a bailout from the European Community, the International Monetary Fund, and the European Central Bank. The Portuguese parliament had refused to accept the Socialist government’s austerity measures, and as a consequence, President Aníbal Cavaco Silva called a general election. The reigning Socialists were swept out of office, and a conservative majority was elected to replace them.
Pedro Passos Coelho, the new prime minister, is 46 years old and has never held office. Yet he has a long history of political activism within the center-right Social Democratic Party (PSD), which he currently leads. PSD was one of the new political organizations to emerge after the coup of 1974, in which young military officers, tired of fighting Portugal’s colonial wars in Africa, overthrew the long-running right-wing dictatorship. The PSD began consolidating its role as a force on Portugal’s democratic center-right in 1979, when it won a general election and liberalized the country’s cumbersome restraints on businesses and private enterprise.
The PSD relied on its economic credentials to gain 40 percent of the vote on June 5. The Socialist Party, led by the outgoing prime minister, José Sócrates, received only 28 percent of the vote, and when the result became clear, Sócrates resigned as party leader, saying that he "took full responsibility for the outcome." Belmiro de Azevedo, one of the county's leading entrepreneurs, said that Sócrates earned a place in the “Guinness Book of World Records” for having done "so much, so badly, and in so little time." Azevedo’s remarks testified to the fact that Sócrates refused to accept the depth of his country’s financial crisis, even after Greece and Ireland were forced to accept bailout deals, avoiding an austerity package for Portugal despite clear evidence of its debt problems. After Ireland sought a Eurozone bailout earlier this year, it seemed that Portugal would soon suffer a similar fate; it had a weaker economy than Ireland and a budget deficit of 9.3 percent (well over the three percent threshold set by the European Union). As a result of these economic woes, the PSD was swept into power alongside the right-wing Popular Party (CDS/PP), which won 12 percent of the vote. Together, the PSD and the CDS/PP took 129 seats in the 230-seat parliament.
Silva has urged a rapid conclusion to negotiating a coalition government, so that Passos Coelho can attend the next European Union summit on June 23 as prime minister. The summit represents the first of many immediate and enormous challenges for Passos Coelho, because his European colleagues will be anxious to see that Portugal means to comply with the terms of the bailout deal agreed to in May. Portugal is obliged under the terms of the $114 billion loan to cut spending drastically, increase taxes, freeze state pensions and benefits, and reduce unemployment payments. And according to the deal, Lisbon will also need to privatize sectors of the economy -- including the state airline, the airport authority, and the freight division of the national railways -- to raise money. In addition, Portugal must postpone major infrastructure projects such as the high-speed rail link to Spain.
It remains unclear, however, whether these policies will reverse Portugal’s economic woes. As of May, Portuguese banks were estimated to have borrowed $68.75 billion from the European Central Bank. The country is already in a deep recession, and its economy is expected to retract a further two percent this year. Unemployment stands at 12.4 percent. The Bank of Portugal warned on June 7 that despite the "high economic and social costs" of the austerity program, it is imperative to avoid any delays in implementing it. It also urged Portuguese lenders to increase their capital ratios and sell off their loan portfolios and non-core assets to improve their loan-to-deposit ratios.
In response to the economic crisis, Passos Coelho has said that he will establish an independent authority to monitor public accounts and would, in fact, "go further" than the deficit reduction obligations Portugal has assumed under the austerity agreement. One problem faced by Passos Coelho in implementing the arrangement, however, is that some of his promised measures, such as freezing pensions and cutting health-care spending and social-welfare programs, may require a constitutional amendment. Since a two-thirds vote in parliament is required for such an amendment, he will need Socialist Party support. Although the Socialists agreed to the bailout deal in the first place, indicating that a cross-party agreement should be possible, they may behave differently in opposition. As in Greece and Spain, popular opposition to austerity may also arise.
The vulnerability in Europe's peripheral economies remains acute, and any one part of this delicate equation in Europe could break. Yet Portugal’s ability to implement austerity successfully will not likely define the outcome of the wider Eurozone crisis. The scale of Portugal’s problem is relatively small in the overall European reality. Either way, however, the PSD election victory does provide an opportunity for Portugal to confront its many challenges. Passos Coelho must lead Portugal in taking difficult steps to rescue its economy and become more competitive on the global stage.