Bucking Austerity, Portugal's Socialists Bring Economy Back from Brink

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In 2010, the eurocrisis shook Europe and the Portuguese found themselves lumped in together with the PIIGS, a derogatory moniker for the debt-saddled economies of Portugal, Ireland, Italy, Greece and Spain. The nation of 10 million was forced to swallow painful austerity measures that slashed spending and hiked taxes in exchange for a multibillion-dollar bailout.

Fast-forward eight years and Portugal has shed its economic ignominy, earning praise for an impressive recovery that bucked the German-led prescription of tough austerity while at the same time registering growth, regaining investor confidence and defying doomsday predictions. And unlike many of its European neighbors, Portuguese politics has steadily moved leftward, not to the populist far right. In fact, its leftist finance minister, Mário Centeno, was recently chosen to serve as head of the Eurogroup, the 19-member body of euro finance ministers — a clear vindication of Portugal’s unorthodox road to economic recovery.

Domingos Fezas Vital, Portugal’s soft-spoken, affable ambassador to the U.S., served as permanent representative to the European Union at the height of the crisis before coming to Washington in 2015. He is more circumspect about his country’s turnaround, although he’s not shy about crediting the Portuguese people themselves for making the recovery a reality.

“What always struck me during the crisis was the attitude of the Portuguese people,” he told us during a recent hour-long interview, praising his countrymen for confronting the problem head on.

Regardless if the recovery was due “to past policies, to present policies, to a mix of both of them — we ultimately owe it to the Portuguese people. This is very, very important because it’s not easy to implement any policy, no matter which policy, if you don’t have a people that are ready to accept the challenges and to face the challenges.”

Those challenges largely stemmed from Portugal’s adoption of the euro, which gave it easy access to credit but curtailed the government’s ability to devalue its currency as a way of boosting exports. When the global economy tanked in 2008, Portugal eventually collapsed under the weight of its debt burden and mismanaged, bloated public spending.

“Our economy was based on cheap labor and so we had to shift to an economy based on skills and quality. So that was the first challenge. And the second one was of course the financial crisis in 2008,” the ambassador told us.

He said the implosion forced Portugal to rejigger its economy. It increased exports such as car parts, attracted more tourists, created a more investment-friendly environment and, above all, got its fiscal house in order.

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“People took the task in their hands and this is why I would say that what we have today is a sustainable recovery because it is based on more exports and on strong fiscal consolidation in the country,” he said. “We owe the present recovery first of all to this attitude: ‘We have to overcome this crisis, and so let’s not lose too much time blaming A or B — let’s start doing our job.’”

But there was plenty of finger-pointing along Portugal’s bumpy path to economic solvency. After the credit bubble burst, the troika — made up of the European Central Bank, European Commission and IMF — offered Portugal a $90 billion rescue package in 2011.

But the bailout came with harsh austerity strings, which the conservative government at the time implemented.

Education spending alone was cut by over 20 percent. Pensions, unemployment benefits and salaries for public servants were gutted. Utilities were privatized. Sales and income taxes jumped. Working hours were extended and four public holidays were scrapped.

The result was depressed spending and job growth — and general misery all around as poverty spiked, bankruptcies soared and frustrations mounted.

Not surprisingly, in the 2015 elections, the center-right government was unable to hold onto power and the Socialist Party — led by former Lisbon Mayor António Costa and backed by several smaller leftist parties — was voted in on a pledge to “turn the page on austerity.”

“The economic rationale of the new Portuguese government was clear. Cuts suppressed demand: for a genuine recovery, demand had to be boosted,” wrote Owen Jones in an August 2017 article for The Guardian. “The government pledged to increase the minimum wage, reverse regressive tax increases, return public sector wages and pensions to their pre-crisis levels — the salaries of many had plummeted by 30% — and reintroduce four cancelled public holidays. Social security for poorer families was increased, while a luxury charge was imposed on homes worth over €600,000.”

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Costa’s government was able to increase job growth by kick-starting demand. But in a delicate balancing act, the prime minister also managed to satisfy the troika’s fiscal demands, slashing the budget deficit to its lowest point since 1974. The country formally exited the bailout program in 2014. In the process, Costa flipped the script on the German-dictated philosophy of adopting fiscal reforms before addressing growth — instead stimulating the economy before tackling reforms.

The ambassador demurred on who deserves credit for the transformation — the conservative government that enacted tough reforms or the current government that loosened the belt-tightening. He said what’s important is the final outcome — and by most measures, that outcome has been dramatic.

At its peak, Fezas Vital said unemployment “went beyond 18 percent. It is now below the European Union’s average. It’s at 7.8 percent. The country is growing — the growth rate is now very close to 3 percent.”

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In fact, the economy has grown consecutively for the last three years, and its investment credit rating was recently upgraded.

That in turn has sparked a virtuous cycle of renewed confidence, “which is very important for consumers, for businessmen, for investment,” Fezas Vital said. “So there is a sense of confidence that comes not only from the results achieved, but as well from this feeling of ‘we’ve made it.’ We faced a very difficult situation and we’ve made it.”

But Fezas Vital cautioned that there are still “lessons to be learned. As this government is the very first to say, we have to be very careful … to make sure that we will never, ever find ourselves in the same situation. And … I think that this is a sort of a revolution in our mindset. Everybody will tell you these days in Portugal that fiscal consolidation is absolutely essential.”

On that note, he says the country still has to tackle the national debt, which remains high at over 120 percent of GDP, while further strengthening a fragile banking sector vulnerable to external shocks.

But Fezas Vital points out that many critics of the leftist Socialist government’s economic policies were proven wrong, and “the success of the Portuguese story is very well illustrated by the fact that the president of the Eurogroup [Mário Centeno] is our finance minister, which tells you a lot about the credibility of our recovery.”

In fact, German Finance Minister Wolfgang Schaüble was one of the Socialists’ loudest critics, warning just less than two years ago that their “voodoo economics” would lead to another bailout. Today, the fiscal hawk has heaped praise on Centeno.

But Fezas Vital, a career diplomat, discounts the notion that Centeno’s appointment means that the eurozone will radically change course and abandon German-led austerity.

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“He’s a bridge-builder. And we like to see ourselves as bridge-builders,” Fezas Vital said, citing other prominent Portuguese such as U.N. Secretary-General António Guterres and former European Commission President José Manuel Barroso.

As such, Fezas Vital said Centeno’s role will be to find consensus among the disparate eurozone members. But he adds that with pro-EU governments now in power in France and Germany and the bloc’s economies stabilizing, Centeno has suggested this is a good time to “discuss trickier issues,” such as easing the debt burden of southern countries such as Greece.

Prime Minister Costa’s successes have inspired other leftist parties in Europe hoping to blunt the momentum of far-right, populist movements in countries such as Austria, Hungary and Poland. But the ambassador — like Costa — is wary of touting the Portuguese example as a model that can be replicated, saying that “circumstances vary” in different nations.

Some critics also argue that Costa’s leftist coalition may eventually become too unwieldy to govern. The prime minister cobbled together a coalition of far-left communists, greens and Marxists that is often locally referred to as “geringonça,” or an unstable contraption. The government has come under pressure by teachers’ and labor unions to further roll back austerity measures, putting Costa in the difficult position of appeasing both his base and foreign creditors.

But Costa enjoys high approval ratings, and Fezas Vital dismisses concerns of future political upheaval, pointing out that “it was possible during the crisis to implement very harsh measures without major social conflict.”

“It’s a small country. Everybody knows everybody. And so there is this compromise mindset,” he told us.

“We will have elections in 2019 in Portugal. Let’s see. We are a mature democracy,” he said. “We are not black and white. We know that there is a gray area, that there is always room for compromise … that the best tool is dialogue, so I wouldn’t be too concerned.”

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Likewise, Portugal has not had to worry as much about the rise of anti-immigrant, xenophobic parties that have gained traction in other European countries. Fezas Vital owes this to Portugal’s legacy of exploration that forged a global colonial empire in the 15th and 16th centuries, leaving behind a footprint of some 300 million Portuguese speakers around the world.

“It’s a very diverse and global culture,” Fezas Vital said. Over the years, “we had millions of Portuguese looking for better opportunities in other countries. After democracy in Portugal [in 1974], we got hundreds of thousands of people coming to Portugal looking for better opportunities. And when these people came to Portugal, we were happy … to do for them what other countries have done for Portuguese people in third countries, including the United States,” the ambassador said, noting that about 1.5 million Portuguese natives live in the U.S., roughly split between the East and West Coasts.

Portugal’s progressive policies extend not only to the economy, but also to other areas such as drugs. In 2001, the country decriminalized the personal use and possession of all illicit drugs, including marijuana and heroin. More recently in February, Portugal’s main opposition party endorsed the legalization of marijuana, a move that, if adopted into law, would make Portugal the first European country to regulate cannabis.

“I think that we realized some years ago that policies we had were not working, and so we had to change,” Fezas Vital said. “And it’s true that what we did at the time was seen by other countries as revolutionary, because we decided to no longer criminalize the use of recreational drugs,” although he stressed that strict punishments are still in effect for drug traffickers.

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But the government decided to treat drug consumption as a health problem, not a criminal one. “And it’s true that it worked,” he said, citing less crowding in prison systems, a decrease in consumption and drug-related deaths and a different mindset that removed the stigma surrounding drug use.

Portugal has also seen tangible results in its pioneering environmental investments. In April, it crossed an important threshold by producing enough renewable energy to meet the country’s entire electrical needs (although for now it still partly relies on fossil fuels). Fezas Vital says the achievement was a matter of necessity. “We have wind, we have solar, we have water, but we don’t have fossil fuels. So it became very clear to us some years ago that to address our deficit in the energy sector, we had to bet on renewables, and this is a policy that has been pursued by Portugal for a long, long time now.

“Our biggest investment in the United States is in the renewable sector — in wind farms,” the ambassador added. “Energy has a geostrategic value these days, and Americans maybe do not know that 30 percent of the American LNG [liquefied natural gas] exported to Europe goes through Portugal.” That in turn helps Europe become less reliant on energy from “other sources,” he said in a veiled reference to Russia.

Portugal’s focus on clean energy contrasts sharply with President Trump’s embrace of coal and his withdrawal from the Paris climate accord. Fezas Vital did not criticize the administration’s decision to pull out of the landmark pact, saying “it is up to each country to decide its policy,” but he said he hopes the U.S. might one day rejoin the agreement. In the meantime, “Portugal is very much committed to the objectives of the Paris agreement” because climate change is a global problem, “and it’s not possible to address this challenge on a national basis.”

Given the stark differences with Trump on the environment, drugs and other issues, we asked how Lisbon’s relations with Washington have fared under the new administration. “No complaints whatsoever,” Fezas Vital replied.

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“Portugal was one of the very first countries to have an ambassador appointed to Lisbon, and we see this as a gesture that was highly appreciated. I had my minister of foreign affairs [and] my minister of defense come to the United States, and they had meetings with their counterparts, and every time I have a message to convey, I have an ear ready to listen to me.

“We are an Atlantic country,” he added, “and this is why I would say that relations with the United States have always been one of the pillars of our external policy no matter the government in place, in Portugal or in the United States.”

Portugal is set to showcase that relationship this June with an ambitious series of programs throughout the U.S. to coincide with Prime Minister Costa and President Marcelo Rebelo de Sousa’s visit.

The ambassador said that two years ago, Costa and Sousa “decided to start celebrating the national day of Portugal on June 10 with our communities abroad. Two years ago they went to France, last year they went to Brazil and this year they decided to come to the United States.”

a4.portugal.algarve.tourism.story“Month of Portugal in the U.S.” will include events focused on culture, economics, politics and science, taking place not only in Washington, D.C., but also in California, Colorado, Florida, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Texas and Virginia.

Local highlights include: the exhibition “Sustainable Azores – Commitment Toward the Future” at the Portuguese Embassy until June 30; “On View: Maria Helena Vieira da Silva” at the National Museum of Women in the Arts; a display of contemporary Portuguese art at the Kreeger Museum; forums and workshops on education, science and energy at the embassy on June 1, 14 and 25; and various concerts of Portuguese singers at the Kennedy Center. The series is capped off by the “Toast to America” reception at the residence on June 27.

“Portugal was the third country to recognize the independence of the United States,” Fezas Vital said, noting that the Founding Fathers toasted America’s independence with a glass of Madeira wine. “It started on a very good note with Portuguese wine, so let’s celebrate that in June.”

He added that the motto for the program is “neighbors across the ocean [to promote] this idea of proximity, how close we are to each other.”

Fezas Vital said he hopes that this concept of closeness is appreciated in Washington, regardless of who’s in charge. “I think that when you realize that we are a credible and reliable friend and ally in an unpredictable world, the predictability of friendship is a value to be treasured.”


About the Author

Anna Gawel (@diplomatnews) is the managing editor of The Washington Diplomat.

Last Edited on May 30, 2018