FOREIGN AFFAIRS: by Peter WestmoreNews Weekly
Why Portuguese voters punished spendthrift Government
, June 25, 2011
Recent elections in Western Europe have seen the defeat of governments which had run up massive deficits, threatening national insolvency. The recent Portuguese election followed a course previously seen in Ireland, Iceland and arguably Britain, where the Labour Government was defeated last year.
In Portugal, the minority Socialist Government of José Sócrates was forced to call an early election when its austerity plan to cut the country’s massive government deficit was defeated in the Portuguese parliament.
Portugalrequested a nearly $115 billion bailout from the European Union and the International Monetary Fund in April, after it became obvious that the country could not meet its debts.
The bailout was conditional on Portugal cutting its public debt from 9 per cent of GDP last year, to 5.9 per cent in 2011, and down to 3 per cent in 2011.
Photo caption: Solar power plant at Serpa.
Among the projects which contributed to Portugal’s economic woes was the push to abandon fossil fuels in favour of expensive renewable energy, including wind, tide and solar power.
In 2006, one of the world’s largest solar-power plants began operating near Moura, in the south, while the world’s first commercial wave-power farm opened in the Norte region (October 2006).
At the end of 2006, 66 per cent of the country’s electrical production was from coal and fuel power plants, 29 per cent was derived from hydroelectric dams, and the remaining 6 per cent came from wind energy.
By 2010, the government announced that renewable energy (hydro, wind, solar and tidal) supplied around 70 per cent of the nation’s consumption. The change was achieved through massive subsidies for alternative energy sources, including roof-top solar panels.
In the recently-completed election, the Socialists’ vote collapsed from 42 per cent down to 28 per cent, while the vote of the main opposition party, the Social Democrats, rose from 35 per cent to 39 per cent, with the third main party being the more conservative Democratic and Social Centre Party (CDS), which received 12 per cent.
A key to the election outcome was that over 40 per cent of people did not vote, a reflection of widespread disenchantment with politics and the country’s politicians.
The Social Democrats and CDS have agreed to form a stable coalition for the next four years.
A key issue in the election was the rise in unemployment, which has approximately doubled from 6 per cent in 2002 to over 13 per cent today, together with cuts in public employees’ pay of 5 per cent and an increase in the country’s goods and services tax, implemented from January 1, 2011.
The burden of unemployment comes on top of the fact that wages in Portugal are among the lowest in Western Europe, a consequence of its relative lack of industries and natural resources.
The new government has promised to meet the debt crisis by selling off government assets. Although previous governments had embarked on an asset-selling program, current major state-owned companies include Águas de Portugal (water), ANA (airports), Caixa Geral de Depósitos (banking), Comboios de Portugal (railways), Companhia das Lezírias (agriculture), CTT (postal services), RTP (media) and TAP Portugal (airline).
The incoming Prime Minister, Pedro Passos Coelho, a Social Democrat, was a businessman before going into politics. He says his experience as an entrepreneur equips him well to be prime minister at a time when Portugal’s government faces budget cuts and asset sales.
He has vowed to downsize ministries and state agencies and create a government that is able to implement an ambitious privatisation program and revise current infrastructure projects, such as the high-speed train.
He has not said whether he would continue the existing subsidies for alternative energy.
Whether he can do this and retain the support of the electorate remains to be seen.
Since the election, business bankruptcies have continued to rise, and private consumption recorded its largest contraction since 1978. The Center for the Study of the Portuguese Economy (NECEP) early this month said that private consumption has fallen by 0.6 per cent, revealing a “very negative picture of domestic demand”.
Its study, quoted by Lusa, the Portuguese newsagency, said that “the contribution of domestic demand to a fall in GDP (-3.4 per cent year-on-year and -3.8 per cent in the month) is identical to the worst values recorded during the 2009 crisis, which illustrates the severity of the downturn”.
However, more severe than the drop in domestic demand was the decline in the value of investment, which was described as “extraordinary” and “difficult to imagine”.
The bleak picture by NECEP occurred despite the reported “positive contribution of exports of goods and services to GDP growth”. Even here, the growth in exports moderated substantially compared to that seen in early 2010, and, in real terms, the absolute value of exports is at levels still below those which prevailed in 2008, before the global financial crisis struck.
Portugalis now a key to the future of the European Union and the survival of the EU’s currency, the euro. With Greece now seeking a second massive bailout, a default by Portugal — whose population is larger than that of Greece and Ireland combined — would be disastrous.