Portugal voted for the wrong government – that’s now been ‘corrected’

October 24, 2015

One of the many faults of the single currency system is the way that is has systematically undermined democracy in the eurozone. Economic policy, and the decisions that effect hundreds of millions of people, are taken in secret by unelected technocrats, and government budgetary policies (literally the bread and butter of politics) are constrained by a rigid set of pan-eurozone rules to which there can be no democratic challenge. Two governments, in Italy and Greece (led by respectively by Silvio Berlusconi and George Papandreou) were removed from office by the deliberate actions of the EU and ECB because they were seen as being impediments to implementing ‘correct’ policies, and the anti-austerity Syriza government was broken though the forced closure of its banking system.

Now Portugal and the eurozone has extended the scope of dangerously undemocratic politics. For the first time since the creation of Europe’s monetary union, a member state has taken the explicit step of forbidding anti-austerity parties from taking office on the grounds of national interest. It seems that democracy must take second place to the higher imperative of euro rules and membership.

Anibal Cavaco Silva, Portugal’s constitutional president, has refused to appoint a Left-wing coalition government even though it secured an absolute majority in the Portuguese parliament and won a mandate to dismantle the austerity program imposed by the EU-IMF Troika.

President Silva was quite explicit about what was happening. “In 40 years of democracy, no government in Portugal has ever depended on the support of anti-European forces, that is to say forces that campaigned to abrogate the Lisbon Treaty, the Fiscal Compact, the Growth and Stability Pact, as well as to dismantle monetary union and take Portugal out of the euro, in addition to wanting the dissolution of NATO,” said Silva.

“This is the worst moment for a radical change to the foundations of our democracy. After we carried out an onerous programme of financial assistance, entailing heavy sacrifices, it is my duty, within my constitutional powers, to do everything possible to prevent false signals being sent to financial institutions, investors and markets” he said.

Portugal's president: it is my duty, within my constitutional powers, to do everything possible to prevent false signals being sent to financial institutions, investors and markets

Mr Cavaco Silva argued that the great majority of the Portuguese people did not vote for parties that want a return to the escudo or that advocate a traumatic showdown with Brussels. This is true, but he skipped over the other core message from the elections held three weeks ago: that they also voted for an end to wage cuts and Troika austerity. The combined parties of the Left won 50.7pc of the vote. Led by the Socialists, they control the Assembleia.

The Socialist leader, Antonio Costa, has reacted with fury, damning the president’s action as a “grave mistake” that threatens to engulf the country in a political firestorm. “It is unacceptable to usurp the exclusive powers of parliament. The Socialists will not take lessons from professor Cavaco Silva on the defence of our democracy,” he said. Mr Costa vowed to press ahead with his plans to form a triple-Left coalition, and warned that the Right-wing rump government will face an immediate vote of no confidence.

“The president has created a constitutional crisis,” said Rui Tavares, a radical green MEP. “He is saying that he will never allow the formation of a government containing Leftists and Communists. People are amazed by what has happened.”Mr Tavares said the president has invoked the spectre of the Communists and the Left Bloc as a “straw man” to prevent the Left taking power at all, knowing full well that the two parties agreed to drop their demands for euro-exit, a withdrawal from Nato and nationalisation of the commanding heights of the economy under a compromise deal to the forge the coalition.

There can be no fresh elections until the second half of next year under Portugal’s constitution, risking almost a year of paralysis that puts the country on a collision course with Brussels and ultimately threatens to reignite the country’s debt crisis. President Silva may be banking on enough defections from the Socialist party, by deputies opposed to the coalition with the left, to allow a construction of a right wing majority in parliament.

Election Results

The election in Portugal was on the 4th of October. Voter turnout reached a new low, with just 55.8% of the electorate casting their ballot on election day.

The centre-right coalition Portugal Ahead (PàF), composed of the Social Democrats (PSD) and the People’s Party (CDS), won the single largest vote with 38.6%, securing 104 (46%) of the seats in the Assembly. Compared with 2011, this was a loss of 12% in support (although the PSD and the CDS did not contest the 2011 election in coalition).

The Socialist Party (PS) fell short of winning the election with an overall majority with 32.38% of the vote and 85 seats. The PS received a higher share of the vote than in 2011, but did not increase its share by as much of a margin as had been predicted by the opinion polls prior to September 2015.

The Left Bloc (BE), despite predictions by opinion polls, achieved its best results in history, with more than 10% of the vote and 19 seats, becoming the third largest parliamentary group.

The CDU Communist/Green bloc won 8.27% of the votes and 17 seats.

This means that a Socialist Party coalition with the Left Bloc and the Communist/Green bloc could could deliver a majority in parliament. Alternatively the Socialist could align with the pro-austerity rightwing Portugal Ahead coalition and shut out the left. The latter was the expected outcome.

Portugal faces some very difficult budgetary decisions

The bond market has reacted calmly to events in Lisbon but it is no longer a sensitive gauge now that the European Central Bank is mopping up Portuguese debt under quantitative easing.

Portugal is no longer formally under a Troika program and does not face an immediate funding crunch, holding cash reserves above €8bn but the IMF has warned the country remains “highly vulnerable” if there is any shock or the country fails to deliver on reforms, currently deemed to have “stalled”.

Public debt is 127pc of GDP and total debt is 370pc, worse than in Greece. Net external liabilities are more than 220pc of GDP

First, the government will have to restrain itself to fulfill the deficit target this year, as 80% of the nominal deficit value for the whole year was already realised in the first half of the year. The fiscal council warns that in order to ensure a deficit of 2.7% of GDP by the end of the year, the government needs to reduce the deficit considerably more. The poor performance was due to both disappointing revenues and overspending.

The second challenge will be the 2016 budget. Under the optimistic scenario that the 2015 target can be met, the government will have to pass at least €700m of austerity measures. Otherwise, and if a slippage in public accounts this year is confirmed, the necessary adjustment in 2016 may be even more demanding. Under the EU fiscal compact the government is committed to reducing the structural deficit by 0.5pp per year. It is already clear that they will fail to do so this year, as the structural deficit is set to deteriorate by 0.2pp to -0.9% of potential GDP. For next year the target is 0.4pp.

President Cavaco Silva may be correct is calculating that a Socialist government in league with the Communists would precipitate a major clash with the EU austerity program. Mr Costa’s grand plan for Keynesian reflation – led by spending on education and health – is entirely incompatible with the EU’s Fiscal Compact. The Compact obliges Portugal to cut its debt to 60pc of GDP over the next 20 years in a permanent austerity trap, and to do it just as the rest of southern Europe is trying to do the same thing, and all against a backdrop of powerful deflationary forces worldwide. The strategy of chipping away at the Portugal’s (and the eurozone) massive debt burden by permanent belt-tightening is largely self-defeating, as it causes economic stagnation wand prevents the sort of growth that would allow debt ratios to fall.

The austerity is pointless because Portugal will almost certainly require a debt write-off when the next global downturn hits in earnest (see this article) . There is no chance whatsoever that Germany will agree to EMU fiscal union in time to prevent this.

Post election political shifts

It was expected that because of the long history of intense hostility between the Socialist and Communists that a left coalition government was impossible, but then the leader of the Communist party announced, after a post election meeting with the Socialist Party leadership, that his party was ready to support a government led by the centre-left Socialists. “A government solution, which inevitably includes the Socialists, will have our political support, to stop a repeat of this policy (of austerity),” Communist leader Jeronimo de Sousa told reporters after meeting. This was a major shift in Portuguese politics. The Communists and the Left Bloc argue that the loss of 28 seats for the government coalition was in fact a vote against austerity and that they are ready to join an alliance to overturn austerity policies.

The Socialist Party leadership overture towards the left immediately threatened to cause divisions within the Socialist Party and it led to the resignation of the leading Socialist party politician Sérgio Sousa Pinto from the Socialist secretariat. Another prominent party leader, Francisco Assis, a potential challenger to Costa, condemned Costa’s plans as “leftwing fantasies”. A big problem facing António Costa in building a left bloc coalition is the previous opposition of the the two leftist parties to membership of the Euro, the Socialist remained committed to membership of the single currency.

At the same time that the Communists were making overtures to Antonio Costa, the leader of Portugal’s Socialist Party, he also received an offer from the conservative-centre coalition. Asked by Jornal de Negocios whether the president would give his blessing to a left-wing government, Costa avoided a direct answer, saying that Socialists informed President Cavaco Silva about the steps to form a stable government that offers a political expression of the people’s wish to reverse austerity policies in compliance with Portugal’s international commitments. This was another way of saying “we are open to negotiations towards both sides”.

As the negotiations unfolded it became clear that the Left Bloc and the Communists considered that the big drop in votes for the right wing parties, and the parliamentary arithmetic that allowed a possible left bloc government, constituted a vote against austerity. The leftist parties appeared to be prepared to shelve their demand for an exit from the Euro in order to enable a Socialist left government that could implement an anti-austerity program. The leftists would also decline to participate in the government but would support it in parliament.

The Left bloc leader Catarina Martins said after a meeting with Costa that for her party the government of Portugal Ahead right coalition ended because there is now an alternative government solution. While no details of what has been agreed in their meeting were released, Martins said that the Socialist programme meets their conditions for “employment, wages and pensions.” Asked about her meeting with Anibal Cavaco Silva, Portugal’s constitutional president she said that the Left can respond to the request for a stable government, provided that it breaks with the cycle of right-wing politics. To the question whether the Left Bloc would be ready to drop their call for debt restructuring, Martins responded saying that the party knows the relative weight of the various ‘programmes’. Martins said they have not talked yet about the budget.

Socialist leader Antonio Costa then publicly rejected a coalition with the right. Costa complained that the centre right coalition did not sufficiently take into account the Socialists’ points of concern, and that the programme proposed by the right as the basis for a new coalition did not mark a turn from austerity.

On October 21st António Costa announced that the Socialists (PS) had successfully concluded an agreement with the Left Bloc (BE), saying the president should nominate him as prime minister as the Socialists have a stable agreement with BE and the Communists (PCP) to ensure the governability of the country. He said that if Cavaco Silva insists on nominating Passos Coelho as prime minister he is just wasting time, because the three parties will be united in Parliament to overturn a PSD / CDS executive. Socialist leader António Costa and Left Bloc leader Catarina Martins both told the press in the presence of the president Cavaco Silva that the conditions for a stable left wing government are met.

Agreeing a budget seems like a daunting task. The Communist party PCP already conceded that these are difficult questions. But even though the difficulties in reaching minimum agreement could be insurmountable, PCP and BE say they want to ensure that this does not prevent the PS to form government. It sounds like they don’t want their fingerprints on the budget but are willing to support the PS as long as it marks “the end of austerity”.

Inside the Socialist party the resistance to Costa’s decision to try out a left-wing government has been growing. There is pressure on MEP Francisco Assis to challenge Costa for leadership of the party. Assis is considered the guarantor of a solution with the conservative-centre coalition, but he denied that he has any interest in a leadership battle at this point, according to an article in Diario Economico. The critics of Costa’s tactics argue that the Communists and the Left bloc have no interest in a majority government but in a minority Socialist government. The fear is that the minority government would not last long, with elections sure to follow in which the Socialists stand to loose its voters to the centre-right.

Blocking an election result is a very dangerous step

President Cavaco Silva is effectively using his office to impose an ideological agenda, in the interests of creditors and the EMU establishment, and dressing it up as a defence of democracy. Portuguese politics has undergone a tectonic shift as the Socialists and Communists have buried the hatchet on their bitter divisions for the first time since the Carnation Revolution and the overthrow of the Salazar dictatorship in the 1970s, yet they are being denied their parliamentary prerogative to form a majority government.

This is a dangerous precedent in the EU. The Portuguese conservatives and their media allies behave as if the Left has no legitimate right to take power, and must be held in check by any means.

Greece’s Syriza movement, Europe’s first radical-Left government in Europe since the Second World War, was crushed into submission, not least by the deliberate destabilisation and closure of its banking system, for daring to confront eurozone orthodoxy. Now the Portuguese Left is running into a variant of the same meat-grinder.

Europe’s socialists face a dilemma. They are at last waking up to the unpleasant truth that monetary union is in reality an authoritarian right-wing enterprise that has slipped its democratic leash, yet if they act on this insight in any way they risk being prevented from taking power.

The single currency system is a monster and was a mistake of gigantic proportions that has all but completely derailed the progressive European project.

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