Populism Endangers Portugal’s Austerity Reforms

As Portugal faces local elections, calls to weaken fiscal consolidation efforts are growing louder.

Portugal’s ruling liberal conservatives have, since they came to power in 2011, strived to balance incompatible pressure groups. Local elections in Portugal have precipitated tensions.

Prime Minister Pedro Passos Coelho’s Social Democrats and their conservative coalition partners came to power with a clear mandate: to do what the left could not and implement the painful but necessary economic and fiscal reforms prescribed by Portugal’s international creditors. The parties have carried out the task with some difficulty but for the most part the conditions set out by other European countries and the International Monetary Fund were met. Hikes in taxes, frozen salaries and incentives for civil servants to retire early have all slowed spending and eased the market pressure on Portuguese government bonds.

International demands for credible commitments to austerity, however, conflict with another influence that equally shapes the Portuguese government’s composition and policies: a populist party machine that propelled Passos Coelho into the leadership of his party and then of the government.

These influences are at odds as campaigning for the local elections that are due later this month is making clear.

Ruling party spokesman Marco António Costa, a known affiliate of the party’s nonideological populist faction, came out in public to accuse the International Monetary Fund of “institutional hypocrisy” after it published a study which concluded that too swift austerity measures may be counterproductive to economic recovery. His criticism is not an academic one. Rather, it is meant to put pressure on the government to deemphasize austerity and return to “growth policies.” Such a fiscal or monetary stimulus should prevent the Social Democrats from suffering too badly in the polls.

The same path is being followed by the conservatives whose leader, Deputy Prime Minister Paulo Portas, is making speeches with a rhetoric based on “the worst is behind us” and stressing employment and growth.

Such populism could not only destabilize the coalition; it can have a bad effect on Portugal’s credibility in the financial markets.

Speculation now abounds that President Aníbal Cavaco Silva, a former prime minister with a background in finance, will move to either call early elections or use his influence to cause a change within the Social Democratic Party that would demote the demagogues and bring about a technocratic leadership.