Wednesday, June 22, 2011

Big week: Wednesday in Lisbon

Change is in the air. For the first time in the history of democracy in Portugal, a woman has been elected president of the parliamentary assembly. Maria da Assunção Esteves, 54, formerly a constitutional court judge and member of the European Parliament, now occupies the second highest office in the land after the head of state, President Aníbal Cavaco Silva. Her election yesterday was endorsed by all parties.

With inauguration formalities now behind them, Portugal's new government led by Prime Minister Pedro Passos Coelho today gets down to the immediate challenges of bringing the country's public finances under control.

In his inaugural speech after being sworn in by President Cavaco Silva yesterday, Passos Coelho summarised the government's priorities: stabilising public finances, helping the most needy, making the economy grow and creating employment.

"The goal of returning to a sustainable path in public finances is an urgent imperative to face our short-term problems,” said the prime minister. He promised not to fail.

Replacing the former minority Socialist government that was forced to resign over the bailout issue, Portugal now has a right-of-centre government made up of Social Democrats in coalition with the smaller CDS-PP party, which will govern with a comfortable majority in parliament.

The nicities are over. Now for the tough stuff. The government is expected to swiftly introduce new austerity measures and economic reforms as demanded by the €78 billion bailout.

Dr Richard Wellings, quoted on the PS Public Service Europe website, today offers the following opinion.

It now seems almost certain that Greece will be subject to some kind of second bailout. Attention may then turn to Portugal and Ireland, the other countries being supported by the European Union and the International Monetary Fund. Both still face enormous difficulties, but their circumstances are very different. 
The main problem Portugal faces is long-term economic stagnation. Growth averaged less than 1 per cent in the last decade. Vast EU subsidies have done little to stimulate business activity. Instead, they enriched special interests with close links to the political elite and enabled the government to ramp up welfare spending, which reached a massive 22.5 per cent of GDP in 2007.
Membership of the eurozone exacerbated the problem. Spending could carry on rising without the checks and balances that markets would have imposed in the absence of an implicit EU guarantee of government debt. At the same time, ill-fitting monetary policies created inflation that made Portuguese businesses uncompetitive. Enterprises were also burdened with expensive new regulations, both from the European Commission and domestic policymakers.
Like Greece – and also Spain – Portugal will have to undergo a very severe adjustment to regain its international competitiveness. But such necessary rebalancing will be hampered by these high levels of regulation. In particular, labour market controls make it more difficult to reduce wages, and instead mass unemployment may result.
While Portugal's debts are not particularly high by international standards, the markets lost confidence in the government's ability to undertake the necessary reforms. If economic stagnation continued it would prove extremely difficult for Portugal to cover the interest payments on its debts.
The bailout has staved off the prospect of default for the time being but there must be a serious question mark over whether the new Portuguese government will be able to push through liberalisations radical enough to transform the country's prospects. Worryingly, a second Greek bailout may set a dangerous precedent that makes it even harder to gain political support.


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