LISBON/BRUSSELS/BERLIN (Own report) – The EU is exerting massive pressure to prevent the new Portuguese government from reversing austerity measures. Last Friday, the EU Commission conditionally accepted – with stipulations – Prime Minister António Costa’s Draft Budget Plan aimed at phasing out the austerity policy. Brussels has already scheduled a budget reassessment for the spring. During her meeting with Costa, the day of the Commission’s decision, Angela Merkel urged Portugal’s prime minister to continue to pursue his predecessor Pedro Passos Coelho’s austerity policy. Powerful financial market actors, notably the Commerzbank, are also opposing the democratically elected Prime Minister. The socialist minority government – supported by smaller leftwing parties – is facing a crucial test.
Back on (Austerity) Track
Last November, the new Portuguese government, under Prime Minister António Costa, assumed office with a promise to end the EU’s “impoverishment strategy and austerity policy.” The Socialist Party, enjoying the parliamentary support of the Left Bloc, the Greens and the Communist Party, raised the minimum wage, cut the value-added tax and passed a law against evictions. It also announced further measures to increase pensions and social security benefits, lower social insurance contributions for low-wage employees and re-introduce the 35-hour week in the public sector. The plans have now been made conditional, because the EU has forced Portugal to make changes in its budget for the current year. “The European Commission considers that the Portuguese government’s 2016 Draft Budgetary Plan is at risk of non-compliance with the provisions of the Stability and Growth Pact,” and is demanding that Lisbon “correct” its alleged “excessive deficit,” according to a statement published last Friday. The Costa government had submitted its draft budget to Lisbon’s parliament shortly before the EU Commission’s decision, because it did not want to have it devalued by Brussels. However, with its decision, the Commission has placed the budget under supervision and announced a reassessment already for the spring.
845 Million Additional Charges
Brussels has even considered rejecting the Portuguese draft budget. Portugal was able to prevent a veto only through tough negotiations. The European Commission has called on Portugal to generate 950 million Euros in additional savings, to further reduce its debt. Finance Minister Mário Centeno then submitted proposals with a volume of 450 million Euros. He was ultimately forced to accept a volume of 845 million. To fulfill these conditions, the country will increase the value-added tax on oil and tobacco, taxes for a new car, bank levies, and charges for finance market transactions.
Pressure from Berlin
Prime Minister António Costa defended his draft budget all the way to the announcement of the Commission’s decision. “We have submitted a responsible budget,” he emphasized at a joint press conference last Friday with Chancellor Angela Merkel. In a conversation with the Frankfurter Allgemeinen Zeitung on the eve of his trip to Berlin, the Socialist explained the motives behind his policy. Costa outlined the problems his country was facing with the increase in competition from other low-wage countries. “Practically, since the introduction of the Euro, our economy has stagnated. In the new framework of competition since China and Eastern Europe opened up, we have had many adjustment difficulties.” The preceding government has not found a way to correct this situation. “It was a mistake to think that something like this would be possible if you impoverish everyone.” However, Costa’s program has not impressed Angela Merkel. She urged the Prime Minister to continue to pursue the austerity course. “The reform path was not easy, but we have made remarkable achievements. We talked about that and of course everything must be done to continue on this successful path.”
Portugal as a Precedent
According to the Left Block’s publication, “Esquerda,” Brussels, with its hard-line position towards the government of Prime Minister Costa, seeks to send a message to Portugal’s neighbor: “The ultimate goal is to get the Spanish Socialist Party to refrain from opting for a ‘Portuguese style’ solution.” Should also a left alliance form the government in Madrid, the EU’s objective of again pushing Spain’s deficit below the three percent limit, would be in jeopardy. Therefore, according to the Commission’s calculations, the future government in Madrid must generate eight billion Euros. The left wing Podemos Party, however, has already declared that it will not continue the austerity policy. Even though the EU’s Commissioner for Economic and Financial Affairs, Pierre Moscovici, made no comment on negotiations between Spain’s socialists and Podemos, last Thursday, he left no doubts that Brussels will insist on compliance with the Stability Pact, calling for a major effort to be made.