The Price of “Austerity”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Passos Coelho, who was until Tuesday Prime Minister of Portugal, knew “what to do.” After signing along the dotted line for a €78 billion bailout he embraced the Troika’s austerity agenda with abandon. Public spending was slashed, taxes were hiked, wages were cut, and a whole gamut of public assets and services were privatized.
As they say in Brussels these days, no pain, no gain. After four years of excruciating belt-tightening, Portugal was apparently back on the mend, despite its public debt almost doubling since 2008. Its economy had been through the grinder but it had come out the other end in much leaner shape. The public deficit had shrunk from 11% in 2011 to 3% today.
Unemployment had also fallen, and kept falling month after month, to the point where it was getting monotonous. Until two months ago, that is, when it shot back up over 14%. Then came the bomb shell: the country’s Ministry of Statistics announced in a rare moment of candor that unemployment, in an “extended sense,” was actually around 22%. As Deutsche Welle reports, the Portuguese government had been doctoring the figures to keep the European institutions (i.e. the Troika) happy:
European politicians prefer lower unemployment figures rather than higher ones, and as a consequence, there are now unemployment figures in “narrower” and “extended” senses. Mostly, the headline figures reported are the lower, “narrower” ones.
In other words, in the real world Portugal has almost identical depression-era levels of unemployment as Spain. Its government is just more skilled at masking the grimness of its economic reality.
However, hiding a decidedly grim reality with a flimsy façade of doctored numbers may work on international investors and rating agencies – at least for a while – but it doesn’t work on those who have to live in that grim reality. And at election time that can be a serious setback.
When Coelho’s governing coalition received only 38% of the vote in last month’s elections, the game was as good as up, especially when it became clear that three parties on the left — the so-called “triple left” — had won an absolute majority and seemed willing to form a coalition.
Even when the Portuguese President Cavaco Silva, a former member of Coehlo’s pro-Euro party, reappointed Coehlo as prime-minister in a desperate bid to prevent “anti-European,” “anti-Nato” forces from winning the keys to government, he merely forestalled the inevitable. Today the inevitable happened: the “triple left” roundly rejected Coelho’s policy proposals, forcing Portugal’s Troika-friendly government to resign.
A Messy Business Indeed
The question now is whether or not the “triple left” can form a functional government and if it can, just how “radical” its policy agenda will be. The makeshift leftist alliance includes the Socialist Party (PS), the Left Bloc, and the Communist Party. Though all three parties are more or less on the left side of the political spectrum, they have major ideological and policy differences.
As Business Insider’s Mike Bird reports, on a left-right economic spectrum, few parties are more to the left than the Left Bloc or the Communists, according to the European Union Center of Excellence at Chapel Hill, North Carolina. Of the 268 EU political parties it assesses, the Left Bloc is the eighth-most left-wing party, and the Communists are the fourth-most left-wing. PS is the 122nd-most left-wing, pretty close to the middle of the distribution.
All of which means that things could be about to get very interesting in Portugal, a country that boasts one of the highest total debt levels in Europe (behind Ireland, Denmark and the Netherlands). Before the elections Portugal, like Greece before it, was supposed to be on the road to full recovery; it just needed to keep taking its medicine.
However, if its new government is indeed composed of parties that campaigned to abrogate the Lisbon Treaty, the Fiscal Compact, the Growth and Stability Pact, as well as dismantle monetary union and take Portugal out of the euro, as President Silva charged, it’s only a matter of time before the people of Portugal are on the receiving end of some ECB-administered shock treatment.
A Taster of What’s To Come
The problem for the Troika is that Portugal’s growing political instability could be a mere foretaste of what lies in store for the rest of the Iberian Peninsula. On December 20, Spain, the Eurozone’s fourth biggest economy, will vote in what is likely to be its most closely fought general election in decades. If recent polls of voter intentions are any indication, no party will win an absolute majority. It may even be difficult to form a viable coalition government of any kind.
In the meantime relations between Madrid and Catalonia are at their lowest point since Franco’s death, in 1975. Catalonia still has no functional government to speak of, but that hasn’t stopped the pro-independence majority in parliament from voting to separate from Spain in the next 18 months. The central government in Madrid has responded by threatening to cut off financial support to the region as well as ordering Catalonia’s local police to arrest anyone involved in “acts of sedition” against the State, a crime that is punishable with up to 15 years in prison. By Don Quijones, Raging Bull-Shit.
In other words, Spain’s richest region (in absolute terms) is on autopilot and on collision course with the central government, which may also be without government soon, while stilling having to service its massive (and growing) debt, possibly without the help of its richest region. Economic madness. Read… Kamikaze Economics: Spain Threatens to Cut Financial Supply Lines to Its Richest Region