A few years ago, Portugal was the P in PIGS, the quartet of Southern European countries who were hit hardest by the Great Depression and the Euro crisis that followed. Years later, in the midst of an economic recovery, the country is being hailed as a ‘socialist miracle’, an example of what an abandonment of austerity and ‘neo-liberal’ economics can achieve.
Socialist Antonio Costa came to power in 2015 and recently formed a new minority government with support from the far left. In his time in office, he has overseen increases in pensions, benefits and the minimum wage. His economic record is impressive: Despite reversing spending cuts implemented by his predecessor, the deficit has plummeted and in June 2017 Portugal left the EU’s “excessive deficit procedure,” which it had been in since 2009. The unemployment rate has dropped from 12 percent in 2015 to 6.3 percent. GDP growth was 0.5% in Q2 versus 0.2% for the Eurozone as a whole. On the left, Portugal is being hailed as an example of what can be achieved by pursuing a progressive economic agenda. But some of the circumstances around the Portuguese recovery tell an alternative story.
First, while the government deficit has fallen from 7.2 percent to 0.5 percent since 2014, this dramatic improvement is owed largely to the sharp fall in interest rates on a government debt standing at over 120 percent of GDP. This has been facilitated by ECB’s quantitative easing programme, which has sent rates across the Eurozone tumbling. Portugal’s 10-year government bond now trades at a 0.2 percent, more than 2 percent lower than when Costa came to power – and 16 percent lower than in 2012.
Second, the dramatic fall in unemployment has been facilitated by a rise in low skilled, low wage jobs and an increasing reliance on contract work. As Portuguese unit labour costs fell more than in other crisis-hit countries in the aftermath of the Euro crisis, the economy’s competitiveness improved. The minimum wage may have been raised but is still below EUR 4/ hour equivalent, half of many north European countries and significantly lower than in Spain and Greece.
Third, attractive tax rules and the low cost of labour has helped sustain a relatively high level of foreign direct investment (FDI). While 14% of the population continue to live abroad, many having left at the height of the crisis, they have been replaced by expat workers and wealthy foreigners, taking advantage of the so-called Golden Visa programme to jump the immigration queue and generous tax laws that do not tax non-residents on world-wide income. A 20% expat tax deal combined with the climate, food and general affordability has made Portugal the top ranked European country for expats to live. Maintaining this ‘beggar-thy-neighbour’ style low tax regime hardly chimes with socialism but has been crucial in attracting foreign workers and capital.
Fourth, the resurrection of the Portuguese economy has not exactly been following the Keynesian textbook – the state has not put idle hands to work. In fact, restoring fiscal credibility has been at the core of the Costa government’s agenda. In 2017, net public investment was negative, meaning that investment was too low to offset depreciation of state assets. In 2018, Portugal still had the lowest level of public investment in the Eurozone. Problems could be storing up for the future. Critics point to an underfunded health system, creaking infrastructure and a struggling education sector. The few fiscally expansive policies besides increases in social spending has mainly been tax cuts, including a reduction in VAT from 23 to 13 percent. Privatization, though scaled back, has been continuing. The private sector has played a central role in the economic revival, for example in urban redevelopment, where overseas money (from China in particular) has flooded into investment properties and the tourism industry has invested heavily, benefiting from the general European recovery and terrorism in nearby Tunisia.
Those on the left who hold up Portugal as an example of what a break with ‘neo-liberal’ policies forget to tell the full story. The recovery has largely been based on low skilled, low wage jobs, artificially cheap interest rates courtesy of the ECB and public under-investment. Some claim that the recovery owes more to efforts by the previous government, led by Passos Cohelo. And the economy is hardly in the clear yet, with government debt the third highest in the Eurozone a potential stumbling block. Sustaining the high level of FDI will be crucial. Sustainable economic and wage growth can only come from such private sector investment. This will be the key to Portugal’s long-term recovery.