Portugal is warned of two ‘terrible years’
By Peter Wise and Jonathan Ford in Lisbon
Published: June 15 2011 18:17 | Last updated: June 15 2011 18:17
Pedro Passos Coelho has no plans to leave his modest fifth-floor flat in an unfashionable dormitory suburb of Lisbon for the plush official residence he is entitled to use after he is sworn in next week as Portugal’s new prime minister.
Noted for his thrift, the 46-year-old leader of the centre-right Social Democrats (PSD) is temperamentally well prepared for the formidable task of implementing the tough €78bn rescue programme the country has agreed with the European Union and International Monetary Fund.
Portugal faces two “terrible years” of deep recession and record unemployment, he acknowledged in an interview with the Financial Times, before the country can return to growth and regain the confidence of international investors.
This will involve “a very rigorous programme of austerity and structural reforms” covering everything from slashing public deficits and extensive privatisations to shake-ups of justice and education.
“There is no alternative,” he says, the adjustment programme “cannot fail”. Failure, he says, would prevent Portugal from returning to the financial markets in 2013 and leave it in a similar predicament to Greece, which has had to ask for a second bail-out. The Portuguese economy would be trapped in a recessionary spiral after a projected 2 per cent contraction both this year and next.
After winning a decisive election victory on June 5, Mr Passos Coelho will take office at the head of a majority government coalition between the PSD and the smaller conservative Popular party (CDS-PP). He has inherited a daunting programme, agreed with the EU and the IMF, that requires his government to cut the budget deficit from 9 per cent of gross domestic product last year to 3 per cent in 2013 and to implement structural reforms that no previous government has attempted.
Not content with this challenge, he aims to go beyond the requirements of the rescue agreement, promising, for example, to accelerate and expand the privatisation programme. The state-owned broadcasting media is to be sold off, leaving only one non-commercial public service channel. He will also privatise up to 49 per cent of water utilities.
Privatisation is not just a question of raising revenue, Mr Passos Coelho says. Portugal needs foreign investment to support growth, which will have to be led by the export sector. The government will throw open the doors to non-Portuguese investors.
“We will be absolutely transparent and rigorous,” he says. “There will be no hidden agenda.”
He would also like to meet deficit-reduction targets ahead of schedule, although he fears the previous Socialist government may have left some “surprises” on the books.
Economists do not doubt Mr Passos Coelho’s commitment to spending cuts, but worry austerity will choke off growth. While structural reforms in areas such as education, labour legislation and justice should ultimately bear fruit, this will take time to ripen. Mr Passos Coelho has less than three years to turn the economy round.
Mr Passos Coelho is staking his hopes for growth on a sharp “fiscal devaluation” — a sharp cut in company contributions to employees’ social security payments — which should cut labour costs and make exporters more competitive. But he says it is too early to determine the scale of the cut, which will have to be revenue-neutral because of the country’s deficit.
There is no doubt that Mr Passos Coelho believes in what he is doing. He sees the rescue programme as a unique opportunity to implement essential reforms that previous governments have avoided for the past 30 years. He is convinced that he is the right man to do the job. The “serious difference” between his party and the Socialists of José Sócrates, the outgoing prime minister, he says, is that the PSD “believes in the changes we have to make”.
Mr Sócrates, on the other hand, was forced into a rescue package with the EU, IMF and European Central Bank “because there was no other way to get the money”.
Mr Sócrates has accused Mr Passos Coelho of using the EU-IMF agreement as a pretext for “the most radical rightwing programme ever proposed in Portugal”.
But Mr Passos Coelho says 80 per cent of voters backed the three parties who signed up to rescue agreement — the PSD, the CDS-PP and the Socialists. This, he says, is an important difference between Portugal and Greece, where larger sections of society are strongly opposed to the bail-out package.
One of his first initiatives will be a new agency to monitor public accounts. This will be “completely independent of the government and parliament” and include at least two foreign experts. His finance minister will also be an independent with no party affiliations.
JOURNEY TO THE TOP
Born in 1964; son of a doctor. Childhood spent in former Portuguese colony of Angola.
Politics: Joined the Social Democrats aged 16. Has served as an MP and mayor. Became party leader in March 2010.
Education: Degree in economics.
Business experience: consultant, chief executive.
Family: Married to a physiotherapist from Guinea-Bissau, they have a four-year-old daughter. Has two daughters by his first wife.
Financial Times
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