Portugal Politics

Portugal

Portugal: Political turmoil threatens Portugal's fragile economic recovery

November 24, 2015

Portugal’s political future has been in limbo since the general elections that took place on 4 October, threatening to destabilize the fragile economic recovery that started in 2014 as neither the ruling center-right coalition Portugal Ahead (PaF) run by conservative Pedro Passos Coelho nor the opposition moderate-left Socialist Party (PS) led by António Costa managed to gain a parliamentary majority. Despite Costa’s statement that the Socialist Party was ready to form a majority left-wing coalition as it had secured the backing of the Left Bloc (BE), the Communists and “The Greens”, President Cavaco Silva first nominated Coelho for his second term as Prime Minister in a controversial move in late October. However, his newly-formed government was forced to resign after just 11 days following a no confidence vote, facing a united left-wing opposition.

Following nearly two weeks of uncertainty after the fall of Coelho’s tentative government, President Silva paved the way for Costa to become the new Prime Minister on 23 November, asking him to begin work to form a new government. However, as there are significant doubts about the stability of a minority left-wing government backed by far-left parties who are opposed to austerity measures, Silva asked Costa to provide “formal clarification” on six central issues related to “economic recovery, job creation and government borrowing” such as compliance with EU rules, in particular regarding the 2016 budget.

All eyes are now on Costa, who on 20 November had reiterated that his agreements with the far left were still holding and that he was confident in the approval of his 2016 budget. Detailing their agreement, Coelho affirmed previously that while the coalition would keep its party’s moderated pro-European stance, it intends to reverse austerity measures such as public sector salary cuts and frozen pensions.

The coming days and weeks will determine much of Portugal’s political direction. However, it is unclear if a sustainable political solution will arise without new elections and uncertainty over the outcome of the ongoing political turmoil, future economic policies and the economic outlook of the country is likely to remain elevated.

The Bank of Portugal expects the economy to expand 1.7% in 2015 and 1.9% in 2016. The panel of analysts we surveyed for this month’s Consensus Forecast left their 2015 GDP growth forecast unchanged at 1.6%. For 2016, the panel foresees the economy growing at a slightly-higher 1.8%, which is unchanged from last month’s forecast.


Author:, Economist

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