Since 2016, Portugal has enjoyed robust growth (at least relative to its European peers), climbing wages, and a precipitous drop in unemployment. This has been welcome news for more than just the Portuguese, though. As many optimistic European social democrats will tell you, Portugal began to experience these results after its new center-left government, led by António Costa’s Socialist Party (PS), came to power with the promise of reversing the harsh austerity measures imposed by the European troika (the International Monetary Fund, European Central Bank, and European Commission). Portugal, as the argument goes, has pioneered a “fourth way” for the European left — one that recasts wage hikes and reinvestment in public goods as deliberate and responsible growth-inducing policies, rather than self-destructive overindulgences by supposedly profligate southern Europeans.
Yet while the PS government has certainly taken much-needed steps to alleviate some of the human suffering wrought by nearly a decade of austerity, it has not taken any meaningful measures to move beyond austerity altogether. Bank holidays, increased public sector wages and lowered income taxes have all come at the expense of other forms of public investment like infrastructure and healthcare. Instead of embracing the type of growth-spurring Keynesian stimulus that Costa promised, the PS government has merely worked to limit austerity’s worst effects by maneuvering within the Eurozone’s strict budgetary limitations. Rather than serving as a model alternative to austerity, Portugal highlights the degree to which peripheral European states are limited in their ability to manage their own economies.
To begin, it is important to understand how exactly Portugal is thought to serve as a counterpoint to the austerity policies that have been dominant among core Eurozone policymakers and economists for the past several decades. The Eurozone, through its very structure and rules, forecloses two critical policy tools used to combat economic recession. The first of these is currency devaluation, which is rendered impossible because members of the Eurozone share a currency, so individual member countries cannot print their own money during a time of crisis to make their exports more competitive. What’s more, the European Central Bank (ECB) — the institution responsible for printing euros — is, according to its charter, tasked solely with keeping inflation rates low. This mandate is in sharp contrast to the Federal Reserve in the United States, for instance, which is tasked with balancing inflation and unemployment. This means that the ECB will not devalue the Euro during crises, even if it would benefit individual member nations to do so.
The second policy tool, fiscal stimulus, is effectively neutered by the Eurozone’s Stability and Growth Pact. According to the Pact, Eurozone countries must cap their deficit-to-GDP ratios at 3% and debt-to-GDP at 60%. This leaves very little wiggle room for fiscal stimulus, and in fact, actually required many periphery states during the Eurozone crisis to take counterproductive measures like cutting spending and raising taxes significantly in the midst of recession. Bailouts by core states like Germany have come with strict conditions that typically involve cutting public services and wages drastically. Many economists argue that this practice merely creates a vicious cycle where spending cuts during recession shrink the GDP, which increases the deficit-to-GDP ratio, and consequently necessitates deeper cuts in a perpetual economic contraction.
Yet the force behind the remaining option — austerity — is not simply German Schadenfreude. The idea behind so-called “expansionary fiscal contraction” under austerity has two dimensions. The first was originally offered by Harvard Economist Alberto Alesina. In a meta-analysis of supposedly all major fiscal policy changes in so-called “advanced countries” between 1970 and 2007, he argued that there was evidence that suggested cuts in fiscal spending correspond to overall economic growth. His explanation was that cuts in spending spur investor confidence, which leads to macroeconomic growth that outweighs the negative consequences of cutting public services. Other proponents of austerity argue that cuts in public spending and wages allow the market to self-correct through internal devaluation. Basically, wages fall by cutting spending on public services and social goods, making labor, and therefore manufactured goods, cheaper. This is thought to make a country’s exports more competitive, which sparks growth in the medium-term. But while cuts in public spending and wages have driven down standards of living in periphery states like Greece, growth has not returned in any meaningful way.
In this sense, Portugal supposedly serves as the counterpoint to these arguments. Critics of austerity are eager to impute Portugal’s anomalous success to the increased social spending and tax cuts introduced by the PS government — the very type of fiscal stimulus that the troika and core nation policymakers criticized as the cause of the Eurozone crisis in the first place. But the notion that Portugal is a harbinger of the dawning era of anti-austerity is illusory for several reasons, especially since it has not, in any true sense, engaged in the type of thorough and sustained economic stimulus that such an approach would require. Pedro Santa-Clara, a professor of finance at the Universidade Nova de Lisboa, noted that “increased current spending has been more than offset by drastic cuts in public investment, higher taxation and lower social transfers.”
This is largely because Costa’s Socialist Party, unlike its more radical left-wing government partners, is unwilling to plainly defy restrictive Eurozone deficit requirements. In reality, Portugal’s relatively strong growth in 2016 and 2017 can be attributed to increasing international growth, which has buoyed exports, and a tourism boom. Though the PS government’s modest policies have provided relief to the Portuguese, particularly young workers, they are at best a small contributory factor in the country’s recent good fortune. Rather than emerging as a pioneer of anti-austerity — the much awaited alternative to the troika’s “There is No Alternative” narrative — Portugal’s socialist government has taken advantage of the breathing room offered by external political and economic forces to limit the poverty caused by austerity while remaining within the limits of the Eurozone’s rules. Wage increases and tax cuts are less a rejection of the Eurozone’s austerity and more a negotiation of its boundaries — how far, exactly, can a government alleviate the human suffering of poverty without breaking the Eurozone’s rules?
It is a gross oversimplification of Portugal’s state of affairs to argue that the policies the PS government has introduced constitute a repudiation of austerity politics. In fact, by holding up the Portuguese as a model of anti-austerity, one actually obfuscates what anti-austerity politics mean in the first place. In this telling of the story, it seems anything short of the government lying supine while Germans in suits write the budget constitutes anti-austerity. More importantly, though, to hold up the Portuguese as a model for future anti-austerity governments in Europe may prove to be a severe political error. Its recovery can be more accurately attributed to external factors that are largely independent of the government’s limited policies. Implementing halfway measures in other Eurozone countries that do not share the conditions driving Portugal’s recent recovery may not produce such impressive results. In fact, these cases could even provide proponents of austerity exactly the examples they need to show that “there is no alternative” after all.
While this temporary growth is no doubt good news for the Portuguese, it is not the consequence of a Keynesian stimulus, which might otherwise have served as a much needed counterpoint to what Joseph Stiglitz calls the Eurozone’s “deficit fetishism.” These cuts are not enough to create the virtuous cycle of growth envisioned by Costa. Instead, his government is in the unenviable position of trying to effect a state-led recovery within the narrow strictures of the Eurozone’s deficit laws. Rather than serving as an example of how peripheral states in the Eurozone can buck harsh austerity measures and their concomitant steep social costs, perhaps the case of Portugal demonstrates that the destinies of peripheral Eurozone states — unable to devalue their own currency due to a shared euro or spend to sufficiently stimulate their economies thanks to Eurozone budgetary rules — are very much still controlled by the troika.
Photo: “2018 Finanzminister Löger bei Eurogruppe und ECOFIN”