Since coming to power, Passos Coelho's Social Democratic Party based its strength on four factors. The first was the weakness of the opposition Socialist Party. The Socialists largely were discredited because they were in power when Lisbon had to request a bailout from the European Union and the International Monetary Fund. After losing the elections in 2011, the Socialists not only were unpopular with Portuguese voters but also had to support the new government in handling the rescue they had requested.
Second, Passos Coelho's government benefited from the division between Portugal's two largest labor unions. The General Union of Workers supported the new government, while the General Confederation of Portuguese Workers opposed it. The division meant that labor strikes in the early months of Passos Coelho's administration were few.
Third, the Portuguese population took the first round of austerity measures implemented by the government with relative calm. During his election campaign, Passos Coelho acknowledged that the new government would have to cut spending, and voters initially supported Lisbon in its decisions.
Finally, Portugal received continued support from its international lenders. Passos Coelho's Cabinet developed a good working relationship with representatives of the troika — the European Commission, the European Central Bank and the International Monetary Fund — and Lisbon implemented most of the economic reforms requested of it. When Portugal's economy began to show a marked decline, the troika allowed Lisbon some flexibility in meeting its budget deficit targets.
Rising Instability
These pillars of the current administration's power are now in danger. In July, the Portuguese Constitutional Court annulled a government plan to eliminate extra payments for public sector workers and state pensioners. This ruling forced Lisbon to find alternative ways to reduce labor costs and cut public spending in order to meet troika requests.
On Sept. 7, Passos Coelho announced a plan to increase the rate of social security contributions by public sector and private sector workers from 11 percent to 18 percent of their monthly salaries. Most of Portugal's political and social factions rejected the plan immediately. On Sept. 15, some 100,000 people protested in Lisbon. The plan even faced rejection within the ruling coalition, as the junior coalition partner, the Democratic and Social Center, threatened to vote against it.
After Passos Coelho's announcement, the focus of criticism against the government moved beyond the specific proposal to broader issues. The Portuguese population is growing more uncomfortable with the government's austerity policies. Meanwhile, Portugal's economy is in recession and is expected to contract by 3 percent in 2012 and to keep shrinking in 2013. Unemployment in the country is at a record high of 15 percent.
Under growing social and political pressure, the government announced Sept. 22 that it had discarded its plans to alter the social security contributions. Although this announcement averted a greater political and social crisis in the short term, Lisbon faces a future plagued with challenges.
After its last two economic reform plans were aborted, the Portuguese government has been forced to seek new ways to meet its lenders' requirements. A new round of tax increases is highly probable. Portugal is racing against time, as the troika must approve Lisbon's reform measures before it can release the next 4.3 billion euro ($5.5 billion) bailout tranche in mid-October. Furthermore, the 2013 budget — which is expected to be drafted by Oct. 15 — likely will include additional austerity measures. This will irritate the unions, the opposition and the population.
Until a few months ago, the Portuguese government made its decision in an environment of relative social and political calm. Now, however, the opposition is strengthening in polls and has begun openly criticizing the government. Moreover, discontent among workers has made the unions close to the government begin to distance themselves from Passos Coelho. This will make Lisbon's attempts to meet its lenders' requirements politically riskier.
The Broader Implications of Portugal's Difficulties
Although the Portuguese economy is relatively small, it is directly linked to Spain in terms of trade and the presence of Spanish banks in Portugal. At a time when Madrid is at the epicenter of the eurozone crisis, further political paralysis leading to financial market pressure on Portugal could negatively affect Spain because of the countries' strong economic ties. Moreover, an increase in social instability in Portugal would undermine the credibility of the troika, because Portugal (along with Ireland) was considered a success in implementing economic reforms.
Portugal plans to return to the bond markets in late 2013, but the plans could be jeopardized by political instability. This could increase the likelihood of the need for a second bailout, which would increase borrowing costs for other countries in the European periphery.
These events show that Portugal and Spain's situations are beginning to more closely resemble Greece's: External lenders and the local population are pushing in opposite directions, significantly destabilizing the government and reducing the government's room for action. Lisbon's initial strategy was to comply strictly with the troika's requests. The strategy was relatively successful, as Lisbon was given a more flexible target by its lenders in return for its compliance. However, that strategy is also leading to domestic unrest.
As a consequence, Portugal is likely to ask the troika for even more flexibility so that Lisbon can ease political and social tensions at home. The European Union and International Monetary Fund are likely to accept a request from Lisbon for a slower implementation of economic reforms. The question is whether these concessions will be enough to appease the Portuguese people and the international markets, whose interests are directly opposed.
