May 1 was a day marked by contradictions in Portugal. During a speech in Lisbon, Prime Minister Pedro Passos Coelho said his country would not request additional assistance once its bailout program finishes in two weeks. But Labor Day also saw protests in Portugal's main cities as unions criticized the austerity measures approved by the government in exchange for the bailout. The General Confederation of Portuguese Workers announced new protests scheduled for June 14 in Porto and June 21 in Lisbon to demand higher wages and an increase in the minimum wage, from 485 euros ($672) to 515 euros per month. These events highlight the incongruities between the situation in financial markets and the reality among the populace — something that is apparent in other eurozone countries such as Spain and Greece.
Apparent Economic Improvements
Like many other eurozone members, Portugal is enjoying the benefits of the environment created by the European Central Bank's promise to intervene in financial markets made almost two years ago. Since then, the interest rates for Portuguese sovereign debt fell considerably, giving Lisbon hope for a successful return to markets once its assistance program ends. In late April, Portugal tested the waters with a satisfactory bond sale. This encouraged Passos Coelho's government to avoid asking the European Union for a precautionary credit line to secure a soft transition from the bailout. The decision will probably be formalized May 5 during a meeting of the eurozone's finance ministers.
Lisbon's decision is also explained by political factors at home and throughout Europe. Passos Coelho understands that the bailout program and the regular visits by the "troika" — the European Union, the European Central Bank and the International Monetary Fund — are deeply unpopular at home. A new credit line would involve new conditionality, something that Lisbon wants to avoid. The government also has to deal with the combative Portuguese Constitutional Court, which has shown willingness to block some of Lisbon's economic reforms. Moreover, countries in northern Europe will likely be relieved when Lisbon makes its formal announcement because it will spare them another debate over financial assistance for a country in the European periphery.
This has been accompanied by a significant improvement in some of Portugal's main macroeconomic indicators. The Portuguese economy grew by 0.3 percent in the third quarter of 2013, followed by 0.6 percent growth in the fourth, mostly fueled by exports. Unemployment fell to 15.2 percent in the first quarter of 2014, from 16.9 percent a year before. The country's current accounts moved from a deficit of more than 10 percent of gross domestic product in 2010 to a surplus of 0.5 percent in 2013. Moreover, in the past few years, tourism has established itself as one of the most dynamic sectors of the Portuguese economy.
A Closer Look at the Indicators
However, it could be too early to celebrate. First, austerity measures are far from over: The Portuguese government recently announced plans to raise the value-added tax and social security taxes in the next four years. The European Commission has granted Lisbon several delays, but the Portuguese government is now trying to reach the EU deficit target of 3 percent of gross domestic product in 2015.
Second, Portugal's increase in exports is mostly explained by fuels, the value of which doubled between 2010 and 2013 as the local energy giant Galp Energia increased its refining activities. According to the Portuguese central bank, private consumption will increase by only 0.3 percent in 2014, while public consumption will actually decline 2.3 percent. Banks remain in a fragile situation, with the main three banks presenting losses in 2013 and expecting a similar situation in 2014. In November, the Portuguese central bank issued a warning about the country's highly indebted private sector.
Moreover, Portugal's unemployment rates are in decline, but not necessarily because people are finding jobs. According to official statistics, job creation accounts for only a third of the reduction in unemployment rates, with emigration and people simply ceasing to look for jobs explaining the rest. Portugal has some of the lowest birth rates in Europe and some of the highest rates of net emigration. Some 240,000 people left Portugal, a country with 10.5 million people, in the past two years. According to Eurostat, Portugal will lose around 7 percent of its population within the next two decades, mostly due to low birth rates and emigration.
Those who are lucky enough to have a job are struggling to make ends meet. Roughly 1 in 10 workers in Portugal is paid the minimum wage, which is among the lowest in Europe. The official minimum wage was frozen as part of Lisbon's agreement with its lenders, and the issue is currently at the core of frictions between the government and the unions. This debate will mark Portugal's economic and political life in the next months. With the next general elections scheduled for next year, Passos Coelho's government is likely to make concessions on this issue late this year or early in 2015. Underemployment is also a problem; statistics show that 13 percent of the Portuguese workforce has part-time jobs, the highest rate in three decades. Half of those people said they would like to have a full-time job. If unemployment and underemployment are combined, a third of Portugal's labor force has employment problems.
While emigration could be seen as beneficial in the short term — fewer people are competing for jobs and applying for unemployment benefits, and more people are sending remittances to Portugal — it will create serious problems in the future. The Portuguese government has said one of the main reasons behind the value-added tax increase is the need to finance the country's pension system. In other words, Portugal has fewer people paying higher taxes to pay pensions for a growing number of retirees. This situation will only get worse over time because fertility or immigration rates are unlikely to improve. As a result, Portugal's fiscal problems are far from over.
