Discontent threatens Portugal's fiscal progress

Riot police stands in front of the Portuguese Parliament during a protest following an online and broadly non-party political campaign against the new austerity measures, in Lisbon, on September 15, 2012.

Story highlights

  • Protests showed an unexpectedly strong backlash to Portugal's tough austerity measures
  • President Aníbal Cavaco Silva will hold later this week in an effort to ward off a political crisis

An unexpectedly strong backlash to Portugal's increasingly tough austerity measures has triggered an upsurge of public discontent and political skirmishing, threatening to undermine the fiscal progress Lisbon has made with its €78bn bailout programme.

President Aníbal Cavaco Silva has convened a meeting of the state council, his top advisory body, later this week in an effort to ward off a political crisis, while hundreds of thousands of demonstrators took to the streets on Saturday in the country's biggest anti-austerity protest to date.

The sudden breakdown in the broad political consensus over Lisbon's adjustment programme and the threat of a potential split within the ruling centre-right coalition is an indication of the political risks still facing some struggling eurozone governments despite a September rally in sovereign debt markets.

José Manuel Barroso, European Commission president and a former prime minister of Portugal, warned that a political "rupture or polarisation" would have an extremely negative impact and could "bring into question the climate of confidence that Portugal has been gradually building".

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A change in public mood was evident among protesters who marched through city centres across Portugal on Saturday. Co-ordinated on the internet by independent organisers rather than political parties or trade unions, the largely incident-free protests attracted many participants who said they had never previously demonstrated.

"I've enjoyed a better life than my parents and they had better lives than my grandparents," said one public sector worker marching in Lisbon. "I've come here to protest because I fear the same may not be true for my children."

The protests were sparked by a recent televised address in which Pedro Passos Coelho, the prime minister, announced a 7 per cent increase in the social security contributions to be deducted from workers' pay next year, while employers' contributions are to be cut by a similar amount.

Although the measure, described as a "fiscal devaluation", is intended to boost employment, lower prices and make Portuguese exports more competitive by cutting labour costs, it has been widely perceived as "robbing workers to pay their bosses", as one trade union activist described it.

However, Mr Passos Coelho said unemployment, currently above 15 per cent, could reach 17 per cent next year if the social security changes were not implemented.

His announcement came shortly before Portugal's international lenders -- the so- called "troika" of the European Commission, International Monetary Fund and European Central Bank -- agreed to give Lisbon an extra year to meet previously agreed deficit-reduction targets.

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Partly a response to calls from opposition parties and other "social partners", the decision to relax the targets came with more sombre economic forecasts for next year, with the government projecting the economy would contract by another 1 per cent after shrinking by an expected 3 per cent this year. It had previously forecast a slight recovery in 2013.

In response to the new austerity package, the centre-left Socialists, the main opposition party, said they would vote against Mr Passos Coelho's 2013 budget proposals when they went before parliament in October and table a censure motion against the government if the social security changes were not withdrawn.

Before losing a general election in June 2011, the Socialists had negotiated Portugal's three-year bailout agreement with the troika, contributing to a consensus in which the country's three main parties, accounting for more than 77 per cent of the vote, supported the agreement.

Potentially more damaging for Mr Passos Coelho, whose government enjoys a comfortable majority in parliament, are stern criticisms of the measure from leading figures within his own Social Democrats and his smaller coalition partners, the Popular party.

Manuela Ferreira Leite, his predecessor as party leader, said she would have voted against the social security changes if she were still in parliament, raising the possibility that some MPs supporting the government could rebel in the crucial budget vote.

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