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Portugal Has Emerged as Europe’s Booming Anti-Germany
Lisbon got its economy back on track by ditching austerity, and now Berlin is eating crow.
Germany’s resolute Chancellor Angela Merkel is not usually one to admit she’s been wrong. But this autumn, when it comes to her faith in austerity economics in Europe, Merkel, together with her then-Finance Minister Wolfgang Schaüble, did as much — in deed, if not in word.
The Germans threw their hefty weight behind the leftist economist Mário Centeno, Portugal’s finance minister, for the coveted post of head of the Eurogroup, the common currency’s influential 19-member directorate. In January, Centeno, a Harvard-educated Portuguese Socialist Party freethinker, will leave Lisbon’s left-wing government to succeed the incumbent president, Jeroen Dijsselbloem. The Dutchman had been a critical ally of Germany in recent years, taking to task the profligate Southern Europeans — and inadvertently ripping open a contentious divide between Europe’s north and south that persists to today.
Centeno constitutes a shift in course. Until now, he has represented a Southern European country, Portugal, that received a 78 billion euro ($92 billion) bailout from its fellow European Union member states amid the euro crisis. But even more remarkable, Centeno was part of a leftist government with the backing of a communist party, which subsequently bucked the marching orders of its northern creditors and the troika composed of the European Central Bank, European Commission, and International Monetary Fund.
Whether Centeno’s ascension, with Berlin’s assistance, represents a shift in German economic thinking remains to be seen. Less than two years ago, Schaüble, the eurozone’s fiercest fiscal hawk, warned Portugal that its refusal to follow the rules would sink its economy and force it to seek another international bailout. But, since then, Lisbon’s cautiously renegade deviations have won plaudits even from budget disciplinarians — including Schaüble himself.
Portugal has proven it’s possible for a struggling country to defy German-imposed austerity in the EU and still succeed. That’s not to suggest that, just because Centeno has served a leftist Portuguese government, he will pursue radical policy ambitions in Brussels. But, as president of the Eurogroup, he will execute duties in a body that grew immensely in significance over the course of the financial crises and will be paramount in guiding the reform processes that still lie ahead.
The Eurogroup was initially designed as an informal meeting for finance ministers to exchange views, but now it monitors draft national budgets and bailout programs as part of the economic surveillance instituted as a result of the crises. The president is a key figure in eurozone developments even though the body has been starkly criticized as nontransparent and undemocratic, as it is not subject to parliamentary discretion, nor are its minutes public.
Centeno, like the Portuguese government he served, already symbolizes the possibility that a new, less German, ideological era of economic governance is in the offing in Europe. Lisbon is the first Southern European government to climb out of the swamp of indebtedness and stagnation. Its economy is undergoing its fastest expansion in over a decade, and more growth is expected next year, which will shrink the country’s budget deficit to 1 percent of GDP — the slightest in 40 years. Unemployment this year fell to 9.2 percent, down from 17.5 percent in 2013, and exports are picking up. (Nevertheless, Portugal’s national debt is still 128 percent of its current GDP, a sign that it is not entirely out of the woods yet.)
“Mr. Centeno’s appointment is representative of a policy change in the workings of the eurozone,” said Gustav Horn, an economist at the Hans-Böckler-Stiftung, a German think tank. “It’s an admission that the hard-line austerity prescriptions and fiscal contraction haven’t worked, which we can see in Greece. Cutting spending and taxes in times of crisis only make things worse. Portugal’s approach was different: first get the economy going, then get the budget right. Merkel has now obviously recognized this.”
Portugal’s path back to the family of healthy European economies wasn’t anywhere in sight when, in 2010, Portugal stumbled into the debt trap and downward spiral that also captured many of its indebted southern European peers. The introduction of the euro 11 years prior had diminished the competitiveness of a country accustomed to tampering with its currency’s value in order to gain favorable trading terms. It also provided Portugal with easy access to almost unlimited credit — which went largely toward property, construction projects, and high-risk financial products. GDP grew. But when the bubble burst and the time to pay came around, Portugal went belly up like the others, outing a legacy of mismanagement, jiggered accounting, and public sector waste.
To stave off bankruptcy, Portugal signed up for a bailout in 2011. That came with familiar instructions to cut the budget deficit, lower wages and retirement benefits, reduce public spending, and in general comply with the EU’s fiscal policy conditions. Portugal’s conservative government at the time dutifully instituted tax hikes and salary cuts for public servants, four national holidays were scratched, and many utilities were privatized. Over two years, the country’s education budget was slashed by 23 percent. Predictably, unemployment soared as the economy ground to a halt.
The upshot was that in 2015 a Socialist Party minority government came to power under the veteran social democrat António Costa with the nod of the Portuguese Communist Party, Greens, and independent Marxists in the parliament — a breathtaking novelty. Costa’s administration came into office having witnessed the unsightly defeat of a Greek government lead by the like-minded Syriza party, which had rejected outright the troika’s terms and then capitulated under pressure, facing a bitter choice between either insolvency (and crashing out of the euro) or compliance.
On the campaign trail, Costa, Lisbon’s mayor at the time, spoke vaguely about challenging the austerity regime without undermining the troika’s framework — in contrast to Syriza’s uncompromising stance. In office, Costa’s government appointed Centeno to the finance ministry. Working in Portugal’s central bank and teaching at the University of Lisbon, the 51-year-old labor market specialist hadn’t been in the spotlight until Costa called on him to design the Socialist Party’s economic platform for the 2015 election campaign. In academic circles, he had the reputation of a liberal favoring labor market flexibility. In office, he proved to be a shooting star: 2017 surveys showed him as the Cabinet’s most popular minister, with Portuguese voters obviously crediting him with putting the economy back on its feet.
Centeno was given a mandate to steer economic reforms — and, crucially, to kick-start the economy by bolstering demand. “It’s completely wrong to think that a country like Portugal could become more competitive on the basis of Third World competitive factors,” Costa told the Financial Times in January 2016, referring to the troika-dictated intension to boost productivity by deflating wages. The government stuck largely to the troika’s fiscal terms while reversing pension and salary cuts, stopping privatization of public water and transport companies, and reinstating the holidays. In spite of reprimands from the troika, it bumped up the minimum wage and scuppered the regressive tax hike. Social security was increased for poor families.
Despite the threats and doomsday prophesies from EU officials, the measures rekindled domestic demand and investment in 2016. Growth became steady. A year after assuming office, Costa’s government with a leftist menagerie behind it could flaunt a 13 percent leap in corporate investment. “Portugal has increased public investment, reduced the deficit, slashed unemployment and sustained economic growth,” Guardian columnist Owen Jones wrote earlier this year. “We were told this was impossible and, frankly, delusional.” In September, Portugal regained investment-grade credit status from international rating agencies.
Centeno’s posting to lead the Eurogroup now lines up adroitly with French President Emmanuel Macron’s reform agenda. Macron can most probably count on Centeno as an ally in tying the euro area’s economies more closely together and kick-starting growth on the troubled southern economies with an investment strategy. Greece remains a major concern for the zone, as its economy has not responded positively to the Schaüble-era reforms. The body will certainly discuss easing the measures imposed in Greece during the height of the debt crisis.
For this reason, the Italian daily Il Sole 24 Ore commented: “Centeno’s election can be seen as a turning point.” It will prove all the more so if Centeno, and his anti-austerity reformism, continues to have the backing of Germany — and that will, in turn, be more likely if the next German governing coalition includes the Social Democrats, which seems increasingly likely.
To be sure, no one in Germany is apologizing about the straightjackets they insisted Europe’s debtors don. But the important thing isn’t whether Merkel goes on the public record crying “mea culpa.” Taking stock of Portugal’s achievement and easing up on the debtor countries — foremost Greece — would be compensation enough.