Italy and Portugal are leading a revolt against EU austerity, sort of
|LISBON, ROME AND MADRID
AUGUSTO SANTOS SILVA, the foreign minister of Portugal’s three-month-old Socialist government, is a mild-mannered sociologist, not a firebrand. But this month he found himself swept up in the defiant anti-austerity mood that has been spreading across southern Europe. Portugal had just been chastised by the European Commission for submitting a budget that missed the 3% of GDP deficit limit the euro zone imposes on its members (the commission projected it would hit 3.4%).
In an interview on Portuguese television, Mr Santos Silva struck back against northern Europe’s austerity preachers: “There are no professor-states or student-states in the EU.” In turn Angela Merkel, Germany’s chancellor, warned Portugal to maintain “solid finances”.
Portugal and the commission quickly compromised on a new budget with an extra €1 billion in tax increases and spending cuts. But the tussle showed that Europe’s war over austerity economics is back. Portugal’s prime minister, António Costa, was elected on a pledge to “turn the page on austerity”, and his government is backed by big-spending far-left parties. Meanwhile Italy’s prime minister, Matteo Renzi, has been challenging Brussels budget hawks at every opportunity. In Spain, where coalition talks have been deadlocked since elections in December, the Socialists are considering a Portuguese-style alliance with the populists of Podemos.
In Greece the radical Syriza party remains in power, though its anti-austerity fire has dimmed. Even in Britain, the leader of the opposition, a leftist called Jeremy Corbyn, sees Mr Costa paving the way for a multinational “anti-austerity coalition”. The Portuguese leader’s supporters say he is the harbinger of an EU-wide shift.
This turn is not one that anyone would have predicted a year ago. Under its previous centre-right government, Portugal was the prize pupil of the EU’s austerians. During the euro crisis, in exchange for a €78 billion ($87 billion) bail-out, the government slashed public-sector wages and benefits, raised taxes and liberalised the labour market. A sharp recession was followed by a modest recovery for the past two years.
But after an inconclusive election in October, Mr Costa struck a deal with the radical Left Bloc and the Portuguese Communist Party to back a minority Socialist government. In return he promised to undo cuts to pensions and public-sector wages. That irked Brussels. On February 2nd the commission said the budget risked violating euro-zone rules. It was anxious to discourage other euro-zone members from seeking flexibility, too.
If any country were to lead such a charge, it would be Italy. Mr Renzi’s 2016 budget forecasts a deficit of 2.4% of GDP, but that is too high for the commission. Italy’s public debt is an immense 130% of GDP; countries with debt over 60% of GDP are supposed to aim for surpluses. Yet Mr Renzi sees tight budgets as a drag on Italy’s economy, which grew just 0.1% in the last quarter of 2015. Mr Renzi says he is fed up. “Europe cannot just be a grey technical debate about constraints, but must again be a great dream,” he declared in January.
Mr Renzi now faces an added danger from proposals floated in Germany. These would impose stiffer obligations on banks in the euro zone and shift to government bond holders part of the cost of any future bail-out. Critics fear that implementing the proposals could spark another debt crisis that would engulf the countries on the EU’s southern flank. Italy’s banks are already burdened with around €350 billion of non-performing loans.
All of this encourages Mr Renzi’s vision of leading a southern European anti-austerity rebellion. In a post on his website on February 1st, he said Italy’s job was “to lead Europe, not to take orders in some palace in Brussels.” But Italy’s tremendous national debt leaves it little credibility to demand the freedom to spend more and tax less. And apart from Mr Renzi’s vague calls for a “more socially oriented Europe”, his alternative to the current EU remains frustratingly unclear.
Portugal’s anti-austerity protests, too, may be more bark than bite. After the government announced its higher-deficit budget, its ten-year bond yields spiked scarily, from under 3% to 4.5%. Under pressure from the commission and markets, it backed off; besides the €1 billion in tax rises and spending cuts, it added further “Plan B” cuts in case of need. Pierre Moscovici, the commission’s economics chief, said Portugal had been persuaded that EU budget rules “must be complied with”. Mr Costa said the deal showed that governments can be fiscally responsible and still “follow their vision”.
Yet the facts undercut both Mr Costa’s claim to have turned back the clock on austerity and the EU’s pretence of fiscal discipline. Several promised tax cuts have been scrapped. Without those boosts to domestic consumption, Portugal has cut its 2016 growth estimate from 2.1% to 1.8%. In 2015 Portugal promised the commission to cut its underlying structural deficit by 0.6 percentage points; the new budget realises only half that. Euro-zone finance ministers declared that the budget targets meant Portugal was not “in particularly serious non-compliance” with EU rules. The commission maintains that it has held the line on deficits, and Portugal claims to be the vanguard of an anti-austerity revolution. In fact, Europe is functioning as it always has: through compromises and fudge.
This article appeared in the Europe section of the print edition under the headline "Fudging the revolution"
