Daily Insight
Group Economics Macro & Financial Markets Research
11 November 2015
Political risks in Europe Aline Schuiling
Portugal’s newly appointed minority government ousted …
Senior Economist
… political situation to remain unstable with high risk of fiscal slippage
Tel: +31 20 343 5606
Prime Minister Cameron sets out pillars of UK’s renegotiation of
aline.schuiling@nl.abnamro.com
relationship with EU Nick Kounis Head Macro & Financial Markets Research
Portugal’s newly elected minority government ousted
Tel: +31 20 343 5616
Less than two weeks after it was sworn in, Portugal’s centre-right minority government
nick.kounis@nl.abnamro.com
(holding 107 of the 230 seats in parliament) was ousted yesterday. The recently formed alliance of left-wing parties, which have a combined majority of 122 of the seats in parliament, voted against the new government’s programme, forcing Prime Minister Pedro Passos Coelho to step down. Next, Portugal’s president will probably have to choose between appointing either a left-wing government or a caretaker government until new elections can be held, possibly in the spring of 2016. Political situation to remain unstable for a while, with high risk of fiscal slippage Even if a left-wing majority government were to be appointed, this could very well turn out to be unstable and short-lived. The alliance of the moderate mainstream Socialist Party (the biggest party in the alliance, with 86 seats) and the much more radical Communists and Left Bloc is unprecedented and, historically, the parties have had widely varying programmes. Until recently, the Communists and Left Bloc were aiming for unilateral debt restructuring and euro-exit, but the new left-wing alliance has now dropped these points from its agenda. Meanwhile, the moderate mainstream Socialist Party has supported a number of policy changes that were implemented by the previous centre-right government during Portugal’s EU-IMF support programme. Party leader Antonio Costa has pledged that the new left alliance will stick to the EU’s fiscal rules and that it will prevent the budget deficit from rising to above the 3%-threshold, which seems to be in conflict with some of the points in its policy programme. For instance, it wants to reverse some of the cuts in civil servant salaries, pensions and public services and some of the tax rises that have been implemented in recent years. All in all, policy making will probably be difficult, with a high risk of fiscal slippage. The budget deficit is expected to be close to 3% of GDP this year and in 2016. Combined with ongoing moderate economic recovery, this should result in the government debt ratio falling slightly from 130% GDP in 2014, to 127% in 2016. Given the recent political events it seems more likely that the debt ratio will merely stabilise or even rise this year and next.
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