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In Southern Europe, an Astute Negotiator Unpicks Austerity

By on February 12, 2016

In this photo taken Wednesday, Feb. 10 2016, Portuguese Prime Minister Antonio Costa addresses supporters of his Socialist Party in Lisbon to explain and take questions about the government's 2016 state budget. (AP Photo/Armando Franca)

In this photo taken Wednesday, Feb. 10 2016, Portuguese Prime Minister Antonio Costa addresses supporters of his Socialist Party in Lisbon to explain and take questions about the government’s 2016 state budget. (AP Photo/Armando Franca)

LISBON, Portugal – He doesn’t boast about being an expert deal-maker like Donald Trump, but new Portuguese Prime Minister Antonio Costa is quietly building a reputation as a canny negotiator and a government leader to watch in southern Europe by doing what many people thought was impossible.

While Greek Prime Minister Alexis Tsipras struggles with the competing demands of bailout creditors and demonstrators on budget austerity cuts, and with Spain’s top politicians unable to unblock a post-election stalemate, Costa is providing a lesson for Europe’s financially troubled southern countries on how to move things forward.

Costa keeps proving people wrong. Against all expectations, he brokered an unprecedented alliance between his center-left Socialist Party and its four-decade antagonist the Communist Party that enabled him to take power despite losing last October’s general election. He has undone last year’s banner privatization of the national airline, and he has persuaded hesitant European authorities to sign off on his debt-heavy country’s spending plan despite the evident risks it contains – not just for Portugal but for the wider eurozone’s credibility.

Critics says Costa is making high-stakes gambles: already, his budget moves appear to be spooking some investors, with a rise in Portugal’s government borrowing rates this week indicating concern about the country’s financial prospects.

But Costa’s boldness has captured the imagination of many Portuguese weary of austerity measures that are the dregs of the eurozone’s financial crisis and Portugal’s 78 billion-euro (currently $89 billion) bailout in 2011.

The European Commission “really wasn’t open to much negotiation and (Costa) managed to pull it off, and to save the coalition (with the communists), and that’s remarkable,” said Antonio Barroso, a London-based analyst with the Teneo Intelligence political risk consultancy. He noted, though, that to some extent reaching deals was in the interests of the other players, too, and that Costa faces no challenges in his party to his leadership and strategy.

Costa, a 55-year-old lawyer with a three-decade career in politics, says he wants to trigger an economic upswing in western Europe’s poorest country by stimulating private consumption. Among its boldest anti-austerity steps, his government is restoring civil servants’ pay that was cut, slashing taxes for low-income families, increasing the lowest pensions, and bringing back four public holidays. The government has also approved a return to the civil servants’ traditional 35-hour working week, down from the current 40 hours, and is cutting the sales tax on restaurant meals to 13 percent from 23 percent.

Financial oversight bodies, international ratings agencies and European officials question the wisdom of those measures. They say making savings should be a priority for a country with such high government debt – at around 130 percent of GDP, one of the highest in Europe.

But Costa needed to take such steps to ensure the Communist Party’s backing. Costa said his surprise pact with the communists was “like knocking down the Berlin Wall.”

Just as unexpected was his reversal of last November’s controversial sale of a 61 percent share in the flagship TAP Air Portugal airline by the previous center-right government. The carrier’s new owners ruled out an ownership-sharing agreement with Costa’s government in mid-December, saying their ideas “didn’t match.” But seven weeks later, “goodwill and dialogue allowed us to unite,” said Humberto Pedrosa, head of the Atlantic Gateway consortium, which consented to surrender its controlling stake and keep just 45 percent.

Costa looks like a cuddly uncle. He is portly – though a natty dresser – and comes across as good-humored and patient.

Those close to him, however, say he can be both charming and tough. When some criticized his government’s recent increase in taxes on auto sales, gas and tobacco, Costa said in a televised public meeting that people should use public transport and quit smoking.

Costa’s gambles could yet backfire, and his critics complain that he is restoring unfair entitlements that have helped keep Portugal’s economy uncompetitive for decades.

His anti-austerity campaign also relies on some political smoke-and-mirrors: there’s still plenty of austerity around if you’re not on a low income, with the previous government’s self-confessed “enormous” tax hikes for the middle class and high earners still in place. And the 2016 government budget raises the overall tax burden to a record level, according to calculations by weekly paper Expresso.

Portugal’s change of tack hasn’t troubled investors too much so far, largely because the European Central Bank’s stimulus program is keeping markets calm. Under that program, the ECB is pumping 60 billion euros ($68.08 billion) a month in newly printed money into the eurozone economy by buying government and corporate bonds, including those of Portugal.

That is effectively keeping down Portugal’s government borrowing rates, allowing it to finance itself on capital markets and not require a bailout program.

But the ECB’s support depends on Portugal’s bonds being classified as investment grade by at least one rating agency. Only one rating agency, DBRS, still holds that view and is due to review its stance in April.

Fergus McCormick, Head of Sovereign Ratings at DBRS, said Friday that a slip in Portugal’s finances “is a risk and the high debt burden leaves the country exposed to shocks.”

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