For much of Europe, reasons for joy are thin on the ground. In Germany, the engine of European growth, the vital, export-dependent manufacturing sector is stuttering. Italy is plagued by economic and political instability, its relationship with Brussels tense. The UK is edging towards a disastrous no-deal Brexit, which could poison its relationship with the EU for years. On top of all of this, there is the turbulence of the US-China currency war and decoupling of global supply chains.
A little hope comes from an unusual quarter: Portugal, which last week led Moody’s, the rating agency, to upgrade its outlook from stable to positive. Its success stems from both sound policy choices and a healthy dose of good fortune. Prime Minister António Costa still has much to do in a country where public debt remains above 100 per cent of gross domestic product. Nonetheless, he has reason to be more optimistic than many other European leaders.
The alliance between Mr Costa’s Socialist Party (PS) and further left groups such as the anti-establishment Left Bloc was considered tenuous when it was forged in 2015. Yet in stark contrast to Italy, the coalition has remained both stable and functional, presiding over a general uptick in Portugal’s fortunes. Public sector wages have returned to pre-crisis levels, while the country’s budget deficit could reach zero by the end of this year. Unemployment has halved to 6.7 per cent, compared to around 14 per cent in neighbouring Spain, which has undergone its own recovery. Portugal’s low crime rate and welcoming atmosphere have been a boon, appealing to both immigrants and external investors.
The alliance cannot be given all the credit for Portugal’s recent good fortunes. A global recovery and an international tourism boom played major roles. So did the difficult but necessary work of the previous centre-right government, which implemented an austerity programme between 2011 and 2014, in return for a €78bn bailout from the European Central Bank, European Commission and IMF. The move helped to slash the budget deficit and reformed the public sector. It also pushed the country into the worst recession in almost four decades, triggering a mass exodus of workers.
Campaigning in the last election at the end of that period, the canny Mr Costa benefited from the legacy of tough centre-right actions even as he pitched himself as an anti-austerity candidate. His critics on both sides of the political spectrum argue he has not fully lived up to that pledge, dubbing some of his policies “austerity-lite”. Mr Costa has been accused of being too cautious in investment while cutting the deficit, and of increasing indirect charges to make up for income tax cuts elsewhere.
Portugal still faces many other problems. State workers are protesting about earnings lost in the eurozone crisis. Tanker drivers recently held a seven-day strike over pay and workers’ rights, leading to some fuel rationing at the height of the tourist season.
In elections in October, Mr Costa is expected to return as prime minister at the head of a leftwing coalition, or potentially even win an outright majority. He should continue down the now proven path of fiscal prudence, but without punitive austerity. The prime minister should also carry out deeper reforms of the country’s outdated public administration. There is work to be done in banking as well, although stability in the sector has improved markedly in recent years. As storm clouds gather over the world economy, Portugal must have a clearer vision for its future direction and economic strategies.
Copyright The Financial Times Limited . All rights reserved. Please don't copy articles from FT.com and redistribute by email or post to the web.