Does Portugal need a regime pact?

The role of economists in a complex national and international setting

Text: Chris Graeme Photos: ICPT

Portugal has been plunged into a political crisis that has only rubbed salt into the wounds of an economic slowdown caused by geopolitical tensions around the world, just as Portugal was recovering from the repercussions of the Covid-19 pandemic. The President of the Economists Association, António Mendonça gave his take on the role of the nation’s economists at a recent luncheon organised by the International Club of Portugal.

The initial address was to have been the role of economists and their contribution to encouraging “common sense” against a backdrop of falling exports, high inflation, and high interest rates brought about from an atmosphere of economic and geopolitical uncertainty that has led investors to have cold feet over decisions to invest in Portugal. A concern well justified with the recent release of data that shows investment in commercial real estate alone (one of the main drivers of the Portuguese economy) plummeted 60% in 2023 compared to 2022.

Portugal’s political crisis, António Mendonça said, would only reinforce the instability and concerns over the current state of the Portuguese economy, and the trajectory of an economic model that could, in the long term, call into question growth sustainability and Portugal’s ability to compete successfully in both geo-political and geo-economic terms.

António Mendonça lamented that Portugal’s decision makers were constantly thinking about the future while not addressing fundamental foundational problems in the present, or learning from the past; a behaviour undermining foundations, and contributing by this inaction to a possible collapse in the future given the huge pressures from enormous challenges posed by issues that have gone unresolved.

Portugal’s rotten public institutions

The economist referred to the ongoing degradation of the effectiveness of the country’s institutions, the good functioning of which was so badly needed for effective governance and its credibility and image both at home and overseas.

In this he was alluding not only to the way the government handled the recent political crisis, but also the much criticised role of Portugal’s Public Ministry in dealing with and reacting to a joint investigation involving the Judicial Police, tax inspectors, the Public Prosecutor’s Office, the Attorney General’s Office, and the Supreme Court of Justice into a criminal investigation into murky lithium and green hydrogen deals by the Department of Investigation and Criminal Action (DCIAP) with the support of the Public Security Police (PSP).

It led to the Prime Minister resigning, the President of the Republic calling snap elections on March 10, and Portugal’s much criticised Attorney General, Lucília Gago, who called for the investigation which led to the subsequent arrest of several important political figures at a national and municipal level, (who were later released without bail because of lack of firm evidence) to publicly declare she was not at fault because the Prime Minister had resigned, after being hauled over the coals for her handling of the case.

“Everything points to the current political crisis being symptomatic of a wider systemic crisis which has developed over several decades and which undermined the functioning of public institutions and relationships between them”, he said.

A call for common sense

The gravity of what had happened in the public administration in recent decades, from the systematic destruction of its role in public management; resulting in the degradation of social cohesion; the constant use of outsourcing, the stagnation of careers within in, substituted with unstable and stagnant career structures characterised by precarious and informal job contracts, and the substitution of experience with political trust (i.e jobs for the party boys), not to mention the lack of the public administration being able to attract talented, well qualified young people to a career in the civil service had resulted in a public administration staffed with employees not fit to do the job.

“The country is not potentially capable or apt to deal with the challenges Portugal is facing, with a lack of strategy, a systemic incapacity to take decisions in a timely fashion, a deficit of administrative organisation, and strategic planning”, criticised Mendonça.

“Right now what’s needed is common sense on the part of the political leaders, but also from all the social and economic agencies. In a complex situation as the one we’re currently going through, the need to associate common sense with rational thinking in decision making processes is a fundamental requirement,” he added.

A regime pact

Calling for a “regime pact” (sounded like some kind of emergency cross-party government pact with unions and bosses), he suggested that might secure political and institutional stability, and allow Portugal to move on to a fresh level of maturity in the political definition of the State and the better use of human and material resources acquired.

The most recent forecasts published by the European Union point to a strong slowdown in Europe’s economy, with growth prospects for 2024 both for the EU and Euro Zone just slightly above a recession with a growth rate of 0.6%.

Germany, the economic driver of Europe, had presented a negative growth forecast of-0.6%, or a recession, while the prospects of growth for 2024 and 2025 were “mediocre”.

Inflation, he said, did show a tendency to slow, but rather than this being the result of a positive economic dynamic, was rather a sign of contractionist monetary policies resulting in higher interest rates with the results that Europe’s economies were being pushed into recession.

“Employment does not, for the time being, seem to be suffering immediate (negative) impacts, which far from showing a healthy economy, could mean a situation of precariousness and a deterioration in labour conditions.”

Despite all of the crosswinds in recent years, it is undeniable that Portugal had enjoyed a good economic performance when compared to EU and Euro Zone averages, and even the Nobel Economy Prize winning economist Paul Krugman had called it a “kind of economic miracle”.

Indeed, Portugal’s GDP growth for 2023 is 2.2%, 1.3% for next year and 1.8% for 2025, while unemployment is expected to remain stable at between 6.5% and 6-4% and public deb falling from 103% this year to 97.2% in 2025.

But in any case, the latest figures on the evolution of the Portuguese economy published by Portugal’s statistical institute INE at the end of October “do not seem to bear this forecast up” with QoQ results contracting in Q3 to 1.9% and MoM results falling back-0.2%.

“This loss of traction in the Portuguese economy has had a visible repercussion on inflation with a like-for-like CPI variation slowing to 2.13% in October.

Challenges for the Portuguese economy

António Mendonça said that as had been stated at this year’s Economists Congress, despite all the headwinds of previous years, it was undeniable that the Portuguese economy had faired better than its EU competitors, but this was no “consolation” when making “structural comparisons” or closing the productivity and competitiveness gap with other more dynamic EU economies that should “serve as a yardstick”.

“I don’t want to downplay the important changes that have occurred in various sectors of the Portuguese economy, with significant impacts in the domains of innovation, energy and environment sustainability, and improvements in production.

Progress in education was also undeniable, as well as efforts o reduce sexual inequality, improvements in the country’s infrastructure, which had improved internal communication (both internet and road and rail communications), and also in digital transformation, and energy sustainability, among other aspects which have been recognised by international institutions, particularly the success of the tourism sector and companies becoming more competitive, productive and export-focused.

It was also important to recognise the positive evolution of public finances, overseas balances of payments, and the labour market all of which were, to some extent, down to Portugal’s better economic performance reflected in the growth in GDP.

On the other hand higher inflation had contributed to an increase in the differential between nominal growth and actual production growth which brought more revenues into State coffers and helped the government achieve a surplus and slash its annual and accumulated debts.

Mendonça also recognised the Medium Term Salaries and Competitiveness Agreement signed in 2022 and agreed and reinforced with unions and business associations (except the Industrial Confederation (CIP)).

However, he hammered home the issue of Portugal’s weak economy in terms of long-term growth and the need to reach a consensus in Portuguese society between political, economic, social partners, and other institutions on how to make Portugal’s economy more dynamic and innovative and draw up a Growth Pact and reach an agreement on the different concerns in the various sectors of the economy and society, creating a strategic platform to guide Portugal’s economic policy in the middle and long terms. In other words a cross-party, cross-sector and social blueprint for the future — a regime pact.