(Repeats Friday item)
* Socialists' alliance with far left surprises by its
* Alliance wins support by raising wages, cutting deficit
* EU may end excessive deficit action against Lisbon
* But some worry as public works investment slashed
By Axel Bugge
LISBON, March 31 While the European left is
largely struggling where it holds power, Portugal's government
alliance stands out as a remarkable exception; it is raising
wages and gaining popularity and yet delivering the lowest
budget deficit in living memory.
The unlikely alliance of centre-left Socialists and two
far-left parties has overcome deep scepticism since it was
formed in 2015, achieving stability and maintaining economic
recovery at a time of political uncertainty across Europe.
Even President Marcelo Rebelo de Sousa, a conservative,
acknowledges its running of a country that left an international
bailout programme only in 2014. "I have been surprised," he said
in February. "Frankly, I didn't think it would be as resilient
as it has shown itself to be in the past year."
The government is a minority Socialist administration rather
than a coalition, with the party filling all ministerial posts.
However, it relies on support from the Communists and Left Bloc
for its parliamentary majority, breaking a taboo that had kept
the far left out of power since the 1974 return of democracy.
Portuguese are warming to the government as it unwinds some
austerity polices imposed under the bailout, although this comes
at the cost of heavy cuts to longer-term public works spending.
Prime Minister Antonio Costa has acknowledged the balancing
act. "Budgets can't be managed with miracles, they are managed
with rigour, hard work and careful management," he said.
Voters' trust in the alliance has more than doubled - albeit
from a low level - and the Socialists, who were in power when
Portugal had to seek the 2011 bailout, are benefiting most.
Polls put support for Costa's Socialists at 42 percent, up
10 points from their share of the vote in the 2015 election and
close to a level that would give them a majority in parliament
were the country to vote again.
Most European governments of the left can only dream of such
ratings. In France, polls have put the candidate of the ruling
Socialists, Benoit Hamon, in fifth place for the first round of
presidential elections with support around 10 percent.
In Italy, Prime Minister Paolo Gentiloni's party is around
five points adrift of the anti-establishment 5-Star movement,
while Greece's ruling Syriza party lags conservatives by twice
Portugal's experience may be of interest in Germany, where
the Social Democrats are exploring options for a coalition after
elections in September. Along with the Greens, they have sounded
out the leftist Linke party, shunned so far at a national level
due to its origins in the defunct East German communist party.
Today, some Portuguese fondly refer to the alliance as
'geringonca', or 'the contraption'. But in 2015 the far-left's
inclusion raised fears on financial markets that fiscal policy
would go off the rails, reversing tough reforms and budget cuts
during the 2011-2014 bailout by the European Union and IMF.
To win support from the Communists and Left Bloc, Costa
agreed to increase workers' pay in western Europe's poorest
country. Last year, the government already raised the minimum
monthly wage to 530 euros ($570) from 505 euros a year earlier.
It will continue rising till it reaches 600 euros in 2019, the
last year of the government's current term.
State sector salaries and pensions are also being increased
in stages, while the alliance is slowing a privatisation drive
pursued by the previous centre-right government.
Despite this generosity, the alliance succeeded in lowering
the deficit. It fell last year to 2.1 percent of gross domestic
product - lower even than a target agreed with Brussels - from
4.4 percent in 2015. The National Statistics Institute forecasts
it will drop again to 1.6 percent this year.
The European Commission has expressed optimism that Portugal
can soon exit an EU excessive deficit procedure imposed after it
breached the bloc's budget rules.
Three years of economic growth have boosted revenue. While
the rate remains modest - the Bank of Portugal forecasts it will
reach 1.8 percent this year, thanks to rising investment and
exports - it compares with a four percent contraction in 2012.
Unemployment has also dropped from a peak of 17.5 percent in
2013 to 10.5 percent in the last quarter of 2016, while a
crackdown on tax evasion has likewise increased state income.
Nevertheless, the popular public pay increases have not been
funded entirely by higher revenue, with the budget savings also
demanding spending cuts. Much of the burden has fallen where
voters may not notice the effect immediately: public investment.
The government slashed this by 16.5 percent last year, to just
1.8 percent of GDP, the lowest proportion since 1960.
AECOPS, the main construction industry association, warns
against the danger of false savings. "Through drastic cuts in
public investment to reduce the deficit, the government has
contributed decisively to the degradation to construction
activity and prevented the recovery of the sector," AECOPS chief
Ricardo Pedrosa Gomes told Reuters.
Economists have also expressed concern about any further
cuts to state spending on the likes of hospitals and schools.
In Greece - which unlike Portugal is still in a bailout
programme after seven years - the IMF has warned that decaying
infrastructure is hampering growth while basic public services
such as transport and health care are being compromised.
Costa has promised to raise public works spending this year
by 20 percent. "It's necessary to invest more, but with prudence
in order not to upset the balance of our public accounts," he
said in a recent speech.
TENDING TO TRUST
Portugal has another problem, a debt burden that at 130
percent of GDP is proportionately the third biggest in Europe
after Greece and Italy. The EU is pressing for this to be cut.
Still, voters are willing to credit the alliance. In the
EU's latest Eurobarometer survey, the number of Portuguese who
"tend to trust" their government jumped to 39 percent in late
2016 from just 15 percent at the time of the 2015 election.
Support for the Communists and Left Bloc has slipped since
the election when they won 8.25 and 10.2 percent respectively.
But the Socialists are now just about the most popular
mainstream centre-left party in western Europe. Their gains have
come at the expense of the centre-right Social Democrats who
ruled from 2011 to 2015 and emerged the biggest party in the
last elections, only to be outflanked by the alliance.
Centrist voters - who doubted in 2015 the alliance could
tame the excessive spending that many blame for Portugal's debt
crisis - appear to be regaining confidence in the Socialists.
All broad policy elements, including budgets and the pace of
social policies like raising the minimum wage, were agreed by
the alliance before the election.
Costa's job in achieving internal harmony may also have been
made by easier by the fact that the far left is represented by
two parties competing for votes. "The Socialists prefer to
negotiate with both of them, in other words creating a dynamic
of rivalry between the two smaller parties that helps to
moderate them," said political analyst Marina Costa Lobo.
Likewise, the lack of a formal coalition also helps by
allowing all three parties to maintain their own identities.
That means the Left Bloc and Communists can continue to push for
a renegotiation of Portugal's debts, even though this is not
included in the agreement with the Socialists, thereby posing no
threat to the government's efforts to control the budget.
There are risks, not least if the euro zone debt crisis were
to reignite, but it's a case of so far, so good. "In principle,
the longer this continues, especially for the electorate on the
left, showing positive results in economic terms, the better,"
said political analyst Antonio Costa Pinto.
($1 = 0.9327 euros)
(editing by David Stamp)