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Portuguese election risks creating stalemate

By Barry Hatton

Associated Press

Published: Tuesday, May 31 2011 10:15 a.m. MDT

People walk by an election campaign billboard with a photo of Portugal's interim Prime Minister and Socialist Party leader Jose Socrates and the slogan "Portugal, YES!" Monday, May 30 2011, in Lisbon. Portugal will elect a new government when it goes to the polls on June 5. A cutout of a fly was pasted on both sides of the billboard drawing the attention of those passing by.

Armando Franca, Associated Press

LISBON, Portugal — Portugal's elections for a new government on Sunday risk delivering a messy political stalemate that could delay urgent economic reforms and aggravate Europe's debt troubles.

The center-left Socialist government, which two months ago had to ask for a €78 billion ($112 billion) bailout to keep the country from bankruptcy, has defied expectations of a heavy defeat and is holding roughly level with the main opposition center-right Social Democratic Party. Polls have shown each of them collecting around 35 percent of the vote, with three other parties trailing far behind.

That presents a problem because the winner is unlikely to collect more seats in Parliament than all its opponents combined, meaning the opposition together would be able to thwart the new government's strategy.

Enacting major economic reforms — a condition of the bailout and viewed as crucial to strengthen Portugal's feeble, debt-burdened economy — needs broad political consensus to succeed. Otherwise, the endeavor could be doomed amid public outrage over plans for more tax hikes and pay and welfare cuts amid a record 12.6 percent unemployment rate.

"Given the reforms the economy has to go through ... you really need a strong government and cross-party consensus as well," said Diego Iscaro, an analyst at IHS Global Insight.

Domestic political squabbling in Greece, for example, has increased market pressure on that country to a point where it is expected to need a second rescue package, or more drastically, to arrange some form of default on its debts.

Portugal will be eager to avoid such a scenario. As well as damaging prospects for national recovery, political uncertainty in Lisbon could undermine efforts to draw a line under the debt crisis that has tormented the 17-nation eurozone for more than a year and could yet spread to bigger countries such as Spain, Italy and Belgium.

"The eurozone isn't going to want to have more problems on its hands than Greece," said Vanessa Rossi, an economic analyst at the London think-tank Chatham House.

All three main parties — including the smaller, conservative Popular Party, which is forecast to claim around 13 percent — gave their blessing to the debt-reduction conditions attached to the bailout, but they differ on how best to achieve the saving targets and generate wealth.

And the chances of the three leading parties clinching a broad consensus look gloomy due to personal animosity between the party leaders and a bad-tempered election campaign.

The leaders of the Social Democrats and the Popular Party say they will refuse to work with outgoing prime minister Jose Socrates if he remains as Socialist leader. The Social Democrats and Popular Party, traditional allies, disagreed with the Socialists' debt-reduction plans and joined forces in March to oust the government, bringing the early election.

The Portuguese Communist Party and its like-minded rival the Left Bloc, which are each expected to get less than 10 percent, have fought against economic liberalization but could potentially support the Socialists in Parliament.

The Socialists want to keep the state at the helm of economic recovery, directing investment towards modernization. The Social Democrats want private enterprise to take the lead.

Socialist leader Socrates, who has been prime minister during the last six years of Portugal's decline, has held a surprising level of support by shrewdly playing on public fears that his main rival wants to scrap long-standing entitlements such as free schooling and health care.

He says the Social Democrats have a "radical rightwing agenda" to privatize public services.

The state has long been seen by the Portuguese as a reliable safety net in what is one of western Europe's poorest countries. "A great majority of people think that way," says Paulo Pinho, an economics professor at Lisbon's New University.

Social Democrat leader Pedro Passos Coelho has focussed on blaming Socrates for Portugal's lame economy which is forecast to contract by 4 percent over the next two years after a decade of growing less than 1 percent a year and amassing unsustainable debts.

"If you don't want to go to bed on election night and have a nightmare, if you really want change, you have to put your faith in us," Passos Coelho said.

But his limited experience as an elected official, having served only as a lawmaker for eight years in the 1990s, and a disastrous election campaign punctuated by gaffes and poor organization, have weakened his appeal.

"He's been finding it hard to assert himself," says Antonio Costa Pinto, a political analyst at Lisbon's Social Sciences Institute.

The next government faces a formidable task in crafting deep reforms and engineering the growth needed to pay off the chronically uncompetitive country's debts.

The drop in living standards is likely to stoke unrest, and trade unions have warned they plan strikes against proposals to cut pay and lay off staff.

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