President Marcelo Rebelo de Sousa called for snap elections to be held on January 30th, 2022, after the current government failed to pass the 2022 budget in parliament at the end of last year. The rejection marked the culmination of an ongoing dispute between the former allies: the communist party PCP and the left-bloc BE on the one side and the socialist party (PS) of prime minister António Costa on the other.

The continuous struggle within the center-left alliance over the public budget has reached a new dimension, as the government prepares to make use of the 16.6 billion Euros from the NextGenerationEU funds – consisting of €13.9 billion in grants and €2.7 billion in loans – that have been allocated to the Portuguese Recovery and Resilience Plan.

At a time when Portugal is set to begin the economic recovery, a decision on the state budget will contain major implications of how NextGenerationEU funds will be spent. The country is now seeking to gain back political stability to advance with a cohesive and determined response to the challenges imposed by the pandemic.

Portugal’s political context and the “contraption” government

The center-left socialists have been governing the country as a minority government since 2015 when they signed a written agreement of cooperation with the communist party (PCP) and the left-bloc (BE). The alliance was established to put the center-right government of the social democrats (PDS) to an end that had implemented the unpopular austerity measures imposed by the Troika in the aftermath of the European debt crisis and which had left the Portuguese economy in shambles, reflected by spiraling unemployment rates, human capital flight, and plummeting GDP growth.

While not directly forming part of the government, the left-wing parties PCP and BE committed themselves to support the socialist government of Costa’s PS in an agreement which came to be famously known as “geringonça,” or contraption. The center-left alliance abandoned austerity and reversed unpopular measures such as spending cuts on welfare benefits and cutbacks on wages.

Yet the socialist-led government tried to maintain good relations with the European Union and refrained from totally overhauling the path of privatization and market reform initiated by the Troika and implemented by the previous center-right government. The left-wing parties that supported the current government, on the other hand, were left unsatisfied with political reform, being stuck in limbo with no apparent social or liberal approach.

The final rift in the left alliance

Ongoing political disputes over social policy and labor law issues ultimately culminated in a rupture between the members of the geringonça. The left has a clear stance on aspects concerning worker-friendly labor laws, affordable housing, improved minimum wages, and the progressive reform of the healthcare system. At the same time, the socialists envision a rather market-friendly reform in line with European commitments that predominantly focuses on stimulating private investment and on the challenges of the green and digital transitions, including, for instance, improvements in energy efficiency, mobility, digital development, and the support of SMEs.

Since the left-wing parties only supported the socialist government in the parliament but did not directly participate, their strongest leverage for advancing their political proposals was during the yearly state budget negotiations. That is why the budget became increasingly difficult to pass.

At the height of the pandemic in 2020, the national budget for 2021 was passed by an overwhelming majority – even the center-right social democrats did not oppose it due to the pressing need for a cohesive response to the challenges of the pandemic. In 2021, however, as the initial economic and healthcare disruptions had eased, political impasse took over parliament once again. So, when the budget for 2022 failed to pass in early November 2021, President Rebelo de Sousa was forced to dissolve the parliament and impose snap-elections in an attempt to regain political stability.

Portugal on the road to recovery

The snap elections take place on January 30th, 2022, when Portugal is on the verge of shaking off the worst effects of the tri-fold – health, social, and economic crises which have held the country in its grip during the past two years. Following very high covid spikes early on, Portugal’s response to the pandemic has largely been seen as exemplary, with the country at a point boasting the world’s highest vaccination rates. But while the government managed to contain the negative health effects to a large degree, the impact on the economy – including a shutdown of Portugal’s important tourism sector that in 2019 amounted to 19.8% of GDP – still looms large.

Contrary to the structural reform and fiscal contraction strategy that Portugal applied during the Euro-debt crisis, the severe economic disruptions following the pandemic have been met with a more expansionary public stance, with the government opting for “solidarity over austerity.” This seems to have paid off because the first signs of timid economic recovery are already emerging as growth has commenced again and is expected to expand by 5.8% this year.

However, the upcoming disbursements of the European recovery funds are of vital importance for Portugal’s future road to recovery. The Recovery and Resilience Plan alone is stipulated by the European Commission to contribute to GDP growth by a range of 1.5%-2.4%.

Estimated effects of NextGenerationEU on the EU’s real GDP

Graph Estimated effects of NextGenerationEU on the EU’s real GDP

Source: European Commission

Under these circumstances, the debate over the appropriate distribution of the European funds is currently overshadowing the political arena in Portugal.

What role do the NextGenerationEU funds play for the snap-elections?

“Now, can I go to the bank?” – Prime Minister António Costa jokingly asked European Commission president Ursula Von der Leyen in June 2021 when Portugal was the first country to have its recovery and resilience plan endorsed by the Commission. The government had crafted the plan quickly, showing the country’s dire need for financial support. Portugal will receive one of the largest pay-outs from the NextGenerationEU funds in relation to its GDP, and Costa is determined to make use of these funds as fast and as effectively as possible to kickstart the economy and implement much needed infrastructural reforms.

A central theme in the election campaign is the need to overcome the acute crisis and bring the economy back on track. But Portugal is also facing significant long-term challenges, as the country is struggling to prepare for the digital and green transition. Physical and digital infrastructure is largely limping, the healthcare system is chronically underfunded, and the energy system is poorly developed, to say the least.

For these reasons, it is crucial for Portugal to gain access to the European recovery funds swiftly and to start with the implementation of the recovery plan as smoothly as possible. The rejection of the 2022 budget has left Costa’s government in a predicament in this regard. The socialists need clarity over the budget, and going ahead with a provisional budget could undermine Portugal’s ability to make use of the European funds properly, as the tranches are still conditional and performance-based – a situation that could jeopardize the macroeconomic outlook in the short term. This is a scenario that the socialists want to avoid at all costs.

If stability is what Portugal needs, why have the socialists effectively opted out of a functional political agreement?

One could argue – in fact, that is what Costa is doing – that the blockage of the state budget left the government with no choice but to ask the president to dissolve the parliament and impose re-elections. Still, the re-elections also present an opportunity for Costa to change the leverage that the left can exercise within the geringonça.

Strategically the move for re-election can certainly make sense for Costa, as he speculates that voters will punish the left-wing parties for their constant attempts at thwarting the government’s agenda and choose stability over party affiliation. In addition, the center-right social democrats had recently gone through a leadership crisis and appeared particularly vulnerable when the party’s leader Rui Rio was only upheld by a meager 53% to 47% vote during the last leadership elections.

So, the timing for new elections was opportune for the socialists who did not make the most robust effort to avoid the budget failure, as they categorically rejected most of the left bloc’s proposals during negotiations.

Costa appears to want to either bend the left to his will or get rid of his insubordinate junior partners, even if that could mean an unpopular partnership with the social democrats – whose leader Rui Rio has already signaled his interest if the socialists miss the absolute majority in the upcoming elections.

Possible outcomes for the snap-elections

As it currently stands, the polls do not foresee a clear winner, i.e., an absolute majority for any of the parties. The socialists are still in the lead, but the social democrats are gaining momentum, and the latest polls indicate a tight race with only fine margins separating both parties.

It is also hard to assess the electoral fate of the small parties for now. The cards have been reshuffled again for them, and within this group, the extreme right (Chega) has ambitions of coming out big during the upcoming elections. And their chances are not slim to trump the communists and left-bloc for the first time since the country became democratic after the Carnation Revolution in 1974.

The socialists will likely miss their goal of attaining an absolute majority and will have to seek another formal agreement to rule as a minority government or even go for a coalition. Although not impossible, a renewed geringonça appears a difficult outcome as it would require the left to give up much of its political position (aside from the fact that this alliance’s failure caused the snap-elections in the first place). Similarly, Costa would instead prefer to seek the support of the animal-rights party (PAN), but current polls do not indicate that this would be sufficient.

Given Costa’s emphasis on stability, a minority government without any formal agreement also seems out-of-the-cards. A more likely scenario would be a formal agreement or even a coalition with the social democrats. Given that the socialists’ priority clearly lies in the smooth implementation of the recovery plans as negotiated with the Commission, Costa will likely find more willing partners in Rio’s social democrats, who have recently condoned the plans in their current form.

However, the current upswing in the polls for the social democrats is certainly frightening Costa. In case the social democrats end up overtaking the socialists, this could force António Costa to grudgingly go back to the Geringonça – and likely have to make concessions to the left as a last resort to retain his position as prime minister.

In any case, Portugal hopes that the snap elections will offer some clarity for the future, but as it stands, political stability continues to appear a distant prospect.

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