Austerity Protests Are Rude Awakening in Portugal

Lisbon - Terreiro do Paço
Portugal has long been regarded a role model in the grinding euro zone crisis. In return for an international bailout, its government cut services and raised taxes while its citizens patiently endured with little of the popular outcry seen elsewhere in southern Europe.

That is, until now.

Suddenly, the Portuguese, too, have joined the swelling ranks of Europe’s discontented, following Greece and Spain, after the government tried to take another step up the austerity path last month. For many here, it was one step too far, driving tens of thousands into the streets in the largest protest of Portugal’s crisis.

As Pedro Passos Coelho, Portugal’s center-right prime minister, prepares to announce a new budget on Monday — filled with still more steep tax increases and public sector job cuts — he faces the kind of popular backlash that was, until recently, absent from the political and social landscape here.

Taking a page from the playbook of their Spanish neighbors, Portuguese protesters are planning to encircle the Parliament building here in the capital for the budget announcement. For their part, Portugal’s powerful trade unions are preparing a general strike for Nov. 14. Arménio Carlos, the leader of the CGTP union, compared Mr. Passos Coelho to Pinocchio, accusing him of constantly changing his austerity message.

“It’s clear that the amount of good faith the government enjoyed has been turned into large skepticism and distrust,” said Pedro C. Magalhães, a professor of politics at the University of Lisbon.

For a government that has assiduously followed the belt-tightening prescriptions of its international lenders — who rewarded Portugal with a 78 billion euro ($101 billion) bailout — it has been a rude awakening to the risks of austerity, which has even strained the governing coalition of Mr. Passo Coelho’s Social Democrats and the rival Popular Party.

Many here say the government has taken the population’s compliance for granted.

The turning point came in September when Mr. Passos Coelho offered a plan to redistribute social security funds by cutting employers’ social security taxes while significantly raising those of employees. Although the measure was meant to lower labor costs, the outcry from workers was so ferocious that he was soon forced to withdraw it.

But the damage was already done. The misstep is now credited with having rattled the social and political cohesion that had underpinned Portugal’s painful but steady progress.

The withdrawal of the tax plan left the Portuguese, who had once grudgingly accepted the pain of austerity, with a new sense of empowerment, Mr. Magalhães said. “The fact that the government backed down and the fact that no catastrophe or international censure came out of it suddenly shows that there are no inevitabilities,” he said.

Carlos Moedas, secretary of state to the prime minister and in charge of overseeing Portugal’s bailout program, said the reversal was “part of the journey” for any government forced to make significant adjustments in return for a bailout.

“The fact that we came back on our decision,” Mr. Moedas said, “had absolutely nothing to do with people coming out on the streets and everything to do with the fact that we got to understand that the ones who were supposed to be the beneficiaries actually did not want the measure.”

Still, the prime minister has struggled to regain the public’s confidence. The effort has been clumsy at best, his critics say. Many felt insult was added to injury when the government subsequently suggested that employers should lower not only their labor costs but their prices as well.

“We are at a low point in our relationship because a government seriously damages its credibility when it doesn’t take the pulse of the real economy before coming up with new measures,” said João Vieira Lopes, the president of the Portuguese Commerce and Services Confederation, which represents about 200,000 companies. Indeed, after watching helplessly while their economy shrank, many Portuguese are now openly challenging the austerity prescription as the wrong medicine for the malaise.

Mr. Vieira Lopes suggested that the fundamental problem was that the bailout assistance program from Portugal’s international lenders did not take sufficiently into account the specifics of the nation.

“The austerity model has been applied rather mechanically,” he said. “This is not a country full of big companies that can adjust to a decline in their domestic market, but rather small and medium-sized companies whose only option is then to close down.”

Many stores in downtown Lisbon are now either closed or advertising huge discounts, as citizens struggle in a deepening recession that has pushed unemployment to a record 15 percent. A sharp rise in the sales tax has decimated the restaurant sector. One measure of the hardship has been the sudden proliferation of the “marmita,” or lunch box, used by employees to take their home cooking to work. Even the investment banking division of Banco Espirito Santo, one of Portugal’s largest financial institutions, recently refitted a room with tables, refrigerators and microwaves to accommodate the trend.

As consumer spending is declining, so too are tax revenues. As part of its 2012 budget, the government anticipated that sales taxes would produce revenues 11.6 percent higher than in 2011. Instead, revenues were down 2.2 percent in the first eight months of this year, as the tax increases suffocate the economy.

This month, the International Monetary Fund predicted that Portugal would remain in recession next year, with an economy set to contract 3 percent this year and a further 1 percent in 2013.

Still, Abebe Selassie, the I.M.F.’s mission chief for Portugal, said that “it would be a mistake not to recognize the progress that has been made so far in Portugal despite stronger adverse negative shocks than assumed when we started the program.”

In particular, he added, “the Portuguese have been putting in place their program even in the face of strong headwinds from other parts of Europe.” In fact, like Spain, Portugal has recently been granted an additional year to meet previously agreed deficit targets, meaning that the new budget must allow Portugal to lower the deficit to 4.5 percent of gross domestic product in 2013 from an expected 5 percent this year. Portugal also recently managed to postpone the repayment of part of its debt after reaching an agreement with investors.

But the immediate concerns for Mr. Passos Coelho are on his doorstep. The aftermath of the social security reversal may be lasting, warned António Vitorino, a former Socialist minister and European commissioner.

“Such a political mistake can have permanent consequences when it hits a society that is already in a state of clear austerity fatigue,” he said.