Analysis-Portuguese snap election points to rocky road ahead

By Sergio Goncalves and Andrei Khalip

LISBON (Reuters) – Portugal will hold a snap general election on Sunday that is likely to worsen political volatility and could produce a short-lived government, just when the country needs an able administration to make the most of EU pandemic recovery aid.

The vote risks ushering in a disappointing end to Prime Minister Antonio Costa’s six-year rule, during much of which his minority administration was celebrated for fiscal discipline that avoided punishing austerity measures.

Opinion polls suggest neither the leading Socialists nor the second-placed centre-right Social Democratic Party (PSD) snapping at their heels can win a majority needed to pass laws they say would stoke long-term growth in western Europe’s poorest country.

Moreover, parliament is expected to become more fragmented and polarised, so cobbling together a workable post-election alliance will be difficult, analysts say.

A minister in Costa’s government told Reuters the Socialists could negotiate a potential alliance with whoever seemed most eager to put the country’s wellbeing over partisan politics.

But options for partners are limited.

The ballot was called in November, two years into the Socialist government’s second term, after former hard-left partners, Left Bloc and Communists, sided with the parliamentary right to defeat the 2022 budget bill.

With trust in tatters, few believe the left will reunite, meaning whichever of the main parties wins could be beholden to untested fringe allies.

“The country is in a political impasse,” said political science Professor Carlos Monjardino of Catolica university.

“The best result from this election that all political parties and the president have in mind would be a two-year political cycle, a transitional solution,” he said.

The PSD has suggested that if it loses, it will consider backing a minority Socialist government through a two-year pact, and expected the same from its rivals.

However, Costa has so far shrugged off such suggestions. Historically in Portugal government pacts with the opposition do not last.

For whoever wins, the first challenge will be to pass a budget and remain in power.

Failure could cause the new government’s downfall and complicate access to EU funds that underpin government spending.

In order to unlock new tranches of a 16.6-billion-euro ($18.7 billion) package of EU recovery funds, the government needs to meet a range of goals, including further reduction of the budget deficit.

In the medium term, a succession of governments risks muddying the funds’ allocation to concrete projects, which has to be done by a 2026 deadline.

Under the Socialists, much of the funds were expected to be channelled to improve the health service, subsidise housing and for financial support to companies.

Friends of nature?

Analysts and insiders say Costa fears a new alliance with his former left partners could hold more budgets hostage to demands for higher social spending.

For now, the best chance for a lasting government appears to lie in an untested potential alliance of Costa’s Socialists with two ecology-minded kingmakers – the People-Animals-Nature (PAN) party and the left-leaning Livre – if the three together reach a slim majority, which is far from guaranteed.

“In the 2022 budget vote, PAN was the only party that did not vote against it,” said Cabinet Minister Mariana Vieira da Silva. “This is sign of responsibility. PAN and the eco-Socialist Livre are parties with whom we can keep talking.”

The Socialists poll at 34%-40%, and party insiders project they could win 112-113 seats in the 230-seat house, up from 108 in the 2019 election but short of a majority. PAN is expected to elect two to four MPs and Livre one to three.

But with about 20% of voters undecided according to recent polls and a spike in COVID-19 infections likely to affect turnout, a win for the PSD or the combined right, which has been growing in polls, cannot be ruled out. The PSD polls at 29-34% and has even overtaken the Socialists in at least one survey.

That could make a kingmaker out of the far-right, populist party Chega, polling at 6-10%, which could make it the third-largest force in parliament.

PSD insiders, however, say Chega is considered too toxic and unpredictable to have a formal agreement with. If Chega decides to enable a right-wing government, as it did in the Azores regional assembly, any such an administration would be unstable.

Portugal’s “slow death”

Despite advances since a 2011-14 debt crisis in mending public finances and eking out growth in line with the EU average, Portugal’s average wage remains lower by more than a third than in Spain and Italy.

For now, there are few tangible differences in the largely centrist, fiscally-prudent programmes of the two main rivals.

Attempts by the Socialists to trim income taxes for the lower middle class from this year were stymied by resistance to their plans for further deficit reduction from former far-left partners.

Likewise, the PSD would need a majority or supportive coalition to fulfill a campaign promise to cut Portugal’s corporate tax rate, the highest among European OECD countries.

For many Portuguese, like 32-year-old Francisco Lourenco, the political class remains too mired in power struggles to pursue a common need to increase economic growth and incomes.

He said he hoped for another election soon so a party or alliance offering a reformist agenda could win a solid mandate.

“Portugal is dying a slow death…There is no adequate response coming from the state, businesses, anybody,” Lourenco said.

($1 = 0.8860 euros)

(Writing by Andrei Khalip; Editing by Frank Jack Daniel)