A coalition of the incumbent center-right PSD and the conservative PP fell short of winning a majority of seats at a parliamentary election held on October 4, and Prime Minister Pedro Passos Coelho failed to garner sufficient support to secure confirmation of a minority administration. As a result, the reins of government have been passed to the center-left PS, which will depend on the backing of three leftist parties—the BE, the PCP, and the PEV—to ensure a majority in the 230-member Parliament.
Prime Minister Antonio Costas will be expected to build upon the significant progress the Coelho administration made toward restoring the economy to health, while relying on the support of parties that vehemently oppose the austerity measures and structural reforms that will be essential to sustaining confidence, which will be key to keeping the recovery on track. His task is made all the more difficult by policy differences among the support parties.
All four parties have agreed to the conditions set down by President Aníbal António Cavaco Silva, which include formulating a 2016 budget and a medium-term fiscal strategy that are consistent with the targets mandated under the EU’s fiscal pact. The challenge, however, will be achieving consensus on the specific means employed to achieve those objectives.
Proposals to reverse several cost-cutting measures implemented by the previous government have already raised eyebrows, with critics noting that revenue projections are based on an expectation of strong growth that may prove to be too optimistic. Moreover, the leftist parties’ prescriptions for reducing the structural deficit, which include tax increases on the wealthy and debt restructuring, are unlikely to sit well with Finance Minister Mario Centeno, a rather conservative economist whose previous experience includes stints with the central bank and the European Commission.
In short, there will be no shortage of opportunities for disagreements that could prove fatal for Costas’ government. Indeed, it is an open question whether the current arrangement can be sustained until April 2016, the earliest date at which another election is permitted under the constitution, let alone for a full four-year term.
In that regard, the outcome of the upcoming presidential election could have significant implications for government stability. Former PSD leader Marcelo Rebelo de Sousa is holding a comfortable lead in pre-election polls; if he wins, he will reserve the right to dissolve the Parliament and call a snap election at his discretion, a power he will no doubt be inclined to use if the PS bends to pressure from the support parties and attempts to make a leftward shift in policy course that contributes to market volatility.