PM-elect aims to implement Portugal bail-out

Pedro Passos Coelho, Portugal’s prime minister-elect, said on Monday he was prepared to “go beyond” the country’s €78bn ($114bn) bail-out agreement to restore market confidence in the economy.

But analysts warned that the 46-year-old leader of the centre-right Social Democrats (PSD), a former company manager who has no previous government experience, would face daunting challenges in trying to deliver both deep spending cuts and economic growth.

The new government faced the difficult task of “implementing a severe austerity plan and structural reforms that will hit a range of interest groups”, said Kevin Dunning, an economist with the Economist Intelligence Unit. “It will not be an easy ride.”

Having led the PSD to a decisive victory in Sunday’s general election, Mr Passos Coelho comes to government at a critical moment for Portugal as it faces two years of deep recession, record unemployment and a demanding deficit-reduction programme agreed with the European Union and International Monetary Fund.

Elected leader of the highly factional PSD in March 2010 after failing in a previous leadership bid, his political capacities have so far been little tested.

Mr Passos Coelho said on Monday he would form a majority government coalition with the conservative Popular party (CDS-PP) “in record time”. He would scrupulously comply with the terms of the bail-out, he added. His aim was to “surprise” markets by achieving the deficit-reduction targets ahead of schedule.

Mr Passos Coelho is particularly concerned to distance Portugal from Greece, where failures to achieve fiscal targets have led Athens to seek an additional €60bn bail-out to avert a forced debt restructuring.

Surpassing opinion poll forecasts, the PSD won 39 per cent of the vote, against 28 per cent for the governing Socialists. The PSD and the CDS-PP, with 12 per cent, will together command a comfortable majority of at least 130 seats in the 230-seat parliament.

Mr Dunning said the majority will “bring some much needed stability to Portuguese politics after two years of minority government” under the Socialists. But there was “potential for domestic disputes over the austerity programme”, he added.

Mr Passos Coelho also faces potential political tensions over plans to revise Portugal’s constitution to ease the passage of labour market reforms and to negotiate a “social pact” between government, employers and trade unions. “If there is a social rupture, there can be no growth,” he said on Monday.

Changing the constitution will require a two-thirds majority in parliament. This means Mr Passos Coelho will have to enlist the support of the defeated Socialist party.

This could prove more difficult following the resignation of José Sócrates, the outgoing prime minister, as Socialist leader following the party’s worst election defeat in 24 years.

António Costa, editor of the Diário Económico business daily paper, said the Socialists were expected to elect a more leftwing leader to succeed Mr Sócrates.

Trade unions, where the PSD holds little sway, have also pledged to resist labour market reforms. “An arithmetical majority is not enough,” Manuel Carvalho da Silva, a labour leader, warned the new government on Monday. “A social majority is also essential.”

According to Antonio Garcia Pascual, an economist with Barclays Capital, delivering economic growth remained the biggest challenge for Mr Passos Coelho, as labour market liberalisation and other structural reforms were “unlikely to yield evident results in the near term”.

Mr Passos Coelho’s opponents, both inside and outside the PSD, have used his lack of government experience against him. But he surprised many commentators by producing a comprehensive election manifesto that was strong in specific measures and concrete targets.

He also impressed many viewers in a head-to-head television debate with Mr Sócrates, which some analysts said may have helped turn the tide of the election campaign.

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