Reform Is Working for Portugal

Forward Portugal.

Photographer: Pablo Blazquez Dominguez/Getty Images

If no good deed goes unpunished, then Portuguese Prime Minister Pedro Passos Coelho got off lightly in Sunday's elections. After overseeing reforms that kept the Portuguese economy from getting worse, his ruling coalition is much smaller -- but for now, at least, it looks like he will still be at the head of the government.

Politicians in Greece (and other economically struggling European nations) take note: Voters will put up with painful economic reforms so long as the remedy seems to be working. For the past four years, Portugal has been striving to honor the terms of the 78 billion euro bailout it received in 2011 from the International Monetary Fund and the European Union. Its efforts have made it a star reformer among Europe's struggling economies.

Opposition parties -- including the Communists and the Left Bloc -- weren't so impressed. Though the economy has begun turning around, and the government has recently said it will ease back on austerity, the left has called for debt restructuring and a new approach to fiscal policy based on shifting taxes on to business. Their message also resonated with austerity-weary voters: In an election that saw record low levels of voter turn-out, over half of the votes went to parties that had opposed austerity.

Granted, debt restructuring might yet be necessary. The IMF has warned that the government's plans may be insufficient to make the debt sustainable. More austerity, on the other hand, might be counter-productive even if it were politically feasible. But the left's call to shift the burden of fiscal adjustment on to business is plainly not the answer: This would hit investment and employment just as the economy is starting to get back on its feet.

Coelho's government has instead put in place labor-market reforms -- cutting overgenerous redundancy payments by more than half, for example, and giving small employers more flexibility in collective bargaining negotiations. Tax reform, with an emphasis on simplification and cuts to corporate rates, is helping as well. These changes were needed to improve competitiveness and boost jobs. Voters seem to have understood that they must be given time to work.

Exports have increased. Unemployment is down and the economy is expanding. Last year the government announced it was leaving the bailout mechanism, regaining its access to capital markets.  

Portuguese officials have always rejected comparisons with Greece, insisting that Portugal has done far more to restore its economy than Greece was willing to. They're right -- but they must understand that their work is by no means finished. Voters have offered to be patient a little longer. Their leaders should resolve to justify that confidence.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at davidshipley@bloomberg.net.