November 25, 2015
Antonio Costa will be Portugal’s new prime minister after receiving the mandate from the president yesterday. The president noted the responses to his six questions which Costa sent back only hours later. The Communists refused to do the same, but this was anyway not so much the point of Cavaco Silva’s last manoeuvre. It was more to lay the blame entirely on Costa, if turmoil hits the new government.
All sorts of predictions are out there on how long this Socialist minority government backed in parliament by the Communists and the Left Bloc is going to last. For the moment, though, relief dominates that after 51 days this uncertainty is over and that there will be a government and a budget.
One of the first challenges is for Costa and his finance minister, Mario Centeno, to prove that a less restrictive fiscal policy is indeed possible without compromising the EU budget rules. The agreement with the PCP and the Left Bloc includes an increase of the minimum wage, restoring the salaries of civil servants in just one year, lowering the social tax TSU for the poorest workers and unfreezing pensions. And at the same time the new government wants to avoid a fall in revenues when some of the revenue-generating measures expire in January 2016.
The budget plans don’t leave much room for manoeuvre with a 3% deficit target for this year and 2.8% next year. Given the left parties' commitment does not allow for wage or pension cuts nor for income-tax increases, the finance minister will find that de facto 75% of his expenses and a large part of his tax revenues are basically untouchable, which leaves the government vulnerable to shocks, notes Jornal de Negocios.
The 2016 budget will be the first cohesion test for the left alliance in parliament, and a capital increase for Novo Banco and Banif is another.
Costa is likely to be sworn in later this week. The majority of the 17 ministers in his cabinet have no ministerial experience, the FT reports. Centeno is a Harvard-trained left-liberal from the Bank of Portugal as portrayed by Diario Economico.
We also have stories on the deposit insurance proposals by the Commission; on the self-destruction of New Democracy; on another populist fiscal shift by Renzi; on why the Italian bank rescue is risky; on the effects of QE on the transmission channels of monetary policy; on Greek banking recaps; and on whether it is possible for both the eurozone and its member states to run an optimal fiscal policy at the same time.