Will Sócrates stand up for the Lisbon Agenda?

Taking a look at Portugal’s economic performance, one idea for a motto for the Portuguese presidency of the EU could have been "physician, heal thyself".

The presidency’s priorities include the sustainability of public finances, completing the internal market and pursuing the Lisbon Agenda of economic modernisation to boost innovation, growth and employment.

But across all these areas Portugal is one of the worst performers in the EU. It is expected to run a deficit of 3.9% of gross domestic product (GDP) this year, over the 3% limit set by the Maastricht treaty, and will be the only eurozone member still subject to the excessive deficit procedure by the end of this year. The economy is expected to grow by 1.8% this year and 2% in 2008 but it contracted by 0.7% in 2003 when European Commission President José Manuel Barroso was prime minister. The economies of other former "cohesion" countries (ie, where the GDP per person is less than 90% of the EU average) have a different outlook. Ireland has growth rates of 4-6% since 2002 while Spain’s growth rate has been 3% or above since 2003.

Ireland’s GDP per capita is 144% of the EU27 average while Spain’s is 102%.

Portugal’s GDP per person is 75% of the EU average, below that of Greece (89%) and new members Malta (77%), the Czech Republic (79%), Slovenia (87%) and Cyprus (94%).

Portugal, which launched the Lisbon Agenda in 2000 when it had the presidency under the government of António Guterres, has the worst record for implementation of single market legislation, with a deficit of 4.4% compared to the target of 1%.

The government of Socialist José Sócrates, which came to power in March 2005, has acted quickly to tackle the country’s problems. Speaking in Lisbon at the launch of the presidency on 1 July, Sócrates pointed out that his government had cut the deficit by half in one year and would continue to do so in 2007 and 2008.

His government has also tackled public finances by launching an ambitious reform of public administration. The retirement age for civil servants has been raised from 60 to 65 and the government has introduced a new sustainability factor into the pension scheme which is related to life expectancy, so civil servants have to work longer or see their pension payments reduced. Benefits are based on the entire active working life rather than the best ten years. Sócrates boasted that this reform had been carried out in two years whereas "the Swedes took 15 years". The size of the civil service is being reduced as retiring staff are not replaced.

Preparing to join the euro imposes discipline on countries to clean up their public finances. But Portugal’s Finance Minister Fernando Teixeira dos Santos said that the country’s economic woes were partly due to a failure to implement needed structural reforms after adopting the single currency.

Teixeira dos Santos said that the marked drop in interest rates with the move to the euro and the growth it induced lead to an "illusion of prosperity" which reduced the perception of the urgent need for reforms. The finance minister pointed out that there was a minority government in the run-up to the launch of the euro so attempts to force through unpopular reforms might have undermined the support for meeting the eurozone entry criteria. "We would have run the risk of fostering a political crisis," he said.

The Portuguese economy has been suffering major structural weaknesses. According to a report by the International Monetary Fund in 2006, by 2005 its economy had lost 10-20% of its competitiveness compared to other members of the eurozone by 2005 since the adoption of the euro because of a lack of wage moderation and poor productivity. Labour costs in the manufacturing sector rose by 6.7% more than those of eurozone competitors between 2000 and 2005.

Portugal is almost a test case for the Lisbon Agenda’s emphasis on the need to modernise the economy to cope with the challenges of globalisation. Private sector employment has been concentrated in labour intensive industries such as textiles and footwear, precisely the industries which have been hardest hit by competition from low-cost imports from China, India and other developing countries. Around 150,000 jobs were lost in industry and manufacturing in 2002-05.

Portugal has also been badly positioned to move up the value-chain to compete better in the knowledge industries. It suffers from low levels of education with a high rate of dropping out from school and it is estimated that only 20% of pupils complete secondary education. Traditionally, demand for workers in low-skill jobs reduced the incentives to stay on longer in education and gain higher education but those employment possibilities are not as abundant as they were. This is despite the fact that spending on the schools system is relatively high compared to other industrialised countries.

Sócrates has pledged to make education a policy priority. The Commission has approved DATE, the country’s regional development programme worth €21 billion over the next seven years. The prime minister was quick to point out that the share of the funding going on "human capital" would rise from 26% to 37%.

The test for Sócrates’ government will be whether the attempts to boost levels of innovation and economic activity in high value-added sectors will feed through quickly enough to offset the effects on Portugal’s industry of global competition.

The many years of head-start enjoyed by the Scandinavian countries and increasing strength of the central and east European states in these fields could make his task difficult. And the danger is that the voters from the Socialist party’s traditional core supporters in industry and the public sector may punish him in a backlash against austerity measures.

But as Sócrates came to power following a loss of credibility of his centre-right predecessor Pedro Santana Lopes, there may be enough acceptance among public opinion that the pain of the reform path is worth enduring. If Sócrates can make his reforms work, perhaps he turns out to be better qualified to champion the Lisbon Agenda than anyone else.

Taking a look at Portugal’s economic performance, one idea for a motto for the Portuguese presidency of the EU could have been "physician, heal thyself".