CATEGORÍA BAJO (%) MEDIO (%) ALTO (%)

result of improving public finances. The Keynesians argue in favour of anti-cyclical policies, under which achieving healthy public finances is secondary to stimulating a distressed economy and a focus lays on the type of policies. The Portuguese case, in which public expenditure has decreased, whilst incorporating what is generally seen as anti-austerity measures, provides mixed evidence to the debate of whether austerity or Keynesian policies should be adopted in future crises. According to the expenditure approach economic growth is largely the result of what austerians would call the confidence theory in which decreasing deficits, and thus improving public finance has led to increased confidence in Portugal’s economic performance, which ultimately led to the economic expansion. However, the anti-austerity method paints a different picture. Here economic growth is the result of enhanced household income which has spurred demand, and thus ultimately generated economic growth. It is certainly the case that investor confidence has grown under both the Passos-Coelho and Costa government, as public finances improved, ultimately leading to the revival of the economy. On the other hand, Costa’s anti-austerity measures have led to enhance household income which on its turn has led to greater demand.

Although both Austerians and Keynesians are likely to be partly correct in their analysis of Portugal’s economic revival, the most likely catalyser of economic growth in Portugal is a combination of stimulating internal demand through increased household income, sound public finances and the stimulating global macroeconomic environment. Interesting in this regard is the contribution of incorporating an MMR design for the purpose of this research. If the same research was done through the use of solely a quantitative (expenditure) or qualitative (anti- austerity) method, a much more unilateral side of the story was likely to be told. Accordingly, through the quantitative method, it is likely that the hypothesis that Costa had rejected austerity was likely to be rejected, whilst the qualitative method is likely to have confirmed it. Through the incorporation of an MMR design this research aspired to paint a broader picture of the Costa government.

A successful case of (anti) Austerity?

The results of the analyses proved mixed, not surprisingly the quantitative method (the Austerians method of choice) undermines Portugal as a case of anti-austerity, whilst the qualitative method (the Keynesian method of choice) underlines how Portugal rejected austerity. The quantitative method paints a picture of little changes in public finances from the Passos-Coelho to Costa government. Expenditure has hardly risen and deficit figures have been reigned in, much to the delight of Austerians. Through this lens one would argue that little change actually occurred under the Costa government. However, through a qualitative lens, in which one looks at policy changes, large differences with the previous government are visible.

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Social cohesion has been strengthened by the return of public wages and pensions to pre-crisis levels, whilst steadily increasing the minimum wage and labour security.

This mix of evidence proves interesting as it seems that the Costa government found a third, more moderate way to regain growth, which incorporates both aspects from the Austerians (fiscal discipline) and Keynesians (increasing output through enhance demand). The finding that a country heavily stricken by a recession may recover whilst rejecting austerity policies and maintaining fiscal discipline seems like a crucial finding of the Portuguese case, notwithstanding current discussions within the Eurogroup to adapt the current government budgetary rules. However, it must be noted that the Costa government was able to spur current domestic demand by transferring from the future, through decreases in public investments. Whether prioritizing current growth over future growth has been wise will depend on the future. The Costa government found an innovative tool to stimulate short-term demand by decreasing public investments. However, this trade-off may have a strong negative impact on labour productivity in the future. Whether the Costa government is able to revamp its public investments in the coming years will seal its fate in the history books.

Implications for future policy

Although merits exist for the arguments of both the Austerians and the Keynesians, the remarkable outcome of this research is that a combination of both policies may be feasible. As both sides of the debate are increasingly convinced that Costa’s government poses as an example of how their ideology is correct, a more nuanced version seems to be closer to the truth. The evidence of this research suggests that it may be possible to decrease overall expenditure whilst implementing policies that are considered anti-austerity. The evidence of the Portuguese case suggests a third way in which government stimulates the economy through partial expansion, whilst maintaining healthy public finances.

The Portuguese government has certainly undermined the rule of thought that austerity can only be applied through the neoliberal type which dominated when the crisis hit Europe. As the crisis worsened, calls for austerity measures and improvement of competitiveness of the heavily stricken countries increased. The neoliberal version of austerity saw the crises as an indication that countries such as Portugal and Greece lagged behind the Northern countries in terms of labour productivity and cost efficiency in production. Following this rule of thought, the remedy for the countries that were hardest hit during the crisis was to rein in unsustainable public finances whilst increasing labour productivity and decreasing the cost of production. This occurred under the supervision of the Troika through the freezing of wages, pensions and increasing the working week. It was argued that through these measures, the Southern European economies would converge towards its Northern counterpart, ultimately increasing its global competitiveness position. The austerity measures imposed under the Troika, may at some sense have led to a convergence with labour markets in the North, it certainly played an important

38

role in depressing Portugal’s economic recovery. As household’s income decreased, their confidence in the future declined, leading to lower internal demand.

Costa’s third way has proven that the cuts necessary for reining in public deficit and debt can vary and must not be imposed on the weak individuals within a society. On the contrary, the third way proved that although a great importance is attached to leaving the European Commission’s Excessive Deficit Procedure, the cuts in public spending can be imposed on other groups than those most in need. Costa’s third way chose to make cuts in capital expenditure in order to relieve the austerity measures imposed on the vulnerable.

This third way has been sustained in the Costa government through a temporary decrease in public investments to cover for current expenditure. By borrowing from the future, the Costa government was able to stimulate internal demand by increased household income, whilst maintaining healthy public finances. What the effects are of the decrease in public investments on the long run remain up for debate, but it likely that at some point the government will have to restore public investment to its previous levels, in order to prevent a fall in labour productivity.

In 2018 Costa’s minister of Finance, Mário Centeno, which played an important role in Costa’s government, was elected as president of the Eurogroup and Chairman of the Board of Governors of the European Stability Mechanism. It has been argued that his appointment as president of such an important organ, which oversees fiscal prudence throughout the euro area, has been an indication that the German and Dutch push for neoliberal austerity has been overthrown. Whether the appointment of Centeno as president of the Eurogroup symbolizes a shift in the ideology with regards to austerity is still unclear. However, his appointment certainly confirms the confidence that other Member States have had in the development of Portugal’s public finances under the Costa government.

Contributions and limits of the study and directions for future research

By analysing the case of Portugal in light of the debate between proponents and opponents of austerity, this thesis has sought to provide a more nuanced assessment of the Costa government. The Costa government has provided a third way of combating indebtedness which incorporates fiscal discipline whilst protecting the most vulnerable in order to regain economic growth. Accordingly, this research contributes to the theoretical literature regarding fiscal discipline by providing an alternative to both predominant narratives that are prescribed to those countries which find themselves indebted; austerity and fiscal expansion.

Besides contributing to the theoretical literature of fiscal discipline, the acknowledgement of a nuanced version of austerity within European context has strong policy implications, especially with Mário Centeno as head of the Eurogroup. Centeno has, within this context, been pushing an agenda to further deepen the EMU whilst revisioning the ESM. The Eurogroup set up an instrument to further converge the European economies and budgets; the Budgetary Instrument for Convergence and Competitiveness (BICC). Although the finance ministers of the euro area

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still strongly disagree what role such instrument should play, Centeno’s alliance to a more nuanced version of austerity is likely to influence policy within the Eurogroup. As economic growth slows down, Centeno’s third way is likely to be brought to the roam of policy options within a European context.

Although the finding that a third way besides austerity and fiscal expansion is feasible, this study faces certain limitations that can possibly be addressed in a future study. Although this study lays out several policy changes under the Costa government, a deeper analysis of policy changes may contribute to a better understanding of how these changes led to enhanced household income and confidence. Furthermore, critics of the Costa government have posed the argument that a great part of Portugal’s economic recovery is the result of an improving global macroeconomic environment. Accordingly, future research may incorporate the role of the expansionary policies of the ECB and strongly improved tourist revenue due to a deteriorating relation between Europe and Turkey.

40 Appendix

Main table 1 has been used for the creation of Graphs 2,3,4,5,6,7,8. The data of the table beneath has been retrieved from multiple sources. One of the main sources is the ECB’s statistical data warehouse (http://sdw.ecb.europa.eu/reports.do?node=1000004527). The first three columns of the table have been retrieved from this report on the 1st _{of August 2019. The developments in}

GDP in Millions of euros has been retrieved from Eurostat’s data browser (https://ec.europa.eu/eurostat/databrowser/view/tec00001/default/table?lang=en). The data for this table was also retrieved from Eurostat’s GDP report on the 1st _{of August 2019. Ensuing,}

the absolute value of expenditure has been calculated by taking the respective percentage of expenditure as % of GDP with respect to the actual GDP values. The absolute values of the yearly deficits have been calculated in a similar fashion, multiplying both the actual and projected deficit (in terms of percentage) with the absolute GDP values. Lastly, the Troika deficit projections have been retrieved from the MoU between the Troika and Portugal from 17 May 2011 (https://ec.europa.eu/economy_finance/eu_borrower/mou/2011-05-18-mou- portugal_en.pdf). Together, these different sources have led to the creation of the table beneath, which is the source for graphs 2 up until 8.

Main Table 1 (graphs 2-8)

Year Revenu Expenditure as % of GDP Actual Deficit

Troika Deficit Projections Troika Deficit Projections (absolute) Actual Deficit (absolute) GDP in Million € Actual Expenditure (absolute) 2009 40.4 50.2 -9.8 - 175,448 88074.896 2010 40.6 51.8 -11.2 - 179,930 93203.74 2011 42.6 50 -7.4 -5.9 10,068 13,006 176,167 88083.5 2012 42.9 48.5 -5.7 -4.5 7,645 9,529 168,398 81673.03 2013 45.1 49.9 -4.8 -3 5,224 8,245 170,269 84964.231 2014 44.6 51.8 -7.2 - 12,402 173,079 89654.922 2015 43.8 48.2 -4.4 - 7,917 179,809 86667.938 2016 42.8 44.8 -2 - 3,674 186,480 83543.04 2017 42.7 45.7 -3 - 5,766 194,613 88938.141 2018 43.5 44 -0.5 - 912 201,612 88709.28

For graph 1 a table is used which stems from my Master Thesis in Economics at the Vrije Universiteit, Amsterdam. In order to produce the table, I retrieved monthly data on bond yields from Eurostat and calculated quarterly averages for Euro countries. For this research only four countries from the population were incorporated, and thus the original table is presented in a

cropped form beneath.

(https://ec.europa.eu/eurostat/databrowser/view/teimf050/default/table?lang=en)

41 Main Table 2 (graph 1)

TIME/GEO Germany yield Greece yield Netherlands yield Portugal yield

20183 0.31 4.08 0.5 1.82 20182 0.42 4.24 0.64 1.79 20181 0.55 4.07 0.67 1.89 20174 0.33 5.08 0.49 2.04 20173 0.39 5.48 0.59 2.83 20172 0.27 6.11 0.53 3.34 20171 0.29 7.24 0.48 3.99 20164 0.15 7.53 0.33 3.53 20163 -0.12 8.17 0.05 3.07 20162 0.08 8.2 0.34 3.16 20161 0.26 9.54 0.45 2.93 20154 0.53 7.81 0.73 2.49 20153 0.66 9.4 0.9 2.61 20152 0.49 11.46 0.71 2.4 20151 0.31 9.91 0.42 2.18 20144 0.7 7.93 0.91 3.05 20143 0.99 6.03 1.25 3.45 20142 1.35 6.17 1.72 3.66 20141 1.61 7.59 1.93 4.86 20134 1.75 8.6 2.13 6.12 20133 1.73 10.23 2.18 6.84 20132 1.34 10.24 1.78 5.97 20131 1.47 11.14 1.74 6.25 20124 1.37 16.16 1.66 7.92 20123 1.36 23.69 1.78 9.67 20122 1.42 25.4 2.06 11.38 20121 1.83 24.74 2.23 13.22 20114 1.93 19.03 2.43 12.23 20113 2.26 16.61 2.73 11.47 20112 3.1 15.5 3.44 9.89 20111 3.14 11.86 3.35 7.36 20104 2.6 11.03 2.84 6.5 20103 2.42 10.79 2.65 5.63 20102 2.78 8.3 3.08 5.11 20101 3.18 6.24 3.4 4.35 20094 3.19 4.97 3.5 3.85 20093 3.3 4.66 3.65 4.04 20092 3.32 5.35 3.86 4.44 20091 3.07 5.72 3.74 4.5 20084 3.5 5.03 3.95 4.3

42 20083 4.26 4.97 4.48 4.77 20082 4.25 4.82 4.44 4.69 20081 3.93 4.39 4.05 4.31 20074 4.19 4.51 4.31 4.45 20073 4.34 4.66 4.43 4.6 20072 4.33 4.57 4.38 4.5 20071 4 4.26 4.03 4.16 20064 3.76 4.03 3.8 3.94 20063 3.88 4.19 3.89 4.04 20062 3.94 4.28 3.95 4.07 20061 3.48 3.77 3.49 3.61 20054 3.34 3.56 3.37 3.48 20053 3.17 3.41 3.22 3.32 20052 3.3 3.6 3.3 3.35 20051 3.6 3.77 3.6 3.6 20044 3.75 3.95 3.81 3.83 20043 4.11 4.31 4.18 4.22 20042 4.22 4.46 4.31 4.38 20041 4.06 4.3 4.08 4.15 20034 4.29 4.45 4.33 4.41 20033 4.09 4.24 4.14 4.22 20032 3.86 4.07 3.96 3.96 20031 4.04 4.31 4.06 4.13 20024 4.42 4.71 4.5 4.6 20023 4.61 4.96 4.73 4.87 20022 5.11 5.47 5.24 5.35 20021 4.98 5.35 5.09 5.2 20014 4.6 5.03 4.76 4.89 20013 4.88 5.38 5.04 5.25 20012 4.96 5.47 5.14 5.36 20011 4.75 5.33 4.89 5.13 20004 5.08 5.79 5.22 5.46 20003 5.25 6.06 5.39 5.6 20002 5.26 6.11 5.4 5.58 20001 5.46 6.44 5.6 5.73 19994 5.16 6.68 5.3 5.48 19993 4.87 6.56 5.02 5.21 19992 4.07 5.87 4.23 4.37 19991 3.86 6.08 3.96 4.05 19984 4.01 7.76 4.09 4.33 19983 4.39 7.83 4.5 4.72 19982 4.89 7.9 4.93 5.14

43 19981 5 10.45 5.01 5.33 19974 5.49 10.18 5.47 5.87 19973 5.6 9.49 5.55 6.25 19972 5.78 9.13 5.7 6.56 19971 5.69 10.87 5.59 6.75 19964 5.89 13.26 5.79 7.24 19963 6.34 14.43 6.25 8.58 19962 6.46 14.87 6.39 8.97 19961 6.18 15.17 6.18 9.45 19954 6.33 15.44 6.34 10.66 19953 6.73 16.21 6.72 11.38 19952 6.91 17.61 6.97 11.99 19951 7.43 18.58 7.56 11.82 19944 7.5 19.83 7.56 11.57 19943 7.17 21.38 7.17 11.5 19942 6.73 20.38 6.8 10.02 19941 6.07 21.21 5.92 8.83 19934 5.94 22.25 5.77 9.28 19933 6.41 22.46 6.19 10.26

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