Portugal braces for fall of government amid austerity backlash

Portuguese Prime Minister Pedro Passos Coelho at the Parliament in Lisbon, on Nov. 10 2015. (Armando Franca / AP)

LISBON, Portugal -- Portugal's new government faced what were likely to be its final hours in power Tuesday as anti-austerity forces in Parliament prepared to force its resignation.

The showdown came less than two weeks after the centre-right government was sworn in. It is outnumbered by left-of-centre lawmakers in Parliament, and they have vowed to unseat it by rejecting its policy proposals in the chamber's first debate since an Oct. 4 general election. A rejection would compel the government to stand down, with the landmark vote expected Tuesday afternoon.

The Socialist Party has forged an unprecedented alliance with the Communist Party and the radical Left Bloc to take power once the current government is out. The leftist alliance intends to reverse the cuts in pay, pensions and public services and tax increases that have brought widespread hardship, street protests and strikes in recent years.

The current political upheaval has its roots in years of low growth and borrow-and-spend policies which weakened Portugal and compelled it to ask for a 78 billion-euro ($84 billion) bailout in 2011 amid the eurozone's debt crisis. The centre-right government, which has ruled for the past four years, introduced debt-reducing austerity measures demanded by creditors.

The government's collapse would be a political setback for the 19-nation bloc's austerity strategy demanded by Germany and the others as a remedy for the crisis. Eurozone leaders pointed to Portugal, and Ireland, as examples of how austerity paid off. Now, the progress Portugal made is in doubt, and some fear the country could go down the same road as Greece, which has needed three bailouts since 2010.

The moderate, mainstream Socialist Party, unlike its more extreme allies, has pledged to abide by eurozone fiscal rules. But it is not yet clear how it intends to reconcile that with increased government spending, and the uncertainty could spook investors. Analysts at ETX Capital saw a link between the euro's weakness against the dollar Tuesday and Portugal's difficulties.

If the leftist alliance triumphs, it would give heart to anti-austerity forces in much bigger neighbour Spain, where a general election is scheduled for Dec. 20.

Portugal's budget deficit in 2010 was more than 10 per cent but the European Union estimates it will be around 3 per cent by the end of this year. Unemployment, which surged to a record 17 per cent after the bailout, has fallen to 12 per cent.

"Portugal today is incomparably better than it was four years ago," Finance Minister Maria Luis Albuquerque told Parliament during the debate.

Among the measures planned by the leftist alliance are giving back government workers their pay that was cut; unblocking pension increases; spending more on the national health service; providing free nursery schools for all 3-year-olds and free school books for all; reducing sales tax at restaurants from 23 per cent to 13 per cent; and restoring four public holidays that were scrapped to improve productivity.

If the government falls, Portugal's president would consult all the parties before likely inviting Socialist leader Antonio Costa to become prime minister within days.