Portugal’s newly-appointed Prime Minister has pledged to emphasize economic reform and austerity. Backed by strong electoral support, this stands in stark contrast to the resistance to reform by other fledgling EU economies and could position Portugal to emerge from its economic quagmire and meet donor conditions.

Portugal’s new Prime Minister Passos Coelho, appointed last Wednesday, stated that the top priority of his administration is economic reform, including difficult austerity measures, and to restore financial confidence in Portugal. The Wall Street Journal reported that the Prime Minister did not delineate specific plans, but emphasized stability and promised to meet the terms of the bailout donors

Passos Coelho’s Social Democrats won 108 seats in a 230-seat parliament in June 5 elections, defeating the ruling Socialist party. The Social Democrats aligned with the smaller conservative Popular Party (CDS-PP), which won 24 seats in the election, to create a majority in Parliament. Voters eschewed the ruling Socialist party, which they blamed for the economic disarray that required Portugal to seek an EU and IMF bailout. According to the Financial Times, one of Passos Coelho’s first initiatives will be creating an independent agency to monitor public accounts. He also said his finance minister will be an independent, with no party affiliation.

Analysis

Unlike the population of other countries such as Greece and Spain that have balked at austerity, Portugal’s election sends a positive signal to international donors and markets. More than 80 percent of voters backed parties in favor of strict economic reform. The personally thrifty Passos Coelho’s reaffirmation of support for an overhaul of the economy will further strengthen donor good will to the country. However, there is a large gap between theoretical support for reform and implementing deep spending cuts that likely will be unpopular when actually implemented.

Moreover, putting those measures in place will test the resolve of the government. It is also possible that the current economic situation is even more dire than previously reported, and that the Socialist government misrepresented some of the negatives in the economy to boost its pre-electoral position.

Passos Coelho told the Financial Times he recognizes the depths of the necessary reforms, and understands that they will be difficult. He said Portugal faces two “terrible years” of deep recession and record unemployment before the country can return to growth and regain the confidence of international investors. The Prime Minister plans to go beyond the requirements of the IMF and EU, including expanding the privatization program to leave only a very small number of publicly owned organizations.

He stated that his goal is to reform the labor markets to create positive conditions for job creation, increased productivity and social mobility. “There is no alternative,” said Passos Coelho, adding that the program “cannot fail.” He said that if Portugal does not fully apply the economic reforms, it will be trapped in a recessionary spiral and will have to request a second bail-out to survive.

Passos Coelho is an enthusiastic believer in the economic reform process. He sees the current situation as a chance to completely refurbish the long-failing Portuguese economy, and believes he is uniquely suited to lead the changes. He also sees the electoral results as affirmation of his mission, and he is unlikely to falter even in the face of public discontent.

His enthusiasm, however, could backfire, at least for the short term. Immediate execution of spending cuts, for example, could stifle growth and fuel public dissatisfaction. His proposed devaluation and cuts in social security payments will help reduce labor costs and make exports competitive, but are likely to raise public hackles. Likewise, his necessary judicial, educational, and labor reforms will ultimately bring positive change to Portugal, but will take a long-term investment to succeed.

The economic and structural reforms may take more than the allowed three years to bear fruit, and public dissatisfaction over the short-term dislocations could set-up a win by parties less supportive of reforms in the next election.

[Lisa M. Ruth is a former CIA analyst and officer. She now is managing partner of C2 Research, a boutique research and analysis firm in West Palm Beach, Fla., and vice president at CTC International Group Inc., a private intelligence firm.]