Monday, October 26, 2015

October 26, 2015 - There's a Coup Happening in Portugal?

Portugal held parliamentary elections on October 4, which resulted in left-leaning parties gaining a majority of the seats (51%). This would be a changing of the guard in Portugal which has had a conservative president since 2006 and a conservative prime minister since 2011. The left-leaning parties campaigned in large part on a platform of anti-austerity. You see, like Greece, Portugal ran into debt issues and received a financial bailout 2011 that required them to implement austerity measures. These austerity measures didn't turn the country around too quickly, though, and were massively unpopular; that's what led to the left-leaning parties winning this election.

The trouble is that the current president has been a proponent of austerity, and now he has declared that the leftists are too radical to be put in power. And he has refused to allow the left-leaning parties to take control of the parliament, even after they won the election. Thus, Portugal is now seeing mass protests and political chaos. Here's a thorough write-up on some of the drama that's worth checking out, though you should know that it is written with a strong bias in favor the left-leaning groups.

Wait, he can do that?
Upon reading the summary above, I suspect your first thought was the same as mine: How can the government refuse to recognize an election? And the answer lies in Portugal's particular governmental system, which is considered a semi-presidential system. Basically, the president is elected in a popular election (like the US) and prime minister is elected by the legislature (like the UK). And then the duties that would be concentrated solely in a president in the US model, are split between the prime minister and the president. And in Portugal, part of this split means that the president is actually the one who nominates the prime minister in consultation with the parliament. In general, my understanding is that this is just a formality; the president is supposed to nominate whoever gains sufficient support in the election. But in this case, the president decided he won't nominate the leftists for fear of sending the wrong message "to financial institutions, investors and markets." It's really a phenomenal statement. And although what he's doing doesn't appear to be unconstitutional in a technical way, in substance, he's trying to nullify an election result. This is something that one might expect to see in a developing country in Africa or Asia with a dictatorial government, but seeing it happen in Western Europe is remarkable.

What happens next?
We can expect this situation to get worse before it gets better. The left-leaning groups are planning to depose the current prime minister through a vote of no confidence, in the hopes of forcing the president's hand. A likely outcome is that Portugal will end up not having an acting prime minister for a while this shakes out. And there will be continued mass protests in the meantime. On the plus side, a lot of the Portuguese won't be skipping work because they're already unemployed (12.4% in the most recent figures). I know, not cool.

Our Take
We should hope that authoritarian rule is not the end result of this chapter in Portugal. The left-leaning parties won the election and should obviously be allowed to take power. Recall that among the most revolutionary things about the American revolution was that we eventually achieved a system that allowed a peaceful and orderly transfer of power. Portugal is threatening to do away with that, and chaos is the only plausible result. That said, it is interesting that the mainstream news sources are barely covering this story at all. And I know I make this point all too often, but if this happened in Russia or another ostensibly democratic enemy of the day, we would be hearing about nothing else.

The reason we're not hearing about this story is because powerful interests do not want to see the rise of anti-austerity movements. Acknowledged or not, the anti-austerity movement is not just about restoring pensions and benefits, it also means not paying back the lenders in full. And these lenders are comprised of some combination of the following: friendly countries (usually Germany), international institutions (International Monetary Fund, the European Central Bank, etc.), and private hedge fund investors or banks. All of these entities have a considerable deal of influence and stand to lose massive amounts of money if the anti-austerity movements ever successfully took power and refused to pay back their loans. This nearly happened in Greece, but the ruling government ultimately backed down at the last minute. The fear is that Portugal might have learned a lesson from the Greece  episode and try to take an even stronger stance right out of the gate. And if one country succeeds, it is likely that the other indebted countries will pursue a similar strategy, resulting in significant economic shocks in Europe.

These anti-austerity movements and their associated debtor nations are often vilified as irresponsible for trying to renege on their debts. But we should remember there's a reason the lenders are being paid interest on these loans. Part of the interest is to compensate them for putting off their own spending, and part is to compensate them for risk--specifically, the risk that the borrower will not pay. This is why poor people / and people with bad credit have to pay higher interest rates--the higher probability that they may not pay off their loans. And Greece and Portugal, well, they were sub-subprime bets for the lenders. There seems to be a temptation to paint the banks and institutions doing these bailouts as noble and sacrificial, but the truth is they made a calculated decision based on their self-interest (profit interest in the case of the private entities, political interest in economic stability in Europe in the case of the others). And sometimes, people miscalculate. This shouldn't be a question of morality; it's a question of economics.

Finally, we should note that the proposed economic agenda of the left-leaning parties in Portugal is liable to be catastrophic. Think Bernie Sanders plus Paul Krugman (an economist who writes for the Times), and I think you'd have a rough approximation. They aim to increase government spending on benefits, presumably run more deficits, and print more money if they are able to regain control of their currency. The likely result of these policies in the best case scenario is a short-term rise in the incomes and fortunes of Portuguese people followed by an eventual, devastating crash. (We'll save the nuances of economic theory for another day.) But while that may be unfortunate, explicitly anti-democratic rule for the sake of business interests is clearly worse. Portugal needs to be allowed to decide its own future; come what may.

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