Portugal gears up for fight over budget deficits

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Breathing fresh life into Europe’s Lisbon Agenda for economic renewal is a top priority for Portuguese Prime Minister José Socrates, as he takes over the reigns of the Union for the next six months. However, his first challenge will be to convince France to stick to the EU rules on fiscal discipline that French President Nicolas Sarkozy appears determined to breach.

Modernising European economies and societies – along with the reform of the Treaties and strengthening Europe’s role in the world – will be one of the three “key axes” of Portugal’s EU Presidency between 1 July and 31 December 2007, Prime Minister José Socrates has announced. 

His key concern is to breathe new life into the EU’s Lisbon Agenda in order to give Europe the ability to face up to global competition. 

While the socialist leader has already stressed his intention to give the social dimension of the strategy the “relevance and visibility it deserves”, he has also made it clear that he is not afraid of pushing ahead with staunch economic reforms. 

At home, he has already implemented a number of measures – including a contested pension reform, which lifted the minimum retirement age for state workers from 60 to 65 – in order to put some order into Portugal’s finances. 

And, although his country remains one of the poorest performers in terms of the Lisbon Objectives – with economic growth stagnating and GDP per capita still as low as 70% of the EU average – in the two years since he came to power, Socrates has succeeded in cutting the budget deficit from 6.8% to 3.9%. 

Furthermore, in the course of 2008, he is expected to bring Portugal in line with eurozone rules – known as the Stability and Growth Pact – requiring governments to keep their deficits under 3% of GDP. 

His hard-nosed pursuit of liberal economic reforms and fiscal discipline could put him on the war path with newly elected French President Nicolas Sarkozy, who has recently announced his intention to defy euro rules and delay balancing France’s budget until 2012, despite promises from the previous government to rein in spending by 2010. 

A clash between France and Portugal could arise on 9 July, when Sarkozy, in an unusual move, has invited himself to a eurozone finance ministers meeting in Brussels in order to defend his decision. He will argue that France needs more tax cuts to energise its economy. 

But Socrates has already proscribed such a move, saying that a “very stringent budget policy” should apply everywhere “be it in France or Portugal or wherever” and warning that the credibility of the EU’s Stability and Growth Pact would be undermined if countries abandon the 2010 target, agreed by all 27 member states in Berlin three months ago. 

Fernando Teixeira dos Santos, Portugal’s finance minister, said he fears that, by ignoring the opportunity for budgetary consolidation during this period of economic upturn, Europe would be making the same mistake as ten years ago, when member states failed to balance budgets during a boom and were plunged into a deficit crisis. 

“Obviously, it’s very important for the single currency and for the whole system for people to stick to their budgetary commitments,” Socrates said on 2 July. And Teixera dos Santos added: “If a country does not want to respect a commitment, that raises a problem that is not legal but political, so I would warn France over the reaction of its partners.” 

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