Crisis and bailout as a “window of opportunity”

6 Under normal circumstances, government intending to pass deep-seated reforms are likely to meet resistance from public opinion, and in particular from those groups which are targeted by the reforms (Pierson, 1994, 1996). As a consequence, institutions and policies are often kept alive even if they are clearly sub-optimal (Pierson, 1996). However, exceptional circumstances might enable governments to proceed with reforms. For example, it is well known in theory how crises (such as disasters or political scandals) can be “exploited” (Boin et al., 2009). When faced with a severe crisis, political leaders/party leaders and their contenders may enter into a “policy game” in which the advocates of policy change (either incremental or paradigmatic) interact with those defending the status-quo (that either resist or contain policy change). As such, the current crisis opens window of opportunities for networks of reformers to push their preferred policies forward (Birkland, 1997, 2006; Baumgartner and Jones, 1993, 2002; Sabatier, 1988; ’t Hart, 2009).

7 The “window of opportunity” opened by the crisis might be capitalized by the governments. As ’t Hart (2009) notes: “While economic crises might limit governments’ budgets, they also allow policymakers greater scope to implement reforms that would otherwise be met with fervent opposition” (see also Rodrik, 1996). As economic crises are often global (undoubtedly true in the case of the current crisis), this move part of the policy-making to international arenas where domestic opposition forces are not represented (’t Hart, 2009). In that sense, negotiations are a two-level game, in which government can obtain deals that suit them and which their domestic groups would never have accepted in the absence of international negotiations (Putnam, 1988).

8 This literature relates to the one which looks at how IMF conditions might be used by government to carry out reforms that would have been rejected otherwise. It is known that any government facing balance-of-payments difficulties and requesting the IMF a loan has to accept the latter’s conditions (generally reducing deficit, lowering domestic demands for exports and making the labour market more flexible). Conventional wisdom holds that the IMF uses conditionality to force governments to accept these reforms. Governments, it is assumed, do not want conditions to be imposed upon them and the IMF is therefore intervening in a way that infringes on a country’s national sovereignty (Fischer, 1999). For example, Gorjão (2012) notes for Portugal that: “Ever since the international Troika (…) there has really been no question as to who would dictate the pace and developments of the Portuguese economy in the next few years. For all intents and purposes, Portugal was placed in an inescapable straightjacket by a series of rigorous obligations with which it was forced to comply to the letter” (Gorjão, 2012).

9 However, this conventional view has been challenged by several authors. To start with, the IMF itself has long insisted on the importance of “ownership”, i.e., the interest of a country in pursuing reforms independently of any incentives provided by lenders (Drazen, 2002). However, this official IMF view has some ambiguity given that conditionality would not be necessary if a country was absolutely committed to pursuing reforms. Many authors resolve this ambiguity by stressing the fact that governments sometimes use the outside pressure of the IMF to make necessary reforms while avoiding the unpopularity associated with them (Remmer, 1986; Edwards & Santaella, 1993, p. 425; Vaubel, 1986, p. 45). A similar (but more elaborated) argument is that the IMF enables government to pass reforms they wanted all along but could not pass given the opposition of veto players within the country (Putnam, 1988, p. 457; Vreeland, 2004; Drazen, 2002).

10 As a matter of fact, executives enter into IMF programs unilaterally: the approval of potential opponents to IMF policies or “veto players” (such as the legislature in a presidential system or a coalition partner in a parliamentary system) is not required. While the approval of these veto players may be required for policy change, failure to enact the changes might be more costly for the veto players once the country has entered into the IMF arrangement. This is because “rejection of reform is not merely a rejection of the executive, but also a rejection of the IMF. (…) These increased costs may lead veto players to approve of policy changes that they otherwise would have opposed” (Vreeland, 2004, p. 2).

11 However, as noted by Pop-Eleches (2009), the way in which the government’s partisan policy preferences compare to the orthodox economic policy requirements of IMF conditionality is important, since the ideological costs of compliance are likely to be much greater for leftist governments than for pro-market politicians.

12 Following this literature, we argue that governing parties (in our case especially the PSD which shifted significantly towards the neoliberal right during the 2011 electoral campaign, Magalhães, 2012), are using the crisis and the Troika MoU as an opportunity to push forward reforms that have little support among the population (Freire, 2009, 2013a). Thus, our first hypothesis (H1) is that some reforms taken after the international lenders’ interventions correspond to government preferences. But we go even further to propose a second hypothesis (H2) that some policies included in the MoU were not demanded by international lenders but were inserted after requests of the governmental itself.

Bailout, public support and representation

13 If H1 and H2 are true, this begs the question of how these measures (and their consequences) are perceived by the population. Conventional wisdom holds that public opinion will oppose austerity policies brought on by the Troika. Indeed, those policies (cuts in salaries and social provisions, increases in taxes) are by nature unpopular, and thus most of the politics of reform literature assume that people would oppose them (Rodrik, 1996; Dorbunsch & Edwards, 1991, Sachs, 1990, Skidmore, 1977). However, several authors have shown that the public is not always opposed to painful reforms embarked on by the government. The reasons for this are multiple. People might support austerity reforms because they believe that hard times now would be followed by prosperity in the future; or because they reason that the government is not to blame for these bad times (Stokes, 1996, 2001; Fernandez-Albertos, 2006). A sense of crisis may lead voters to favour reforms (Grindle & Thomas, 1991; Keeler, 1993; Nelson, 1992; Remmer, 1991), and voters might wonder whether the outcome would not have been worse in the absence of a program.

14 If in fact people do not always reject the austerity policies associated with intervention, or the government implementing them, what would explain this variation? A first obvious reason is the perception of the culprit for bad times. Pop-Eleches (2010) shows that in Latin America the roots of the debt crisis were widely perceived as being external, which meant people were less willing to bear the economic costs of adjustment policies; on the other hand, the domestic roots of the economic crises in Eastern Europe were much less disputed, and, therefore, voters were more likely to support or at least tolerate neoliberal reforms despite their considerable short-term costs (see also Hayo, 2005).

15 A first research question is therefore to determine the perception of Portuguese citizens towards the crisis, the MoU, and the austerity policies: do they see them to be mainly the fault of their own government(s) or mainly caused by external factors? An inch of answer could be found in the literature mentioned above. Stokes found that when unemployment is high (which is definitively the case in Portugal), people tend to blame government (Stokes, 2001, p. 26). Thus we have: H3. A majority of citizens blame the government for the current economic situation.

16 Secondly, it is important to understand whether the blaming of government is, as expected, associated with a greater tolerance with the bail out and associated reforms: H4. A minority of citizens are against the bailout.

17 Another hypothesis relate to the variation across voters according to their party identification. As noted by Hayo (1999), identification to a party that was in power when the IMF was called in affects attitudes towards reforms. This is because citizens who identify for a party which called for IMF intervention, feel partially responsible and thus rationalize this choice by viewing the outcome positively. Given that both PSD and CDS-PP signed the Memorandum, this reasoning is likely to hold true for t hem as well.

18 H5: Citizens who identify with the PS, PSD and CDS-PP, are less likely to blame Troika policies vis-à-vis the citizens that identify with radical left parties (BE and PCP/CDU).

19 In the present paper we will also be comparing the evaluations of both MPs and their voters vis-à-vis the Troika MoU and the austerity policies, and thus we also rely on the literature about political representation (Pierce, 1999; Freire & Belchior, 2013) and of the responsible party model (Pierce, 1999). On this view, the electoral choices of voters indirectly control political decisions, given that political parties fulfill pledges that supposedly correspond to the will of those electing them. As Pitkin acknowledges, this model should bind representatives to positions that are congruent with the preferences of citizens (Pitkin, 1967). Thus, the study of the congruence of attitudes of Portuguese representatives and their party voters will allow us to understand the quality of political representation during these hard times.

20 In this respect we will be comparing the evaluations of MPs and their voters, by party, in terms of the evaluation of the Troika MoU, the attribution of blame for economic recession, and the attitudes towards the effects of the MoU (namely in terms of the creation of inequalities). Since one of the hot topics related with this bailout is if the Portuguese government is, or is not, going beyond its political mandate (i.e., the one they received from the voters in 2011), worrying above all with being responsible vis-à-vis their international principals (the Troika) and apparently not so much vis-à-vis their domestic principals (the Portuguese electorate), we will also give some attention to perceptions of the violation of electoral commitments.

21 So: which attitudes towards reform and IMF/EU do we expect from MPs as compared to voters? We first expect a larger mismatch between MPs and their constituents on the right side of the political spectrum. Indeed, even before the crisis it has proven to be the case for a large range of socioeconomic policies (Freire & Belchior, 2013; Freire, 2009), and the gap should a fortiori be stronger since the centre-right government is passing a series of unpopular policies. Moreover, since September 2012 both the PS and its union allies (UGT) have become gradually more distant vis-à-vis the governmental parties and the MoU [1] – thus probably getting closer to the discontent of the population.

22 That is why we expect: H6: The rightwing MPs are the less congruent with their constituents, vis-à-vis leftwing MPs and their voters.

23 We also know that MPs tend to adopt more extreme policy positions than their citizens on both the left and the right of the ideological line (see Miller et al. 1999). Portugal is no different in this regard (Freire and Belchior 2013). In line with these findings, it makes sense to argue that the political elite would also hold attitudes about IMF and the intervention which are more extreme than those of the citizens. Thus we have: H7: A larger proportion of mainstream MPs than voters support the intervention; while a larger proportion of MPs than voters from radical parties is against it.

Data and methods

24 We rely on three different types of data. First, to analyze both the context of the bailout and the austerity policies derived from it, we rely on content analyzes of mass media articles and official documents. Second, in order to examine how Troika interacted with the Portuguese governments to design austerity policies we rely on 28 qualitative interviews with key ministers and junior ministers, both from the current right-wing government and the previous socialist cabinet [2] that were fielded in January – March 2013. Third, to study the evaluations of both MPs and voters, by party, towards the Troika MoU, austerity policies and their effects we rely on two surveys, conducted between June 2012 and May 2013, which used the same batteries of questions inserted in the questionnaires specifically for that purpose [3].

Bail out: a history

25 After the fall of the Lehman Brothers in September 2008, there was a dramatic slow-down in the Portuguese economy. Exchange devaluation was not an option (unlike in the previous debt crises in the 1970s and 1980s), and the original approach taken by the first Sócrates’ government (PS – majoritarian: 2005-2009) was fiscal expansion. These counter-cyclical policies were taken in coordination with the EU’s initial neo-Keynesian approach to the crisis (European Commission 2008). A few months afterwards, however, the European Council urged the country to rapidly engage in policies aimed at medium-term fiscal consolidation (European Council 2009), thus forcing national government to give a huge U-turn in their expansionary policies, taking back what they had just given.

26 In April 2010, the Greek government asked for financial assistance from the EU to avoid bankruptcy, while the Portuguese government interest rates soared to their highest level since entry into the Euro. As the incumbent PS had lost the absolute majority in parliament, in the September 2009 general elections, the new minority government sought several times the opposition support (PSD) to pass budgetary measures. For about one year, it won its cause, and was thus able to get the budget 2010 approved, so as three different versions of the Stability and Growth programmes (SGP) that should be delivered to the EU.

27 Such a cycle would eventually come to an end in early 2011. With the 10-year bond yields consistently above 7 per cent, the government was forced to negotiate a fourth austerity package with the EU. While there was no formal need to approve it in Parliament, Sócrates declared he would resign if the opposition proposed a successful resolution against the SGP IV in Parliament. Despite the pressure of new rating downgrades, a freshly re-elected president of the Republic did not take action to rescue the plan from rejection in Parliament (Freire, 2013a, 2013b). The PSD voted against it and the Prime Minister immediately resigned. In the aftermath of these events, the caretaker government had no choice but to ask for the bailout on April 6, at the beginning of the electoral campaign.

28 While the main interlocutor of the troika was the caretaker government, the troika also regularly consulted the two centre-right parties. By contrast, the radical left parties claimed that the bailout was undemocratic and unnecessary and refused to discuss with the troika. As a result, the memorandum of understanding (MoU) was signed in May by the lenders and the three mainstream parties: PS, PSD and CDS-PP. The negotiations finished in May, 2011, for 2011-2014. The bail out covered € 78 billion, two thirds of which to be financed by the EU, and the final third by the IMF. It foresaw action on three fronts. First, actions were planned in order to reduce the gross public deficit-to-GDP ratio down from 5.9% in 2011 to 3% in 2013. The measures (broadly based on the SGP IV) included, on the expenditure side: decrease in administration operating expenditures and government wages (through wage and promotion freezes and a gradual reduction in staff); cuts in social transfers (in unemployment benefits, pensions over 1500 euros, etc.); freeze of all other social outlays; increase in fees to access public services (in hospitals, in the courts, in public highways) and the increase of school’s class sizes at the primary and secondary levels. On the revenue side, efforts consisted mainly on the rise of taxes (VAT, corporate and personal income taxes). A second central objective of the MoU was to safeguard the financial sector deleveraging and to strengthen capitalization of the banks; allocating in total 27.2% of GDP to the banking system.

29 Third, the program contained deep structural reforms in three areas: First, policies to enhance flexibility and firm competitiveness, with measures such as an important reduction of severance payments; more flexibility in firing and in working time arrangements and a shift in the tax burden from production to consumption. Second, objectives were set to increase competition out of protected sectors. For example, the programs targeted the further liberalisation of the electricity and gas markets, of the railway and of the telecommunication and postal sectors; and promised a revision of the competition law. Third, a reform of the Judicial system was planned, including new court management models, procedural simplification, specialized courts, wider use of information technology, and alternative dispute resolution. It has to be noted, however, that despite their harshness, the program included some measures to protect the poorest segments of the population, for example the protection of salaries or pensions for income below a certain amount or the lowering of the minimum duration of contribution in order to get unemployment benefits.

30 At the June 2011 general elections, the right-wing parties obtained an absolute majority of votes and seats and, as the head of the PSD, Passos Coelho, became the new PM. The government started right a way to implement the program, and has been receiving every semester the visit of the Troika, which had the responsibility of assessing compliance with the MoU. At each visit eight significant revisions to the memoranda were agreed on (until October 2013). In these, the lenders noted the progress made as regards the initial objectives and the ones still to be made. While the results for deficit reduction have been disappointing, a greater source of satisfaction for the IMF/ EU was the shrinking of the current external account deficit: to around 3 percent of GDP in 2012 from nearly 10 percent just two years ago. As noted recently by Ricardo Cabral, this extremely rapid fall in imports “is a stark indicator of the size of the shock the Portuguese economy is being subjected” (in Monastitiotis et al. 2013: 30). Also, the troika repetitively claimed satisfaction regarding the advance of structural reforms: according to the lenders Portuguese authorities had been “exemplary” in their application of the MoU.

31 Interestingly for our purpose, each of these revisions also included a specification into details of the existing measures, so as several new ones. The main reason presented to the public for these new measures is the difficulty, given the very fast increase of unemployment (that reached an all-time high of 18% in May 2013), and the decline of economic growth, to decrease public deficit and debt according to the initial objectives. Many of these measures are aimed to further increase revenue and decrease expenditures, those being necessary steps even though the government had received twice one extra year to meet the deficit reduction of 3%. As regards revenue, taxes had been increased, mainly those on income and goods and services On the expenditure side, cash social transfer – such as the wages for public employees and for pensioners were considerably reduced (while the initial memorandum mentioned only a freeze of salaries and promotions of public employees), very considerable savings had been made in the Health and Education sector and many investment were cuts. It should be underlined that most of these cuts in salaries, pensions and the Welfare State were well above the original MoU prescriptions (Abreu et al., 2013), which were the ones that framed voters’ choices in the 2011 elections. Moreover, the additional memoranda also included totally new structural reforms, such as a new law on licensing.

32 Three important observations emerge from this section. First, there is a striking discrepancy between, on the one hand, the satisfaction of the international lenders as regards the Portuguese compliance with the program and, on the other, the feeling of the population which saw its life style deteriorate to the bottom (Freire, 2013a, 2013b; Abreu et al., 2013). Second, we should note the specification into the detail, and even the addition of new and very significant measures in the seven amendments of the MoU until May 2013. This led to many people (political commentators, opposition parties, unions, etc.) to argue that the government is governing well beyond the political mandate they received in the 2011 elections and that followed the first version of MoU (Freire, 2013a, 2013b).

33 Also striking is the relatively easiness, at least until recently, with which the government managed to pass these extremely ambitious reforms. Indeed, at least until September 2012, and with a few exceptions for that period, protests had been relatively modest in Portugal and most of the measures had been passed with the abstention of the Socialist Party (De Giorgi et al., 2013). As a matter of fact, the few actors which managed to force the government to step back were: (i) one huge mass demonstration (ii) the coalition partner CDS-PP and (iii) the Constitutional Court (TC). As regard the former, in September 2012, a replacement of social contributions to employers by those of workers (a financially neutral move that would decrease employees’ salaries and increase firms’ profit) was proposed by the Prime Minister. In parallel with contestation from both unions and employers to the measure, and with huge mass demonstrations against the proposal (in September 15, 2012: around 1,5 million people went to the streets in several Portuguese cities), the CDS-PP and its leader (the vice Prime Minister, Paulo Portas) declared to be against the measure. Finally, the proposal was withdrawn. An additional, extremely important, veto player was undoubtedly the TC which vetoed many important laws or decrees, such as the decreases of wages of public servants and pensioners.

Influence of the Commission before the bail out and reasons behind calling into IMF

35 When asked about the influence of the EU on socioeconomic decision-making before the bailout, interviewees all stressed the gradual increase in Commission monitoring of their budget. Already in 2008, each government of the euro-zone had to present its draft budget in April to the EC (preceding parliamentary vote in September). This draft was then analyzed by experts of the Commission who spotted errors, gaps or anything likely to increase deficit or debt more than was allowed. In 2009, the EC, following the European Council guidelines, requested government to take measures to promote economic growth and employment, thus allowing them to deviate from the strict budgetary objectives. One year later, however, it required a U-turn towards sharp austerity and deficit reduction, at the same time giving much more specific guidelines to governments as regard their budget. As a former minister noted: “from 2010/2011 in particular, the constraints of the EU were much stronger, requiring detailed information on the measures that we intended to adopt (whether to reduce expenditure or to increase revenue) but more than that creating a real bond, commitment from the government to actually adopt these measures”.

36 The fourth Stability and Growth Pact, in particular, was prepared in very close collaboration with the EU Commission. The objective, according to the interviewees, was to avoid rejection or critics at a later stage, and thus maximizing the chances of avoiding a bail out. Following a similar goal, the Prime Minister prepared with Helena de André an ambitious reform of the Labor code (“the pact for employment”) in collaboration with the social partners, to boost competition. As we know, the SGP IV was rejected in Parliament. When interviewed, the current ministers recognized that they then knew that this rejection would call in the international lenders (but also provoke elections that they felt were likely to win). This contrast gives some support to Pop-Eleches’s argument that, the more a government is ideologically close to the IMF orthodoxy, the more likely it would be to call it in.

Negotiations of the initial MoU

37 After the failure in Parliament of the last SGP (IV), the IMF/EU were brought in and negotiations for the bailout started. At this point, key participants recognized that the rapport de force has changed; and that their margin of negotiation was smaller. As a former minister noted: “it is always different (…) negotiating when you are trying to reach an agreement which, at the limit may not happen (…) from when you are negotiating with the Troika after requesting a bailout. Another one gives the case of freezing the minimum wage as an example: the ECB and EC wanted us to include a reference in the to the freezing of the national minimum wage. The government refused to do several times and ultimately it was not included in the SGP 4. When the Troika MoU arrived, (…) they said there was no point discussing it, they told us to write the freezing of the minimum wage or they would not give us financing”. In addition to the minimum wage, the government had to cede to the troika on issues like the amount of the loan (a further 10 million were requested) and the timing of the privatization (the government only wanted to sell when the market picked up).

38 However, none of the participants saw the negotiation as a diktat from the international lenders but rather as a continuous dialogue, in which the diagnosis of the problems, the objectives to reach, and the best ways to get there were agreed upon. Interviewees stressed the importance of benchmarking (i.e. comparing Portugal to other countries) for the problem diagnosis, but also the fact that, once those problems were identified, the government was the one which was expected to come up with possible solutions. An agent from IMF for example notes: “It’s up to the government to come up with a plan. (…) It’s not like the Troika comes with a list of things and says that they have to do these things and then get the money. It doesn’t make sense because partly only the government knows how things work.”

39 Moreover, the government had also been able in many cases to get is own way in case of conflict. For example, it successfully opposed cuts in public servants’ salaries and in lower pensions, the decrease of unemployment benefits for existing contracts only, firing in the public sector, or the possibility to fire without fair cause. As a former secretary of state told us: “Even if a country is in this situation, terrible and without choice, the Troika did not play against us. It was a very intelligent negotiation, in which we tried to find out what would be the best for the country”. Similarly, another PS top official noted about health reform: “I would say that the large majority of measures were negotiated, or proposed, by the government itself. Most of what is in the Troika’s memorandum on health is what was in the SGP 4. There weren’t many changes (…) and in two meetings and the exchange of documents we very easily managed to agree with the Troika without any problems”.

40 Very interestingly, a minister noted the way in which the main opposition party pushed for reforms that the PS government successfully managed to put out of the table: “We knew when they had been negotiating with the PSD, because when we had an agreement, two or three days after the issue was back again on the negotiation table; more rigid than what we had agreed (…) for example, regarding TSU, it was proposed by the Troika, we argued, explained which were the disadvantages, and the troika accepted. Two days after, they put back again the question on the table, and we had to negotiate again in more difficult terms because the PSD went in favor of it (…) that is why the PSD signed the program, it had an influence on it”. There was thus, congruence between the PSD and the CDS orthodoxy and the initial memorandum. For example, a current secretary notes the following for the energy sector: “In this case the Troika is in total agreement with what the government thinks; in other words, even without the Troika, the government would think that these measures should be taken to cut costs, and so our interests are in line with each other, which can be good because the measures then really move forward and overcome any resistance”. When asked about whether the measures negotiated in the initial Memorandum from what their policy preferences were, a majority of ministers answered by the negative.

Additional Memoranda

41 Interviews with ministers from the current government also support the two hypotheses stated above, in the sense that many ministers saw the intervention as a window of opportunity to push reforms they wanted all along and even often required the international lenders to insert some items in the document to get reforms easier. To start with, all ministers from the current government saw no important differences between the MoU and their own policy preferences. Moreover, and in clear agreement with H2, many ministers or junior ministers of the current government presented several examples of measures to be introduced in the revision of the MoU in order to circumvent opposition to it. According to the interviewees, this has been the case, for example, for the liberalization of several sectors of the economy; for the shift from collective negotiation with unions to negotiations with commission of workers for a specific industry/corporation, for the quick judicial process for urban rehabilitation (opposed by lawyers), and for the recent new laws on licensing. A current junior minister stated: “Most of the Troika’s memorandum are things the government wanted to do, most of them. The policy of this government (…) is to increase competitiveness by cutting salaries and the sooner we are able to stabilize the economy, the sooner growth will begin, so all this business of cutting salaries, the sharp rise in taxes and in effect the reduction of income, the increase in the cost of electricity, doing away with various things that the public companies did to provide good services because they are not profitable, and so on, all this was in the MoU and it wasn’t in the first version. It is there because it is on the government’s agenda and they know they are in stronger position to accomplish this if they have a state obligation to do so.” Another ministers, also from the current government, when asked if a minister would have done something very different without intervention of the Troika answered: “No, probably no … there is here a window of opportunity that allows to bypass the resistance of stakeholders, professions, industries, pharmacies, of our administration, to make reforms that were necessary. For sure, these reforms were understood as necessary within the country.” In our view, this evidence enables us to confirm H1 and H2.