Featured interview

May, 2016

Interview with Dr. Augusto Santos Silva, Minister for Foreign Affairs of Portugal

PRISMA GROUP: To begin with let’s discuss Portugal’s contemporary relations with the Eurozone. The coalition government incorporates members of the Communist Party and the Left Bloc, some of whom are anti-EU. Can you characterise how you see the diplomatic relationship between Portugal and the EU developing in this context?

Dr. Augusto Santos Silva (A.S.): Our administration is a minority government of the Socialist Party, which is a member of the party of European socialists; the Sozialdemokratische Partei Deutschlands (SPD) in Germany would be our counterpart in political terms. Since the socialist party did not have the majority of parliamentary seats, the government is supported by an agreement undersigned by the Socialist Party, the Communist Party, and the Left Bloc party. This is the first time this type of arrangement has occurred in Portugal – it is a very Scandinavian way of doing things.

This socialist, centre-left-wing government is a minority government with majority support in parliament, formed on the basis of a detailed written agreement. The main goal of this agreement is to re-establish normality in Portugal, now that the adjustment programme is completed. We will rebuild normality for wages, pensions, and working hours.

The agreement grants government-own policies in a great number of areas, namely in regards to external and European affairs. The parties that signed the parliamentary agreement concurred in allowing the majority government to run its full term. Ours is not a formal coalition: the programme of the government is the Socialist Party programme with specific measures agreed with the Communists and the Leftists. This is very important for our discussion because the programme to which the government is committed is committed to all the measures governing the Eurozone, and to all the alliances that define the strategic position of Portugal, mainly our commitment to NATO and to the stability and continuity of the main trends of our foreign policy.

PRISMA GROUP: What do you expect the socio-economic repercussions of some of the Socialist Party’s main policy points to be, such as raising the minimum wage and reinstating some of the civil holidays that were removed in 2013?

A.S.: We cannot envisage any negative effect for two reasons: first, we are close to European standards, for instance, we are going to raise the minimum wage to €630 in the last year of our term; this year the minimum wage will be €530, the lowest minimum wage in all the Eurozone. Today we are celebrating an agreement between social partners to sustain this raise. Firstly we are reducing the gap between us and Eurozone standards, and secondly we are doing this with the social backing of employers. This morning one of the trade unions is going to sign an agreement to sustain this small raise in the minimum wage.

In regards to working hours, Portugal has a maximum work schedule of 40 hours a week; I think Germany has 41 hours and in the administrative and tertiary sector the maximum work schedule per week is 36 hours. We are approximating the schedule of our civil servants to these standards and if you compare the working hours of civil servants with those of the private tertiary sector they are very close. The 35-hour week was the regular work schedule in Portugal and it was suspended during the adjustment period; we are now re-establishing normality. The same goes for public holidays. We are re-establishing the public holiday scheme in accordance with our compromise with the Holy See, because two of the holidays that were suspended were religious festivities. The agreement between the Portuguese government and the Holy See was to suspend those holidays until the last day of this year, and we are now discussing the renewal of terms in one year with them.

This is not innovation on our part; we are taking these steps in accordance with our commitment to the Eurozone. The exceptional period we lived between 2011 and 2014 is now over, so we see no need to draw out these conditions.

In order to give impetus to our economic growth and to the creation of employment – one of the main pillars of the agreement we established with our European partners and with IMF and the ECB – we had to undertake strong fiscal consolidation for five years to correct some of the imbalances that were damaging our economy.

PRISMA GROUP: I’d like to return to economic growth shortly, but first can you outline the implications of the Transatlantic Trade and Investment Partnership (TTIP) for Portugal: do any of TTIP’s provisions for trade liberalisation pose a threat to social institutions in Portugal?

A.S.: No, quite the contrary. In diplomacy, we distinguish between offensive or positive interests and defensive points. Offensive interests are areas where we anticipate benefits, and defensive points are points of negotiation in which we have to protect national interests. In the TTIP, we have many more positive interests than negative points so we are very much in favour of speeding up and concluding negotiations.

It might not be possible to conclude negotiations during the Obama administration, but we support the efforts of the European commission to accelerate the negotiations so that the partnership can be implemented by the end of this decade.

In policy terms, Portugal is very much in favour of the liberalisation of trade and investment. This is a very important point. We are an open economy, for instance, in 2015 exports constituted more than 40% of Portuguese GDP. We are in favour of liberalisation in economic exchange, be that in trade or investment terms, because we want to reinforce the weight of the export sector in the Portuguese economy, we want to promote Portuguese investment abroad, and we want to attract direct foreign investment in Portugal.

We have a very important national interest in the TTIP, because some of our most important export sectors are subject to the highest trade tariff taxes still imposed by the US. In regards to trying to lower commercial tariffs we are very much in favour of the TTIP. We have two impact studies that show that the TTIP would represent one billion [Euros’ or Dollars’?] worth of positive benefits to the Portuguese economy annually.

PRISMA GROUP: Portugal’s trade balance has greatly improved and I read that there is something like 22,000 Portuguese companies currently exporting goods…

A.S.: That is for goods only. If you count services as well, there are more than 40,000 Portuguese companies exporting.

PRISMA GROUP: Yes. So, aside from engaging in diplomatic negotiations such as TTIP, what is your government doing to build on the competitiveness of Portuguese exports? And what should the role of German FDI be in bolstering the Portuguese export sector?

A.S.: These are very important questions. Answering the first one, the most important driver of Portuguese competitiveness is fiscal consolidation. We have to exit the Excessive Debt Procedure (the EDP) because we are still in what is known as the corrective arm of the stability pact. In 2015 we shall have a deficit of 3% and our goal for the 2016 deficit is 2.6% of GDP, in order to exit the EDP. We are reducing public debt and, most importantly, we are reducing structural imbalances. For instance, if you don’t take into account the interest rates that Portugal pays we had a positive balance of 0.6% in 2015, and we are anticipating a 1.4% positive balance in 2016. In current terms our budget is positively balanced, the problem is that we still pay 4% of GDP in interest rates because of our debt.

So, first of all we have to conclude the fiscal consolidation. And second, we have to complete some reforms in the product market. Our youngest and most qualified entrepreneurs are still coming up against important barriers to accessing the market. We have a very important programme to improve standards for startups and strengthen the links between universities and industry. We also have to continue the fight against bureaucracy: we had a modernisation programme in public administration in the former socialist government called Simplex, and we are re-establishing this, making things simpler for entrepreneurs and employers. We also have to manage some on-going reforms, in areas such as the labour market. The most important reforms are done, they were a key aspect of the adjustment programme, and we are now implementing them. In terms of our labour market our standard is now very close to the current standard in Europe.

Finally, we have to place an emphasis on competitiveness, and base it on technological and qualification standards. We have a structural problem in Portugal caused by the stock of human capital, but we have been addressing it over the last decade. Unfortunately, one of the main characteristics of the Portuguese dictatorship was disinvestment in schools, and as a result of this when we compare the stock of human capital in Portugal with OECD standards we are in a lower position.

PRISMA GROUP:…Exacerbated by people leaving the country during the financial crisis?

A.S.: Yes. But when we compare flows – not stocks but flows – we come closer to OECD standards. For instance, one third of young people are in higher education and this is the common OECD standard. As you see we have a very ambitious programme: fiscal consolidation, reforms in the goods market, monitoring reforms in the labour market, and innovation programmes.

PRISMA GROUP: We’ll talk about the German trade contribution to goods and services in a moment, but on the fiscal consolidation side Commerzbank recently came out with a report suggesting Portugal wouldn’t achieve its debt consolidation targets – what would be your message to German investors whose confidence in Portugal might be shaken?

A.S.: My message would be very simple. I do understand the concerns of investors, who like to see their money in a prospective situation; I understand this but we must talk in facts and not in perceptions, images, or especially rumours. The facts are these: in 2015, we achieved the main goal of reducing the public deficit to below 3%. We had to resolve one of our private banks, at a cost of 1.2% of GDP, but this was a one-off measure. If we leave aside the one-off measures to see the structural consolidation in 2015, we were already below 3% of the deficit.

We will achieve 2.6% of deficit in GDP terms in 2016. We have already initiated the ascent of the curve of public debt that is raised with the adjustment programme, and in 2015 the debt was already falling. The reduction will accelerate further in 2016 and the following years.

We are not taking any policy measures that would represent a threat to fiscal consolidation. We are not raising salaries for civil servants: these wages have been frozen for five or six years; we are only ending the cuts we had to make in pensions, and in the salaries and the wages of our civil servants. We are not taking any kind of measures that could put fiscal consolidation in danger.

Portugal has a problem that is not yet resolved, and this is a problem that we share with the whole Eurozone: namely the issue of bank supervision and banking sector instability. The results of the adjustment programme were not very positive, to say the least, in regards to this main pillar of banking stability and supervision. We had to resolve the third most important private bank in Portugal in 2014 at a cost of 2.5% of our GDP, then last December we had to resolve the eighth largest private bank in Portugal at a cost of 1.2% of GDP. But from this year we in the Eurozone are committed to a resolution that saves taxpayers money, so we are much more protected than we were before. But as you know the Bank Union is not yet completed in the European Union: we have a single mechanism of resolution, we have a single mechanism of supervision, but we do not yet have the mechanism of insurance, the Single Deposit Insurance Scheme. We are discussing that in the framework of the EU.

So, I don’t want to ignore our problems: first of all we have a very high public debt – our public debt costs something like 4% of GDP annually in interest – and we also have a problem with the stability of our financial system. But the fiscal consolidation in the public administration parameter is quite stable.

PRISMA GROUP: Germany is already the largest investor in Portugal’s industrial sector, and the second largest trading partner after Spain. Figures aside, can you characterise the value of German investment in Portugal?

A.S.: In terms of investment Germany is very important for us, because German investment in Portugal represents the paradigm of good practice. For instance, if you visit the Volkswagen factory in Palmela it represents all that we want to implement as a new paradigm in Portugal in industrial relations, in technological incorporation, and in regards to the Portuguese advantage of the qualification and productivity of our workforce.

Bosch is just completing several new investment agreements in Portugal, and at least one of them is in partnership with one of the most technologically-prestigious Portuguese universities. This is the future. German investment in Portugal is oriented towards the future of a European economy whose competitive advantages regarding Asia are the right ones: technology, qualification, social sustainability and so on.

Portugal is no longer an economy of low wages and low environmental standards. We are a European open economy that is trying to step up in the value chain, and even our traditional sectors such as shoe-making and textiles are following this impetus. For instance, in our shoe-making industry we are now in the same segment as the Italians. Bilateral trade and investment relations with Germany are strategically placed for this ambition, because German investment is traditionally among the most future-oriented. We learn a lot from Germany.

If you’ll allow me I have one thing to sell: tourism. We have exceptional natural resources and are undergoing a very important modernisation of the Portuguese tourist sector. Our trade balance since 2013 has been positive, but in goods we still import more than we export. But this still-negative aspect is more than compensated for by the service sector, and half the value in this sector is generated by tourism. Tourism is the single most important export activity in Portugal. This is not a fashion, which comes and goes, but a pillar of the Portuguese economy. The modernisation of the tourist sector in Portugal is impressive because it is young people who are managing and investing in all the areas of our culture: in hotels but also hostels, in urban rehabilitation and so on. You can leave your hotel at midnight and walk in the centre of Lisbon with total safety. Tourism is very important and Germans are a very important contingent of tourists in Portugal.