What will happen after this weekend’s agreement between the Socialists, the Left Bloc and the Communists?

The outcome of the agreement signed is fundamental as much as it is historical: after the horror of austerity, a new page is being turned.

11 November 2015 by Francisco Louça

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Over the weekend, the Socialists and the Communists signed an agreement. Since the Left Bloc and the Socialists had already done likewise, there is, right now, a parliamentary majority to defeat the briefest government in the history of Portuguese democracy, bringing an end to the Passos Coelho and Paulo Portas saga. The outcome is fundamental as much as it is historical: after the horror of austerity, a new page is being turned.

Over the previous weeks, I have been quite critical of the time it took to close a deal and of its lack of audacity, because two separate agreements – even if they are basically the same – and three motions for rejection to take down the government mean a choice was made not to come up with a strong statement. But now that an agreement has been reached and it is public, it’s time to focus on its contents and durability, which I shall discuss from the only point of view that matters (to me): how to answer to the social crises exacerbated by the torment of austerity.

I will start with the agreement’s contents.

The agreements that have now been made public came up with an emergency response embodying emergency measures, but did go the extra mile, inasmuch as some of them could become longstanding alternative answers to austerity if there is a will to do so.

The three conditions mentioned by Catarina in her television debate with Costa were, even before the electoral campaign, the starting point for this weekend’s agreement: the SP must drop the reduction of the Single Social Tax paid by the employers, as well as the Single Social Tax for workers whose pensions have been cut; forget the so-called “conciliatory lay-offs” and unfreeze pensions. Faced with electoral results, which left the right wing with no majority, the SP accepted these conditions. And there were plenty of socialists sighting in relief, for they did not support those three ideas put forward by their own party.

But the agreements that have now been made public go further than that — much further than that, actually. They did come up with an emergency response embodying emergency measures, but did go the extra mile, inasmuch as some of them could become longstanding alternative answers to austerity if there is a will to do so.

The agreements stipulate the end of privatisations — there will be no more privatisations. They also cancel the recent processes of handing the urban public transports of Lisbon and Oporto to private companies. They protect water as an essential public asset.

As for labor incomes, which affects millions of workers, public sector wages will be fully restored (in 2016), while wages in the private sector will benefit (those over 600€ due to a reduction in the surcharge, which will be abolished in 2017; the ones bellow 600€ because of a decrease in social security contributions, with no future impact on pensions nor the sustainability of the social security). Four public holidays will be restored. Bearing in mind that losing them meant workers that to work more hours for the same wages, all workers will be positively affected — all 4,5 million of them.

All pensioners will be better-off (pensions bellow 600€ will be unfrozen and shall see a small recuperation, while those above 600€ will no longer have to pay the IRS surcharge), and that means two million people will be better-off. In contrast, the right wing had vowed to go ahead with a 4000 thousand euros cut in Social Security (1600 millions by freezing pensions, plus 2400 in 600 million a year in benefit cuts, as promised to Brussels). The difference is abyssal.

New fiscal rules will apply: IRS progressivity is restored with more tax brackets; the familiar quotient, beneficial for wealthier families, is replaced by an IRS deduction per child; there is a limit clause for rises in Municipal Property Tax (it cannot exceed 75€ per year) and Corporate Income Tax reductions will come to a halt; the deadline to report company losses will be reduced to five years, instead of the twelve, and new rules will curb fiscal benefits from dividends. Finally, VAT in restaurants will return to 13%.

To fight poverty, the minimum wage will rise to 557€ on January 1st, 2017, and to 600€ by the end of the mandate. Poor families will be entitled to reduced electricity fares. Such measures will benefit one million people.

Measures shall be adopted to make sure false autonomous workers are provided with proper contracts; collective bargaining shall be reinstated; the special mobility regime for public workers, which lead to lay-offs, will be cancelled.

Attachment orders on people’s homes due to public liabilities will no longer be allowed. Mortgage Mortgage A loan made against property collateral. There are two sorts of mortgages:
1) the most common form where the property that the loan is used to purchase is used as the collateral;
2) a broader use of property to guarantee any loan: it is sufficient that the borrower possesses and engages the property as collateral.
debts will from now on be settled whenever there is dation in payment (that is, the bank keeps the house), if there is no alternative in terms of new deadlines and interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
.

The list of measures on health and education includes reducing NHS user charges and a textbook exchange mechanism.

The Socialist Party withdrew its electoral law proposal, which included single member constituencies (the “first to pass the post” system used in the UK).

Finally, a parliamentary cooperation proceedings have been agreed, with multiple meetings between the parties, and including setting up committees on external debt sustainability and the future of social security. These committees shall write trimestral reports.

What is thus achieved is stability in people’s lives, relief for pension holders, wage recovery, jobs protection and more fiscal justice. On the other hand, such an increase on aggregate demand will cause an immediate positive economic reaction.

What is then missing?

The agreements lack structural solutions for investment and on how to manage and improve both external and income accounts. Only debt restructuring will enable it; otherwise, there will be no leeway to resist external pressures and launch employment.

The agreements lack structural solutions for investment and on how to manage and improve both external and income accounts. Only debt restructuring will enable it; otherwise, there will be no leeway to resist external pressures and launch employment. It will take investment and promoting the productive capacity, and the State will have to play a strategic pivotal role in reacting to the protracted recession we have been dealing with.

Besides, we cannot yet foresee what the conditions imposed by Brussels, Berlin or the ECB ECB
European Central Bank
The European Central Bank is a European institution based in Frankfurt, founded in 1998, to which the countries of the Eurozone have transferred their monetary powers. Its official role is to ensure price stability by combating inflation within that Zone. Its three decision-making organs (the Executive Board, the Governing Council and the General Council) are composed of governors of the central banks of the member states and/or recognized specialists. According to its statutes, it is politically ‘independent’ but it is directly influenced by the world of finance.

https://www.ecb.europa.eu/ecb/html/index.en.html
will be, but we know they won’t be favourable. We must keep in mind the statement issued by the European Commission only two days after the elections, which demanded new measures on social security — the subject will remain a matter of dispute. And we must also keep in mind how rating agencies Rating agency
Rating agencies
Rating agencies, or credit-rating agencies, evaluate creditworthiness.  This includes the creditworthiness of corporations, nonprofit organizations and governments, as well as ‘securitized assets’ – which are assets that are bundled together and sold, to investors, as security.  Rating agencies assign a letter grade to each bond, which represents an opinion as to the likelihood that the organization will be able to repay both the principal and interest as they become due.  Ratings are made on a descending scale: AAA is the highest, then AA, A, BBB, BB, B, etc.  A rating of BB or below is considered a ‘junk bond’ because it is likely to default.  Many factors go into the assignment of ratings, including the profitability of the organization and its total indebtedness.  The three largest credit rating agencies are Moody’s, Standard & Poor’s and Fitch Ratings (FT).

Moody’s : https://www.fitchratings.com/
have been threatening the Portuguese Republic. Lastly, the Novo Banco issue [the bank that was created after the bankruptcy of BES and that the government has been trying to sell, unsuccessfully] will blow up before the summer, bringing about wither important losses to the budget balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. , demands for recapitalisation or a new bank resolution process, which must be carried out in accordance with technical demands that protect the public welfare and cut down on external debt.

These are the problems that will be knocking on our doorstep over the next months and years. The new majority is quite aware of it, because there is a safeguard clause guaranteeing that no budgetary unforeseen event or situation will lead to higher taxes on labor or lower wages and pensions. The time has surely come to start devising the answers to such unforeseen events and situations, because they will be here before the new Budget.


Source : Esquerda

Author

Francisco Louça

founder of the portuguese Bloco de Esquerda. Professor of Economics in Lisbon’s Instituto Superior de Economia e Gestão (“Higher Institute of Economics and Management”)


Other articles in English by Francisco Louça (3)

  • What is to be Done with the Banks? Radical Proposals for Radical Changes

    13 April, by Eric Toussaint , Michel Husson , Costas Lapavitsas , Ozlem Onaran , Patrick Saurin , Stathis Kouvelakis , Francisco Louça , Stavros Tombazos , Michael Hudson , Giorgos Galanis , John Weeks , Miguel Urbán Crespo , Pete Green , Gilbert Achar , Alan Freeman , David Harvey , Andy Kilmister , Philippe Marlière , Thomas Marois , Sabri Öncü , Susan Pashkoff , Alfredo Saad Filho , Benjamin Selwyn , Pritam Singh

  • Zoi Konstantopoulou and Francisco Louca

    1 June 2015, by Francisco Louça , Zoe Konstantopoulou

  • What to do about the debt and the euro?

    5 May 2013, by Michel Husson , Ozlem Onaran , Francisco Louça , Nacho Álvarez Peralta , Stavros Tombazos , Bibiana Medialdea , Antonio Sanabria , Jorge Fonseca , Daniel Albarracín , Mariana Mortagua , Giorgos Galanis , Manolo Garí , Teresa Pérez del Río , Lidia Rekagorri Villar

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