-Analysis-

LISBON — What a successful gamble for Lisbon: The European Commission is about to ratify the proposal to end Portugal's excessive deficit procedure. The country will be joining the club of virtuous economies , against experts' forecasts. The recovery is a remarkable achievement considering Portugal hit a virtual rock bottom in 2011. On the brink of bankruptcy, the country had to ask for financial assistance to the tune of 78 trillion euros from Brussels and the IMF and had been forced to take strict austerity measures.

By 2016, Portugal successfully delivered its deficit below the 3% of GDP required under European rules. It performed even better than promised, bringing it all the way down to 2% of the GDP, well below the 2.5% initially demanded by the Stability and Growth Pact.

Surprise! The left-wing coalition that took the helm promising to "turn the page on austerity" is now performing better than Spain (4.5% of deficit in 2016) or France (3.4%). Mindful to stay on course, the Portuguese government's goal is to keep reducing the deficit by half a percentage point until it reaches a balanced budget in 2020. Those who, just last year, were predicting an imminent second assistance program are now eating their words.

Now's the time to do away with the theory that Europe is doomed to a future of austerity

Without any fuss or confrontation with Brussels, but rather by tenaciously defending budgets that were considered fanciful, Lisbon is proving that its way was the right way for putting the country back on track. "Now's the time to do away with the theory that Europe is doomed to a future of nothing but austerity," says Portugal's finance minister, Mario Centeno, positive that his country has opened up a new path in dealing with a financial crisis. "Our model is a recipe that can be exported to the rest of the continent," he says.

It is an undeniable victory for the socialist prime minister, Antonio Costa, who came to power in November 2015 as the country looked like it was about to sink into a long winter. Even his predecessor, the conservative Pedro Passos Coelho, admits his rival is succeeding.

So what is Lisbon's recipe? It can be summed up in one sentence: Release the pressure on households to encourage them to start spending again.

A photo taken in the streets of Lisbon – Photo: Wendelin Jacober via. Flickr

In the beginning it appeared that Antonio Costa's minority government, which relies on the support of an eclectic mix of far-left parties, would be short-lived, stuck between commitments to austerity made by his predecessor in Brussels and the demands of his allies in parliament. But he was able to avoid the stumbling blocks, on one hand making social policy pledges, with the elimination of surcharges on income tax, raising minimum wages and pensions and a gradual return of the 35-hour week for civil servants, and on the other hand making drastic cuts in public investments, down 30%, and raising corporate taxes and several other indirect taxes (on housing, fuel, sodas, etc.)

The Portuguese have started consuming again

In his own smiling and accommodating way, Antonio Costa the tightrope walker is banking on a financial rectitude that will not wear down middle class morale. And the middle class is starting to be optimistic again after feeling crushed by the weight of austerity politics. Growth has just reached a 10-year high at 2.8% for the first quarter of 2017, and unemployment is below 10%. "The government was able to improve the country's macroeconomic situation while going back on several measures imposed by the troika the European Commission, European Central Bank, and International Monetary Fund. I'm the first to be surprised," admits Luis Coelho, professor of finance at the University of Algarve. "The result is convincing. The Portuguese have started consuming again, investing and launching new projects, which boosts activity and significantly brings unemployment down, especially given that the country has been enjoying a new tourism boom."

But Coelho points to a few noteworthy clouds on the horizon, namely one of the highest public debts in the Eurozone after Greece and Italy (130.4% of the GDP) and a still unstable financial sector. Recently, the government had to bail out the public bank Caixa Geral de Depositos to the tune of 3.9 billion euros (about $4.4 billion).

"The money-saving measures were taken without structural reforms," says João Luis César das Neves, professor at the Catholic University of Lisbon. "The government managed to carry out a sort of socially acceptable austerity policy... so far. But the perils remain, as far as both finance and the economy are concerned," he says, expressing concern about Portugal's difficulty to finance itself and about its dependence on ECB policies.

He is not certain there is a Portuguese magic recipe. "We are continuing to endure austerity policies, but under a different form." By sparing some politically influential social categories, such as civil servants and pensioners, the government has bought itself some social peace. Which have not yet been resolved. " And he warns that "things could soon get more complicated."

"But," he adds, "we said the same thing last year."