WSJ — For the past four years, this corner of Europe has been a testing ground for the austerity that creditors prescribe for sick economies across the eurozone. Strong conservative leaders pushed painful measures through pliant parliaments in Portugal and Spain, lifting both out of recession.
But Sunday’s election cost Portugal’s Prime Minister Pedro Passos Coelho his parliamentary majority, leaving him at best with a minority government that will struggle against the leftist opposition to keep an austerity-guided recovery on track.
That doesn’t bode well for Spain’s Prime Minister Mariano Rajoy, who faces his own electorate in 10 weeks.
Spanish officials welcomed Mr. Passos Coelho’s apparent re-election as an endorsement of tough fiscal restraint. “Your government has had to take difficult decisions, but, thanks to those decisions, Portugal is now in condition to create jobs and grow,” Mr. Rajoy said in a congratulatory note Monday.
Mr. Rajoy has reason to worry, however, about the cost of such an achievement.
As in Portugal, austerity fatigue has cut deeply into the governing party’s popular support. Antiausterity parties have flourished in both countries, even as their economies return to growth. Spain’s is expected to expand 3.3% this year, Portugal’s 1.6%., but both remain beset by high unemployment.
Recent polling suggests that Mr. Rajoy’s conservative Popular Party would finish first in the Dec. 20 election but lose its majority in a more-fragmented parliament.
Europe’s deepest recession in decades has remade its political map many times during the past seven years.
Greece has seen several governments fall since it requested an international bailout in 2010. The governing coalition in Ireland, which also imposed belt-tightening measures in return for a bailout, faces a hard re-election fight early next year.
Mr. Passos Coelho would be the first eurozone leader to fully carry out such a program and win a new mandate. President Aníbal Cavaco Silva is expected to ask him soon to form the next government—one that probably will be backed only by his two-party alliance, which won 104 of parliament’s 230 seats.
The leader of the defeated Socialist Party (PS) has already set out “red lines” for government policy that Mr Passos Coelho would have to accept in return for PS support for its programme.
The prime minister said he was prepared to reach a compromise with the PS as a moderate pro-European party that did not share the radical anti-euro sentiments of other leftwing parties in parliament.
He said his government planned to reduce income tax, restore public sector wages to pre-bailout levels and strengthen the welfare state, issues analysts said could form the basis for an understanding with the PS.
However, the prime minister said his government would not relax its goal of bringing the budget deficit below 3 per cent of national output this year, the minimum level required under eurozone rules.
The most urgent priority, he said, was to approve the government budget for 2016.
For decades in Portugal and Spain, government control alternated between moderate conservatives and moderate Socialists, both nominally committed to European Union standards of financial discipline.
Conservatives won the 2011 elections in both countries, ousting Socialist governments that had led both to the brink of bankruptcy, then used their majorities to clamp down on budget deficits.
The rise of the far-left Podemos party in Spain over the past 18 months disrupted the pattern. Podemos, which rejects the EU rules and likens itself to Greece’s ruling Syriza party, has been polling between 10 and 20% of potential voters in Spain.
A similar party in Portugal, the Left Bloc, which branded both major parties as servants of the pro-austerity German finance minister, won 10% of Sunday’s vote, a surprise showing that will make it a major player in parliament.
The Left Bloc drained angry voters away from Socialist candidate Antonio Costa, helping the prime minister outpoll him.
Podemos’s appeal in Spain also helps explain why Mr. Rajoy’s party leads the Socialists by as much as nine percentage points in recent polls.
“The big difficulty for the center-left in Europe is to show that there is an alternative to austerity policies while staying committed to meeting fiscal European rules,” said Antonio Costa Pinto, a University of Lisbon political scientist.
At the same time, the splintering could make governing harder.
Mr. Costa indicated he won´t stand in the way of Mr. Passos Coelho’s re-election, but neither would he allow the passage of austerity bills his party opposes. Those include more public spending cuts, such as putting some schools and more of the country’s pension savings under private management.
Pressure from the Left Bloc “will force the Socialists to harden their stance toward the government, and that does not bode well for political stability,” Antonio Barroso, an analyst at political risk consultancy Teneo Intelligence, said in a research note.
The Portuguese newspaper Publico said the election “left the country at an impasse.”
Political analysts, noting that just one of the five minority governments in Portugal’s 40 years of democracy has ever completed a four-year term, predicted that Mr. Passos Coelho’s would collapse sometime next year, leading to a new election.
“Basically we will be in campaign mode” until then, said Pedro Adão e Silva, a public policy professor at University Institute of Lisbon.
