In the short term, the only workable alternative to a bailout (or full-fledged liquidity crisis) would be to enact immediate widespread cuts in public sector pay as well as in government transfers and subsidies. These cuts would have to be accompanied by a freeze on spending on public projects and by a credible commitment to privatise (or in some cases liquidate) state owned enterprises, particularly – but not only – in the transport, financial and media sectors.
This seems an extremely unlikely scenario given the ongoing political campaign leading up to the election and the growing levels of social unrest and strikes. Adding to the political and economic uncertainty is the fact that while the opposition centre-right is ahead in the polls, the current margin far from assures that a stable governing majority will result from the June 5th election. To further complicate matters, the two far-left parties (the Communist Party and the Left Block) continue to poll between 15% and 20%.
In the medium and long term, solving Portugal’s grave economic problems will require the consistent implementation of a wider range of pro-growth structural reforms that are able to address the structural causes of the crisis (I discuss these in a forthcoming article in Economic Affairs: ‘The Portuguese Malaise’). But even assuming that a stable centre-right government emerges from the upcoming election, it is by no means certain that an agenda of structural market-oriented reform will be pursued given that statist ideas continue to enjoy significant support across Portuguese society.