The Greek crisis has reached the river Tagus, and Portugal, a country that tends towards melancholy and detachment, now finds itself in the throes of the European maelstrom. Needless to say, Portugal’s economy is not in such dire straits as the Greek isles. Whereas the Greek deficit came to 12.7% in 2009 and its national debt is at 124% of GDP this year, the Portuguese figures aren’t quite as catastrophic: 9.4% for the deficit and 85% for the national debt. But that didn’t keep interest rates on Portuguese 10-year bonds from approaching 6% last week, which makes for the widest spread from returns on German bonds in many years. Besieged by the market, José Sócrates’ Socialist government has presented Brussels with a Stability and Growth Programme aimed at reducing the national debt to 2.8% by 2013.
A tsunami of ready cash
The announcement of austerity measures has triggered transport and postal strikes, but no cataclysms as yet. Despite discontent over the rise in unemployment to upwards of 10.2%, the highest rate in 40 years, public reaction has shown remarkable restraint to date. So what is Portugal’s problem? "Low productivity, which translates into sluggish growth,” answer market analysts and the business community. In point of fact, Portugal’s economic growth has been virtually flat over the past few years and the lowest in the eurozone since the transition to the single currency. “There is a serious domestic demand problem," its economists say. The omnipresent red tape that encumbers the domestic market, and sets the tone for the country in general, has been a drag on innovative momentum, despite the country’s vigorous renewable energy sector. Moreover, Portugal was hard hit by the EU’s eastward enlargement and the emergence of countries like China with an abundance of cheap labour, with which Portuguese exports can’t compete.
"The structural funds allocated by the European Union were used to improve infrastructures, not to shore up industry," add the experts. The sum of those factors has taken a heavy toll. For many years the Portuguese economy ran on its own supply of cheap labour, but in the wake of wage hikes without attendant productivity increases, unit labour costs there shot up much faster than in Germany. And it was in this state of general stagnation that the tsunami of ready cash hit the eurozone, thanks to low interest rates proffered by the European Central Bank.
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Spending its way out of the morass
The upshot? A country whose labour force is losing competitiveness, protected by unbending labour regulations, decided to overextend itself with easy credit. Household debt subsequently increased to 100% of GDP, and that of the country’s business sector to 140%. Adding that to the public debt, Portugal’s aggregate indebtedness exceeds 300% of GDP. With an aggravating factor into the bargain: since that indebtedness was not based on domestic growth, it naturally became foreign debt. And so it was that Portugal came to be imperceptibly and increasingly vulnerable to the international financial markets. How can such an uncompetitive country with such slow growth ever repay so much money? the markets are asking. Experts like Kenneth Rogoff, ex-chief economist at the IMF, are worried about the country’s fragility and its exposure to fallout from the Greek crisis. A hypothetical bailout of Portugal could cost some €70 billion, as against the €110 billion for Greece, according to the latest market estimates.
The government has proposed a stability programme, but one that is chiefly geared toward growth with a view to overcoming the economy's inadequacies. The plan features infrastructure projects such as dams, electric power systems and a high-speed train to Madrid. In other words, the government aims to spend its way out of the morass and pull the country forward into a more modern and more stable economy. The plan would entail the end of many illusions and accepting some harsh realities: hardcore austerity, an end to state interventionism, and boosting both export efforts and domestic saving. So the Portuguese will simply have to grit their teeth and bear another dip in the standard of living. In Lisbon, oddly enough, suchlike prospects do not cause excessive traumatism after a decade of zero growth. In fact, the 2008 financial crisis came at a time of prevailing despondency anyway. "It’s simply more of the same here,” as they say in the Lisbon business district. There are indeed infinite reserves of patience in the land of fado.
How can Portugal be saved?
How can Portugal avoid becoming the next Greece? Lisbon weekly Expresso has asked several international experts for their opinion. Ricardo Reis, from the University of Columbia, New York, recommends the government “controls public spending”. It could also announce “a major deficit reduction plan with specific targets and a schedule to repay debt early”, adds Peter Cohan, a Boston financial consultant. Gary Dymski, however, a crisis expert from the University of California, argues that the Portuguese executive “has to mobilise on three levels: it has to work with other threatened nations to come up with common goals and ideas; it has to work within the Euro framework on behalf of the threatened nations, and it has to mobilise the population to fight for a decent standard of living and the maintenance of a real social safety net.” In a similar vein, David Caploe, from Singapore Economy Watch urges the Portuguese government to “PUBLICALLY (Caploe’s emphasis) request the rating agencies like S & P to make clear and open the criteria they are using to make their ratings - especially when they are compared to other, more advanced countries whose statistical profile is similar to Portugal, but whose rating they have NOT downgraded”.
Chief European economist for Barclays Capital, Julian Callow, recommends that Portugal accelerates the consolidation of public accounts and suggests that a “2 point VAT hike would be a good idea as well as a 3% cut in public sector compensation”. Although Portugal’s situation is different from Greece’s, international investors are sceptical about its ability to pay off public debt with the low national growth forecast for the years to come, the weekly adds. The only thing certain is that Portugal is being pushed into eye of the storm of the European financial crisis and it will not be easy to emerge unscathed.