Slow progress to avoid decline

Portugal, along with the other so-called "PIGS" (English acronym for the economic laggards Portugal, Ireland – or Italy –, Greece, Spain), is in a tight spot. But its modest dynamism appears to have shielded it from the worst effects of the economic crisis.

Published on 15 February 2010 at 18:25
In front of the Carmo Church in Porto. Photo: Maremagnum

Last week, while prime minister Jose Socrates was busy trying to convince the markets that Lisbon would cut public spending to bring its runaway deficit back in line with Maastricht parameters within four years, the Portuguese parliament was doubling funding for the country’s autonomous archipelagos: Madeira and the Azores. The expense involved was negligible: €50 million.

But it was a very bad signal to the international financial markets: viz. evidence that the Socialist government, now that it has lost its absolute majority in last September’s elections, is now exposed to sudden attacks orchestrated by the centre-right and extreme left — a mixed-bag opposition, but one that can generally agree on putting their own interests and those of their constituencies before national ones. So it is now clear that Portugal is going to have to pay not only for the structural limitations of an insufficiently competitive economy, but also for certain failings in its political establishment.

The economic cost of poor governance

According to a recent OECD study, Portugal is the European nation that has the least confidence in its own parliament (19%, as opposed to 64% of the Danish at the opposite end of the EU spectrum). Such rampant scepticism seems justified insofar as it roughly corresponds to the ranking the World Bank gave the country for the quality of its governance. The societies that distrust their political establishment the most and feel they are misgoverned tend to be those of southern Europe, including Italy.

The most satisfied societies, on the other hand, are to be found in Scandinavia, where the OECD ratings attest to internal solidarity, trust in public institutions and a sense of belonging. It stands to reason that these virtues confer a very substantial economic advantage: countries that practice those virtues will be more apt at consistently implementing collective rules and regulations, fiscal policies, and measures to fight corruption and profligacy.

On the wrong side of Europe

Less “virtuous” countries, in contrast, pay dearly for their sins – and then some. Indeed, Nordic Europe also proves the most virtuous in terms of the debt/GDP ratio, where Portugal brings up the rear along with Greece, Spain and Ireland – the unfortunate “PIGS”, to use the somewhat racist acronym coined by Anglo-American market analysts. If we leave out Ireland, which has a special crisis profile, and add Italy, which is in better shape but likewise outside the Maastricht parameters, the distressed zone of Europe ends up overlapping with the mistrustful and fragmented zone.

Portugal is on the wrong side of the EU, at the far west of a continent that is shifting its logistics towards eastern and southeastern Europe, where companies find expanding markets, cheap labour and unabashed tax incentives. Like Spain, Portugal has sought to remedy the situation by developing a double vocation: a European one, with the same conviction as the countries which, having emerged from dictatorship, have found in the European Community a secure berth in the democratic system; and an Atlantic one, geared towards its former colonies. Brazil. Angola, where Portuguese investments are now second only to Chinese. And Mozambique. The last two are ideal markets for cheaply-manufactured goods of mediocre quality.

A slow paced economy

The European market, on the other hand, drives Portuguese industry towards technological specialisation, above all in alternative energy, where Portugal has attained a certain proficiency. All this goes to form an economy with dynamic attributes, to be sure, but with a greater measure of inertia; one that is, in short, dignified and composed, like its capital, Lisbon. The advantage of flying low is that when you fall you don’t get hurt as badly. This past decade Portugal’s GDP increased 1.5%, which is less than in the rest of the EU; but now it is declining more slowly than the EU average (-2.6% as against -4%).

When the recession first hit, the government sought to shore up the economy by investing in strategic infrastructure projects, such as the Lisbon-Madrid high-speed railway, to lever the country out of its geographical marginality. But the growth in public spending forced it first to curb spending, then to adopt an “austerity” budget for 2010, which half-won over the international markets. In early February the treasury had to hold off on a bond issue on account of the excessive interest rates charged by the market. A few days later, after the situation had calmed down, demand for the bonds outstripped the supply four times over. But only a rigorous stability plan like the one the European Commission has asked of Lisbon and Athens can keep Portugal safe from incurring other risks. So the unpredictable Portuguese parliament had better approve that plan.

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