The crisis: a view from Portugal
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After years of continuous growth in public spending and public debt, the Portuguese economy finds itself in a bleak situation in the context of the ongoing international crisis. Internal and external imbalances have been steadily accumulating and recent events in Greece have placed increased pressure on the country’s debt. The combination of a stagnant economy with the pressure of large budget and current account deficits leaves little room for optimism. The EU bailout package addresses some of the more immediate liquidity concerns but will prove unsustainable if structural adjustments do not follow.
Portugal’s situation is not as severe as that of Greece – the predicted budget deficit is around 8% – but it does have a number of disturbing similarities, particularly in the lack of competitiveness. The pervading lack of competitiveness is associated with an economy marked by high levels of direct and indirect government intervention and leaves little room for solutions. Several structural factors contributed to make the 2000-2010 period essentially a lost decade for Portugal in terms of economic growth: an extremely rigid labour market, an inefficient and often unreliable justice system, a pervading culture of nepotism and corruption in numerous institutions, and growing government intervention in key economic sectors are among the main factors and all seem unlikely to experience major improvements in the short run.
Apart from the far-left parties (which have an electoral weight of close to 20% and hold radical anti-capitalistic views) there is a large social-democratic consensus in Portuguese society favouring Keynesian views that is shaken only by the prospect of imminent financial collapse. The Keynesian consensus pervades most political, media and academic contexts and leads to a dangerous state of denial and to blaming external agents (greedy faceless speculators, the US, the ECB or even Germany) for the crisis.
In the face of collapse, there seem nevertheless to be some encouraging signs. The opposition parties to the right of the current socialist government have been publicly insisting on the need to suspend major public works projects and cut public spending and it was recently announced that the construction of a major new airport in Lisbon as well as that of third major bridge across the River Tagus would be reconsidered. Amazingly, however, the socialist government has apparently decided to proceed with the construction of a high speed train project linking Lisbon to Madrid.
In the past, the fiscal irresponsibility of Portuguese governments was often resolved via monetary and exchange policy. The euro provided international credibility and lower interest rates but also removed the possibility of devaluing the currency at a national level. In this context, the only sustainable remaining options seem to be an austerity programme involving major cuts in public spending and wages (which might lead, as in Greece, to grave political and social unrest) or leaving the euro.
Either way, there are very difficult times ahead.
6 thoughts on “The crisis: a view from Portugal”
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[…] Arquivado em: Economia,Nanny State Watch,Política,Portugal — Miguel @ 12:36 “The crisis: a view from Portugal” de André Azevedo Alves no IEA blog Apart from the far-left parties (which have an electoral weight […]
Excellent post! Although academics have described the internal adjustment mechanisms within a monetary union, politicians seem not to have understood them, yet. Unfortunately, people in Greece, Portugal or even Spain have to pay for their politicians’ ignorance.
The latest arrangements may provide a breathing space for Greece, Portugal and Spain — but will those countries’ governments make sensible use of it? Will they have the political will and public support to take the necessary steps to repair their public finances?
The United Kingdom’s situation is somewhat different, being outside the eurozone and with longer maturities for its government debt. But the same political doubts apply, exacerbated by the indeterminate result of the recent general election.
As the haggling between the parties continues, it seems clear there is no public appetite in the UK, any more than in Greece, for the spending cuts and tax rises that are necessary.
There are good reasons to be very bearish about the long-term prospects of the PIIGS, with the exception of Ireland. In particular, their demographics (rapidly ageing populations) mean it will be very hard politically to make the necessary cuts. Furthermore, support for economic liberalism is traditionally weak in these countries.
Most major countries have now large amounts of so called sovereign debt due to countries spending more than actually collecting in taxes.Though the PIIGS or Club Med countries have much bigger problems. Mainly a real lack of free markets within their countries,with far too much protectionism from their governments with red tape and bloated over sized public sectors,which makes all services and goods more expensive for their consumers.
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