Dr Richard Wellings writes for PublicServiceEurope

It now seems almost certain that Greece will be subject to some kind of second bailout. Attention may then turn to Portugal and Ireland, the other countries being supported by the European Union and the International Monetary Fund. Both still face enormous difficulties, but their circumstances are very different.

The main problem Portugal faces is long-term economic stagnation. Growth averaged less than 1 per cent in the last decade. Vast EU subsidies have done little to stimulate business activity. Instead, they enriched special interests with close links to the political elite and enabled the government to ramp up welfare spending, which reached a massive 22.5 per cent of GDP in 2007.

Membership of the eurozone exacerbated the problem. Spending could carry on rising without the checks and balances that markets would have imposed in the absence of an implicit EU guarantee of government debt. At the same time, ill-fitting monetary policies created inflation that made Portuguese businesses uncompetitive. Enterprises were also burdened with expensive new regulations, both from the European Commission and domestic policymakers.

Like Greece – and also Spain – Portugal will have to undergo a very severe adjustment to regain its international competitiveness. But such necessary rebalancing will be hampered by these high levels of regulation. In particular, labour market controls make it more difficult to reduce wages, and instead mass unemployment may result.

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