Ask Portuguese politicians who they are these days and you will get a sharp and predictable reply: "Not Greek!" Ask a Spaniard or an Italian and they'll say they are neither Greek nor Portuguese. A German will say he's a German, a French might answer he's a German too. And a British prime minister may repeat that he's not sure if he's a European. (Well, these days, who is?)
People love short explanations for complex matters. Take Greece: what got Greece into this deadlock? Too much public debt and too many lies is one acceptable answer. Ireland? The banking system is to blame, and the bubble it provided for the real estate market. But Portugal had no major banking problems and, in fact, private debt is higher than public debt. So, how did this small, open economy go into quarantine?
The bottom line is that Portugal pursued an expansionist fiscal policy for an entire decade, supported by abundant cheap credit, which also led to high household and commercial debt. Low savings and high debt, combined with fiscal expansion and low growth, caused two major imbalances: on public accounts and external accounts. For 10 years, no one seemed to care, not only because the money was pouring in all eurozone countries, but also because unemployment was at a low rate. That fooled the Portuguese people: the credit was financing mainly nonproductive sectors, such as real estate and construction, including state-owned companies and PPP projects. When the markets stopped the feeding and started the bleeding, Portugal got stuck. Thus came the EU-IMF-ECB "troika", with a €78bn loan, along with austerity and a plan to change the economy.
Portugal has now weathered seven months of austerity. All kinds of taxes have been raised, tax deductions have been reduced or eliminated, pensioners are losing pensions, social support is diminishing, the public companies are downsizing, and average salaries are being cut. In Portugal, although the yearly wages are lower than the European (and British) average, they are paid in 14 monthly sums (workers receive double salary usually in August and in December). Now public servants have lost two of these 14 payments.
The banking system is rapidly deleveraging, privatisations are moving ahead, structural reforms are being approved, whether in the labour market or in reducing the state intervention in the economy. All of this makes Portugal's situation very different from the one in Greece: the EU teachers' pet to Greece's rebel.
Portugal has a three-step agenda ahead. The first is to absorb the imbalances, which means reducing public spending and extinguishing all external deficit. The second step is to keep rolling over its accumulated debt, something that cannot be reduced overnight. The third step will be to create confidence in Portugal's economic sustainability and ability to pay its debt. Only then will the financial markets open up to Portugal and put debtor/creditor relations back to normal. By 2013? Hopefully, but unlikely.
Portugal has political stability and seems to be enjoying social tolerance: there's protest but no riots, no blockade nor violence, unlike in Greece. Besides, the country is on course to reduce its fiscal deficit to 4.5% this year –latest official reports are positive. Banks are in better shape than the markets feared. So, from a financial point of view, Portugal really is on track.
So what's missing? Yes, you've seen it from the beginning and, actually, you see it almost everywhere in Europe: economic growth is missing. The fundamental problem remains: internal devaluation is needed, but with no economic stimulus (something only the European surplus countries and the ECB can provide), economies such as Portugal's will step on the brakes – and Europe itself may break.
Portugal's economy is shrinking into a -3% to -4% recession this year, and relies on exports to tip those scales. The unemployment rate is up to 13% (with a staggering 35% among young people) and prime minister Pedro Passos Coelho admitted that it will keep rising. If the economy doesn't show vital signs by the end of this year, and should Portugal need more austerity measures, then the social environment may break into intolerance and fiscal goals may slide. Bear in mind that the "troika" is not welcomed by most Portuguese, who are understandably against losing autonomy to non-elected institutions.
The question for Portugal is not if the country's going to need more money from the troika (it probably will, for the initial package came up short), or more time (getting back to the markets in 2013 seems too optimistic and depends a lot on what Europe manages to achieve), or even if there will be need for an haircut (a big taboo). The main question is if all the structural reforms that are dramatically being imposed by the troika, and the European agenda on the sovereign debt crisis, will succeed in putting the economies under austerity back on track.
Creating jobs and promoting growth really is the issue in Europe. Including Britain, where David Cameron recently wrote a letter to the EU asking for a growth agenda. Or maybe this was just Cameron's way of getting back to the "saving the euro" agenda. Agenda? Well, just call it Europe.
[Hoje, no Guardian]
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