Prime Minister Lucas Papademos has returned to Greece after holding talks in Brussels, Luxembourg and Frankfurt with European Union officials aimed at securing further emergency loans. It remains unclear whether he has done enough — or indeed if he can do enough on his own — to secure further funding.
There have been no such problems for Greece’s debt-plagued bailout brother Portugal, which on November 16 was told it would be receiving its third installment of a 78-billion-euro emergency loan package. While Greece is hanging on for the 8 billion euros it needs by mid-December to prevent bankruptcy, Portugal has already received exactly the same amount.
In a tale of two peripheral eurozone countries struggling against the odds to overcome crises that are much bigger than just the sum of their parts, the similarities between Greece and Portugal do not end at the size of their loan tranches.
Membership of the eurozone has not worked out as planned for either, not necessarily because their public finances were not up to it when they joined but because their economies, their political systems and possibly their people were not ready.
Like the drachma, the escudo appears to have been overvalued against the euro. This led to a loss of competitiveness that neither country was able to make up for through structural reforms, such as introducing greater efficiency into the public sector, or through advances in innovation and production.
Like Greece, it appears Portugal became stuck in an economic rut that suited some of its political and business class but which left the economy lagging dangerously. “Portugal entered the euro with an overappreciated exchange rate,” Jose Reis, an economics professor at the University of Coimbra, told Kathimerini English Edition. “The competitiveness of the Portuguese economy became very weak. The capacity to import became higher but the capacity to export became lower. Internally, this system also favored the financial sector and the economic groups mostly concentrated in so-called nontradable sectors. The state has been caught up in strong private interests for a long time.”
Portugal called on its eurozone partners and the International Monetary Fund for assistance when it was locked out of international markets. In return for the assistance, the Portuguese government has embarked on an austerity program designed to reduce the public deficit from 9.8 percent of gross domestic product in 2010 to 4.5 percent next year.
However, as a result of the drama in Greece and changes of government in Italy and Spain, Portugal’s problems have drifted out of Europe’s immediate field of vision over the last few weeks. This has perhaps denied us an opportunity to ponder the potential flaws in the way that the eurozone, the IMF and governments themselves are tackling the crisis.
Some within the eurozone believe Portugal is on the road to recovery. Last month, German Chancellor Angela Merkel’s spokesman Steffen Seibert said the center-right coalition government that took over in June — after the bailout was agreed — is making good progress. “The German government sees with great respect how Portugal and the Portuguese people have embarked on a very difficult path to reform and to change the structure of their economy,” he said. “Portugal is on the right path, in our view.”
Encouraging words indeed, but one of the things the crisis has taught us is that statements of confidence by European officials can be undermined by events very quickly. Greece was once on exactly the same “right path” as Portugal. “We have made it perfectly clear that we consider the steps being taken by Greece as being courageous and that our assumption was that they would convince the markets that Greece was on the right path,” ECB Governing Council member Yves Mersch said in March 2010.
At that point, Greece had adopted just a fraction of the austerity it has since pursued. Now, it finds itself way off the right path and wandering through a no-man’s land of deep recession. Many Portuguese fear they will soon end up in similar trouble.
Portugal reverted to much stricter austerity measures soon after signing its bailout agreement. The coalition government’s 2012 budget includes cutting the number of public servants, reducing their wages, hiking energy taxes, slashing spending on education, healthcare and social security, and raising VAT on some products to 23 percent.
Last month the Portuguese government announced the latest measures to raise an extra 2 billion euros, or 1.5 percent of the country’s GDP. They were announced almost at the same time as Greece imposed an emergency property tax to make up for the 2-billion-euro shortfall in the budget. In another eerie similarity, Lisbon sought the added revenue because fewer public sector jobs had been cut than expected — just as in Greece — and because the island of Madeira had failed to report the full scale of its debt. Greece almost missed out on receiving its fifth loan tranche earlier this year because two Athens municipalities had hidden their debt.
This week, the Portuguese government forecast that the country’s economy would contract by 1.6 percent this year and 3 percent next. It’s not as severe as the Greek recession but still means that Portugal, which has experienced negative growth since the last quarter of 2010, is expected to go through more than two years of recession. It will be the Iberian nation’s worst recession since 1974. Unemployment stands at 12.4 percent — some 6 percent below the Greek jobless rate but still the highest it has been in Portugal since the 1980s.
Professor Reis believes the austerity program is the wrong formula. “It will kill any chance of economic recovery,” he said. “With negative growth, unemployment and a large part of the population without positive expectations, it is not possible to solve the problems or to pay the debt. We need a longer perspective and not these short-term measures. With a longer perspective, we could combine the level of productive investment necessary to avoid dangerous unemployment rates, the level of credit to promote production and exports, and the level of social policies to avoid a social crisis.
“It is because austerity is not a solution that I feel there are some parallels between the situations in Greece and Portugal,” added the economist.
Despite the Portuguese being less inclined than the Greeks to protest against unpopular measures, Lisbon has seen increased activity on the streets over the past few months. Portuguese workers are due to hold a general strike on Thursday to express their opposition to pay cuts and sackings. The protests seem to undermine the argument that the adjustment program is working in Portugal because there is broader consensus.
As in Greece, the Portuguese government, which is a narrow coalition, is finding that when the measures begin to bite, those affected start to react. “There is not a genuine political consensus on the measures taken in this context of crisis,” said Reis. “We are set to see moments of strong conflict and a general rejection of the policies of austerity. Even entrepreneurs and private enterprise associations are increasingly critical.”
One of the reasons people question these shock tactics is that they see their country’s debt growing and its economy shrinking — it appears a never-ending downward spiral. But some EU leaders and officials insist the austerity programs can work. Their position seems undermined by the fact that even the IMF is now questioning whether drastic fiscal adjustments actually work.
A recent study called “Chipping Away at Public Debt,” conducted by a research team led by Paolo Mauro, chief of the IMF’s Fiscal Operations Division, found that over the period analyzed, EU governments announced 66 austerity programs and pledged cuts of 1.7 percent of GDP on average but delivered only slightly over half of this. The study suggests that in most cases when targets have been missed, it has been down to the poor state of the economy. “The most important determinant whether fiscal adjustments succeed is economic growth,” it says. “When growth falls short of expectations, weakening revenues are frequently a source of deviations of fiscal outcomes from targets.”
Another IMF research team produced a paper titled “Expansionary Austerity: New International Evidence,” whose key finding — that “the existing empirical evidence for expansionary austerity is seriously flawed” — also appears to support those questioning the current method for tackling the crisis. Apart from suggesting that a good economic climate is needed to help countries undergo fiscal adjustment, the study suggests that broad political consensus is not a prerequisite. “Even politically weak governments can undertake adjustment if they succeed in shaping public opinion through reasoned arguments.”
However, reasoned arguments have been lacking from the debate about how to tackle the debt crisis. On the issue of privatization, for instance, much has been made of the fact that Greece has progressed too slowly with its privatization program. While the lack of activity has been a further sign of political reluctance and administrative incompetence, these failures have overshadowed an important economic argument. A desperate country selling in a depressed market is going to have trouble collecting adequate revenues. There is also evidence that suggests an extensive sale of state assets might bring some short-term respite but not long-term relief. The Portuguese know this better than most as they conducted a major privatization program a few years ago.
Greece’s five-year target of raising more than 20 percent of GDP through sell-offs is higher than the 15.7 percent collected by Portugal between 1996 and 2000, the biggest ever intake by a developed country, according to IMF figures. Despite this, the Iberian country now has to sell more state assets. “Privatization is an ideological agenda more than an economic agenda,” said Reis. “It is clear that state assets will not be sold at a price that may be considered good. It is wrong to sell public assets when the economy has stagnated and the state is not in a favorable situation. The impact of privatizations on public accounts will not be significant. But the impact on economic relations, on deregulation and on the well-being of the population will be strong.”
There is clearly much for Greece to learn from Portugal and vice versa. There is also plenty of cause for people in both countries, along with those in other parts of the eurozone, to question the way EU technocrats and their own leaders are tackling the economic crisis.
Mirroring the debate taking place in Greece at the moment, Reis says that all options — including leaving the euro — have to be considered, although he recognizes that a return to the escudo would be accompanied by a “deep political and social crisis.” But for the Portuguese economist there is no doubt about the best way to avoid a dead end.
“The best solution is, of course, a European solution based on cohesion, mutual financial responses, the reformulation of the Stability and Growth Pact and of the role of ECB, and a new process of economic and social integration, instead of the asymmetric relations that we know now.”
Greeks and Portuguese will be among those watching most closely as the European Commission presents its ideas on eurobonds and the debate about whether the ECB should be a lender of last resort heats up. They are, after all, in the front line, feeling the full force of the impact of any decisions taken and there are ample indications that the decisions taken so far have not always been in their best interests.