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.