John O’Donnell and Axel Bugge Sintra, Portugal
Celebrated among Europe’s elite as a model of how to reform an economy after a debt binge, Portugal’s enthusiasm for change has appetite for further belt-tightening.
With Greece’s future in the euro uncertain, after its leftist government all but tore up a reform-for-aid deal, Europe’s policy setters are putting an extra shine on other countries that were bailed out – in part to avoid a spillover.
They have declared Portugal, following on the heels of Ireland, a recovery success story after a debt crisis that started with a financial crash and drove countries from Greece to Ireland to the brink of bankruptcy.
“l compared the case of Portugal to the film Match Point,” Jose Manuel Barroso, the former president of the European Commission, and one-time prime minister of Portugal, said, referring to Woody Allen’s film. “Which side of the tennis court would the ball land on after hitting the net? Ireland or Greece. It was Ireland’s. Recovery is now under way in Portugal.”
European Central Bank President Mario Draghi chimed in last weekend, praising Portugal for grasping the nettle and making difficult changes to the way its economy works.
“A great deal has been achieved and we have praised progress where it has taken place, including here in Portugal,” Draghi told a group of central bankers and academics gathered at an European Central Bank (ECB) event near Lisbon.
Apathy
Yet Draghi’s encouragement was tempered by his broader warning that Europe was letting its guard down on reform, underscoring worries about apathy in a region artificially buoyed by the ECB’s trillion-euro-plus money printing.
Portugal, like Europe, had been ambitious. It made sweeping changes to meet the terms set for emergency loans from the euro zone and International Monetary Fund under its bailout, including reforms to its labour markets and legal system.
It cut civil servants’ wages and pensions and made the biggest tax hikes in generations.
But economists say that drive has waned after the three-year bailout programme ended last year and international inspectors stopped visiting the country to check on its progress.
Attempts to cut state salaries have been partially overturned by the country’s highest court, while a general election due in September or October has also sapped enthusiasm among politicians to pursue further changes.
Talk of failure, however, is, off the agenda. The Portuguese economy started to recover in 2014 after three years of recession, expanding 0.9 percent, and growth is expected to accelerate in 2015 to around 1.5 percent.
Those figures, however, mask deep-seated problems. Almost one in seven Portuguese who could be working are not, the third highest level of unemployment in western Europe.
Charts, which Draghi used in his presentation, hint at the reason for this. One, labelled “untapped potential”, ranks Portugal as last on a list of eight euro zone countries for labour productivity, well behind Spain, Italy and France.
In a ranking of countries by “ease of doing business”, Portugal comes mid-way down the list, behind Ireland. – Reuters