The Portuguese Government is convinced that the ongoing austerity measures and economic restructuring will enable the country to return to the credit market in 2013, but recent projections refute this assertion. Foreign politicians and economists predict that Portugal, like Greece, will exit the Eurozone. What do the Portuguese think about this?
According to Ernst & Young, if the interest rate on ten-year government bonds is not reduced to at least 8 percent (now 13.7 percent) in 18 months, Portugal will not be able to convince banks to continue lending to its economy. The experts from Ernst & Young believe that such reduction is unlikely because they see a slow progress in the consolidation of public finances and weak improvements in the competitiveness. The findings of the consulting firm are confirmed by the Bank of Portugal that on March 29 published its forecast of the economic development for 2012 – 2013.
Forecast suggests that domestic demand in 2012 will fall by 7.3 percent and private investment will decline by 12 percent. In terms of the repayment of external debt, the Bank of Portugal is also highly skeptical. The EU demands the reduction of debt in the amount equivalent to four and six percent of GDP. The Portuguese were able to secure only 2.4 percent through austerity measures, but many Portuguese experts and politicians believe that it is not possible to continue to tighten their belts.
The strike that gathered 300,000 people on March 23 in Lisbon showed that the country is on the verge of social explosion. The policy of austerity has led to the sharp decrease of incomes accompanied by growth in unemployment. The gap between the rich and the poor is increasing. According to the Organization for Economic Cooperation and Development (OECD), the gap at the end of last year reached a 30 year high. The richest 20 percent have an income of up to six times higher than the poorest 20 percent.
Payment of debt to increase revenue from the government is also impossible. The forecast of the Bank of Portugal is extremely joyless and suggests a decline in GDP in 2012 by 3.2 percent, and a slight increase by 0.3 percent in 2013.
From this it follows that the Portuguese by the middle of next year, under the most favorable prognosis (unless there is a default in Greece) will almost certainly require further financial assistance of the European Union and the International Monetary Fund, which experts estimate at 100 billion euros. This is after the payments on the old debt of 10 billion euros. Not being able to devalue the Euro, Portugal will have to choose: either to take the new assistance, or leave the Eurozone.
The American economist and Nobel laureate Paul Krugman who recently visited the country, in an interview with Público said that it was clear that the accession to the Eurozone was a mistake for Greece and Portugal. “Without the Euro there would have been fewer cars on the streets, but more working people. If nothing else works, then the exit from the Eurozone is the only feasible option,” said Krugman. If in a year the economic growth is lower than planned and deficit increases, and the EU asks for further strengthening of the austerity measures, Portugal has to say “no”.
Former Greek Prime Minister George Papandreou, who no longer has to pretend, said that Portugal, like Greece, is facing the only choice – the exit from the Eurozone. He believes that “peripheral” EU countries fell victim to speculative attacks of the global financial system and will not regain the image of stable emerging economies any time soon.
Thus, foreign politicians and economists predict that Portugal, like Greece, will exit the Eurozone. What do the Portuguese think? An Economist Joao Pereira Amaral advised the current Prime Minister Pedro Coelho to immediately apply for assistance from the European Union, “so that Portugal could get out of the Eurozone as soon as possible, unless it is compelled to do so with severe consequences for the national economy. Unfortunately, our elite are always late with decision making. ”
However, this economist opposed the entry into the Eurozone from the very beginning. Those who drew the country into the zone are silent. Those who, for the sake of political expediency, inflated the value of the assets of the country and succumbed to the sweet voice of the Germans and French prefer not to speak. They were lured by the promises that their business was tourism, and the strong Eurozone countries would deal with the industry. They were told that since there was a common market, the income for good wages and pension will be shared with them. When, after accession of Eastern European countries with cheap labor to the EU, investors began transferring production from Portugal’s there, and the country was left with no industry.
In addition, the crisis of 2008 coincided with the parliamentary elections, and the Socialists government covered up the real situation with the debt, until they were forced to ignominiously resign in April of last year. However, the government of Social Democrats that replaced it also did not support the idea of leaving the Eurozone, as it feared the image of “the outcast undermining European stability.” In addition, it is clear that in terms of the new currency the country’s foreign debt will increase significantly, therefore, the expert believes that they must ask the special support of the ECB to maintain the exchange rate of the newly created currency.
Coelho publicly stated that “those who spent unnecessarily and lived on unearned money should tighten their belts and not because of fear of punishment, but because without this there would be no conditions for growth.” According to Coelho, belt tightening means a reduction of the budget spending to 2.4 percent of GDP (1.6 per cent in 2012 and 0.8 percent in 2013), which means freezing of pensions, cuts in social benefits and allowances, assistance to autonomies, operating expenses of state-owned companies, capital expenditures, as well as increased rates of VAT, personal income tax and profit tax.
Historically, Portugal has never been a Mediterranean country, and never looked at the east, but always at the west, at the ocean and had a powerful bloc partners represented by Portuguese-speaking countries that include Brazil and strengthening Angola. It is to Africa that Portugal could greatly increase the export of footwear and textiles, however, so far its only export is the unemployed.
Consolidation with the countries of the Commonwealth of Portugal may be prevented because of the false pride over the dealings with the former colonies. The Finance Minister Vitor Gaspar recently made a trip to Washington, not Brazil. Gaspard was trying to convince the Americans to allocate new loans because “Portugal is implementing measures to reduce the budget deficit, privatization and structural reforms.” However, in practice we see that these measures are ineffective. Reduction of spending without increasing revenues and investments is a dead-end option, and structural changes in the economy will require no less than 10 years. There is nothing to export, and investors are scared of the “junk” rating of the country.
Ernst & Young data suggests that the gap between the prosperous and the poorest economies in the euro area will only get worse. Growth in Spain, Greece, Ireland, Italy and Portugal in the period before 2015 will not exceed 0.5 percent, compared to 9 percent in 12 other Eurozone countries. This determines the inevitable collapse of the Eurozone, unless it devalues the euro, which is unlikely.
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