© Ricardo Cabral
|
Ricardo Cabral
Assistant Professor, Center of Competence for Social Sciences, University of Madeira and Researcher at Centre of Applied Economic Studies of the Atlantic, Portugal
1) Portugal's Economy Minister has stated recently that the population is supporting the government's plan to implement tough reforms and austerity measures, as well as that the country is not going to abandon the Euro. Do you think it is an effective approach to avoid Greece's destiny and violent protests that took place there?
I believe that these measures may not be effective. The Portuguese government, being under the auspices and directions of the EC-ECB-IMF, are currently implementing the exact same measures that the Greek government implemented in Greece, under the diktat of the troika. For example, wage cuts, pension cuts in percentages that are nearly identical to those implemented in Greece, tax increases, bank recapitalization programs, etc.
I would argue, as most observers do, that these policies have not worked in Greece. In fact, they cannot work. However, the troika seems unwilling to admit their policy mistakes in Greece (I should note that the troika has made important amendments to the Greece adjustment programs, namely by lowering interest rates on loans and by defending a substantial debt restructuring. But they have done so without acknowledging responsibilities for unfavourable outcome. There should be consequences of bad decisions. People responsible, who are for those actions, should be replaced).
While the institutions may believe they are promoting the adoption of best practices, they are, in most instances, doing the opposite. The troika mandated policies are setting the Greek real economy back several years if not decades.
In Portugal, there is not a tradition of violent protests. Therefore, I do not expect violent protests to occur. However, the crisis is so profound that people are protesting publicly when, for example, the Prime Minister or the President make public appearances.
2) There are more and more pronounced opinions about the need of a second bail-out for Portugal. Do you think it makes sense?
The amount of the bailout funds was clearly insufficient to begin with. For instance, EU-IMF lending covers just around 28% of the total borrowing requirements of Portugal's central government in 2012 (a significant part of the total amount is short-term borrowing that is rolled over several times during 2012). And that total does not even enter in consideration with the borrowing requirements of the public companies (mainly in the transportation sector).
However, most people in Portugal and elsewhere are not aware that if the EU and the IMF had not helped Portugal in the first place through the bailout, Portugal would presently be in a much better financial situation. The Portuguese government would have achieved a primary budget surplus in 2011. The trade balance deficit would have likely fallen well below 5% of GDP in 2011, in what is likely to be the lowest trade deficit in 25 years, and among the lowest trade deficits in the last 40 years.
Thus, were the Portuguese government to default on its sovereign debt, then the government budget would likely change from high deficits to small surpluses and it is likely that Portugal's external borrowing requirements would fall to close to zero (since the banking system would, following a sovereign default, have to restructure its liabilities). This means that, assuming one could prevent capital flight, the external adjustment that would be required would be minimal.
Following a default, Portugal would likely need any external aid nor would it need to exit the Eurozone since it would already be sufficiently competitive within the euro. Of course, the key player would be ECB. The Eurosystem (ECB and euro area national central banks) would likely become the main owner (if only temporarily) of the Portuguese banking system following the Portuguese government default. Moreover, Portugal would only be able to remain in the euro if the ECB were to accept new post-default debt issued by Portuguese private and public institutions as collateral in its refinancing operations.
So Portugal is really in a situation where our policy makers should reject the EU governing institutions and the IMF aid, while planning for the default and debt restructuring. The EC-ECB-IMF mandated policy measures are destroying the Portuguese real economy, notwithstanding these institutions' good intentions.
3) How in your opinion, should Portugal battle the ongoing economic troubles, including high unemployment?
It should renegotiate the bailout package and suspend the implementation of the most damaging measures of the adjustment program imposed by the EU and IMF.
It should open talks with its creditors and with its EU partners with a view to restructuring its debt as soon as possible. While this may sound counter intuitive, the debt restructuring would result in much faster economic growth.
It should rebalance its taxes in order to improve its external competitiveness. It could do so by lowering certain taxes (e.g., VAT and employers' social security contributions) while increasing others (certain excise taxes and corporate tax rates) and eliminating tax deductions.
It should, as quickly as possible, implement bank resolution laws (a special resolution regime is a procedure for banks in financial distress, which ensures that banks keep functioning while their liabilities are restructured) similar to those of the US or the UK, and use them to recover the banking system. Portuguese banks' balance sheets are very weak, and banks, in a desperate and pointless effort to save themselves, are damaging some of Portugal's most competitive firms and Portugal's domestic economic activity.
To promote job growth today the Portuguese government should implement structural investment programs with long term effects on domestic economic activity and on external competitiveness. There are several areas where the country should and could invest, for example, in railway infrastructure or electricity supply. But there are numerous other measures it could undertake to promote growth.