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Portugalís Austerity Malaise

Interviewee: Manuel Pinho, Visiting Professor, School of International and Public Affairs, Columbia University
Interviewer: Christopher Alessi, Online Editor/Writer, CFR
April 26, 2013

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Earlier this month, Portugal's constitutional court struck down a number of spending cuts targeting civil servants that were put forward in Prime Minister Pedro Passos Coelho's 2013 budget. The ill-fated austerity measures represented around Ä1.4 billion of a Ä5 billion package of spending cuts and tax increases required by the country's EU-IMF bailout agreement. Indeed, Portugal may be forced to alter its fiscal adjustment program amid growing political resistance to austerity. A stimulus plan announced in recent days may signal Lisbon's pivot to more pro-growth measures. Manuel Pinho, Portugal's former minister of economy and professor at Columbia University, says the results of Portugal's financial assistance program speak for themselves. "Employees and civil servants are bearing most of the cost of adjustment," he says. "Europe has approved a policy of punishment and liquidation of the so-called bad-behavior countries, and the results are recession and unemployment. It's very difficult to adjust the budget deficit and to adjust the public debt under these circumstances."

Demonstrators march in Lisbon against government austerity policies. The banner reads: "Change policy and government." (Photo: Jose Manuel Ribeiro/Reuters)

What is the current political and economic situation in Portugal?

In April 2011, there was a panic. Portugal was forced to ask for financial support from the EU, the European Commission, the European Central Bank, and the IMF [following the collapse of the Socialist government and its failure to implement austerity measures to tackle its budget deficit]. Then there were elections, and a coalition of right-wing parties stepped in [in June 2011]. The current government got it wrong in several aspects and deserves the blame. First, it announced its intent to go beyond the targets of the troika, as if the recessionary policy was not enough. Second, fiscal policy is highly imbalanced given that taxes rose abruptly while no major structural expenditure reducing policies have been adopted. Third, the government has attached no importance to the economy. And fourth, the government cut dialogue with the opposition.

The constitutional court ruled [in April 2013] that some of the [austerity] measures are targeting specific groups and did not respect the principle of equal treatment. So now what the government has to do is replace these measures with others that respect the principle of equal treatment.

What's at stake for Portugal?

Given the recession, it is very difficult to adjust the budget account to reduce public debt. This is well understood in the United States, but it's not well understood in Europe.

The country is already damaged economically. The results of Portugal's financial assistance program speak for themselves: GDP declined by 3 percent in 2012 and will fall by at least 2 percent in 2013; the rate of unemployment rose to 18 percent (the unemployment rate among the young is around 40 percent); public debt continues to increase; and the government has been unable to meet the budget targets. Employees and civil servants are bearing most of the cost of adjustment.

Given the recession, it is very difficult to adjust the budget account to reduce public debt. This is well understood in the United States, but it's not well understood in Europe. It is very clear that more recession will not lead Portugal anywhere.

What's the role of the larger eurozone?

It turns out that the financial assistance program of the troika is not delivering results: public debt continues to increase. So the country can continue its effort, but I think that Europe's policy should make a U-turn.

It turns out that the financial assistance program of the troika is not delivering results: public debt continues to increase. So the country can continue its effort, but I think that Europe's policy should make a U-turn.

Europe has approved a policy of punishment and liquidation of the so-called bad-behavior countries, and the results are recession and unemployment. It's very difficult to adjust the budget deficit and to adjust the public debt under these circumstances.

Germany and the ECB have been changing gradually. They have allowed some flexibility in the budget targets, and the ECB is gradually seen as a lender of last resort. However, Germany and the ECB are always behind the curve.

What are the implications, if any, for the U.S. and global economies?

I do not see a large knock-on effect. At the same time, I don't see a sustained solution for the problem of the eurozone. You can have a monetary union in Europe with rich countries and poor countries, but you need the appropriate institutions—you need fiscal integration on the one hand and you need a central bank that can be a lender of last resort. And Europe needs to adopt countercyclical measures. When there's a recession, you should increase spending, and Europe is doing the opposite. So I'm not surprised at all that the United States has economic growth and unemployment is on the decline while Europe is in recession and unemployment is increasing.

What are alternative policy responses?

The Portuguese government must do its best to negotiate with the troika measures that do not aggravate recession, because otherwise there will be no solution. But the problems of Portugal have no solution if there is no solution to the problems of Europe.

Regarding rules and institutions, the eurozone has three major problems: First, it is a monetary union without fiscal union, as in the United States. In the United States, the federal budget is very large compared to state budgets; in the eurozone it is the opposite. Second, the ECB is not seen as the lender of last resort, as the [Federal Reserve] is in the United States. Third, the rules of the eurozone only impose targets on public debt, not in private debt. The problems of Spain, Ireland, and to some extent Portugal stem from excessive borrowing by the private sector.

Regarding economic policy, the behavior of Europe is in sharp contrast with the Obama administration, which has allowed the budget deficit to increase and public debt to rise because it is convinced that economic problems cannot be overcome without economic growth.

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