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Portugal’s Economy Headed Down a Dead-End Street?

LISBON, Oct 26 2010 (IPS) - “They are a heartache,” admitted Portugal’s Prime Minister José Sócrates about the draconian economic measures his government approved in a bid — with dubious effectiveness — to calm the financial markets and recover lost credibility.

The socialist leader underscored that his country is experiencing “the worst crisis in 80 years,” in explaining the moves to increase taxes and reduce the social safety net, with which he hopes to contain the fiscal deficit at 4.6 percent in 2011.

But many observers doubt that the sacrifices are enough for the European and international financial entities, or the markets.

Finance Minister Fernando Teixeira dos Santos presented a new package of measures on Oct. 16 for 2011 and warned that “the country could lose independence if it is unable to convince the international markets,” which would mean the formal entry of the International Monetary Fund (IMF) onto the scene.

The wave of social unrest taking place in Portugal can be compared to 1983, when the country’s public finances forced an IMF intervention, which in turn resulted in extremely harsh economic measures.

Another parallel is the fact that the two rival labour confederations convened a general strike for Nov. 24 — the first such cooperation in a protest since 1983.

According to assessments from most analysts here, the recommendations that the IMF has already begun issuing — without Portugal having requested assistance — include a “general budget” for next year that is even more restrictive than the government’s, and would particularly affect the most vulnerable segments of the population.

The budget guidelines that the legislative Assembly would have to approve include a tax hike averaging 20 percent — the highest in 27 years.

It also includes a salary reduction for public employees of 3.5 to 10 percent; new cuts in aid to poor families and taxes on retirement pay, among other unprecedented actions aimed at reducing public spending by 15.7 billion dollars and boosting state revenues.

The government is focussing on a quick reduction of the deficit, which surpassed 9.4 percent in 2009, and reached 7.3 percent this year, with the goal of cutting it down to 4.6 percent in 2011, and the hope — unrealistic, say analysts — of shrinking it to three percent in 2012.

Some additional figures explain the financial quagmire in which Portugal now finds itself. Currently, its public debt is 223 billion dollars, about the same as its gross domestic product (GDP) for 2009, which totalled 232.6 billion dollars.

Just to repay that debt, Portugal would need to come up with 39.2 billion dollars in 2011 — equivalent to its annual education budget.

In April, the IMF listed Portugal as the final member of the “club” of 10 highest-risk countries in the world in terms of public debt.

The possibility that the IMF may once again impose its rules is alarming to the political left, from the Marxists (who represent 19 percent of the electorate), to the “leftist wing” of the Socialist Party (PS), to the left’s “historic representatives,” whose main face is former president Mário Soares (1985- 1995).

The budget “that was forced on us by the European Central Bank (ECB) is especially hard for the Portuguese, in particular for those with lower incomes,” Soares told IPS.

When the general budget plan became known “it turned into a time bomb, which will have unforeseeable consequences in the social arena,” he added.

He blamed the situation on “the markets, which are insatiable, resulting from the neoliberal ideology, which transformed the markets so that nobody knows what they are, nor who commands them, and which have been placed at the centre of everything –of societies, of politics, of ethics and of the people themselves.”

“The Portuguese parties and labour unions aware of this situation, whether supporting the government or from the opposition, should join their European counterparts to create a movement of opinion against the ‘economicist’ practices of the ECB and the European Commission,” the executive arm of the European Union, he said.

A vast movement like that is needed, “before the revolts by young people, the unemployed, or simply those who feel the injustice of the restrictions, turn into violent, uncontrollable or desperate actions, as it seems is the case in France,” concluded Soares.

In an interview with TSF-Radio Jornal, Tiago Caiado Guerreiro, one of Portugal’s best-known economists and an expert in fiscal matters, described the tax measures as “brutal increases that have repercussions on goods of primary necessity.”

The average Value Added Tax (VAT) will rise from 21 to 23 percent, but with higher rates in some sectors “that are absolutely immoral, like jumping from six to 23 percent” for some foods, said Guerreiro.

By staking all bets on controlling the deficit, the government’s planned general budget fixes economic growth at just 0.2 percent for 2011, compared to the already limited growth of 1.3 percent this year, and open unemployment at 10.8 percent.

Local analysts believe the Portuguese will suffer more, comparatively, than the Greek or the Irish, with similarly severe crises. That is because the per capita GDP of Ireland is 41,000 dollars, Greece’s is 31,000, while Portugal’s is just 21,700 dollars.

Mario Gómez Olivares, economics professor at the University of Lisbon, told IPS that in light of these data, “I can say that Portugal has the worst social conditions of the three countries for withstanding the storm.”

He based his opinion “on both the distribution of wealth and the blind measures on tax percentages, which dramatically affect the poorest.”

“With the per capita GDP measured in purchasing parity, which is much lower in Portugal, the impact will be most notable in the decline in available income for the middle class and in the even poorer strata,” concluded the professor.

Contributing to national discontent were French President Nicolas Sarkozy and German Chancellor Angela Merkel, who in a recent joint declaration proposed rescinding the right to vote in the EU of countries with excessive deficits.

Columnist and historian Rui Tavares, an independent member of the European Parliament, wrote in the Público newspaper of Lisbon on Monday, Oct. 25, that the proposal is “a whim of Germany, and dangerous on top of that.”

“Those people don’t understand anything about democracy and seem intent on removing all meaning from the word,” he said in reference to Merkel and Sarkozy. “Federalism without democracy is not federalism, it’s usurpation,” Tavares concludes in his column.

The Sócrates government, a minority in the Portuguese legislative Assembly, now has the complicated task of trying to find allies for the general budget and its harsh measures.

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