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Monday, March 10, 2014
- The flood of economic woes devastating Greece and Portugal are evidence that the German prescription imposed by a troika of multilateral creditors is not working, and that both countries are heading into a blind alley, says economics professor Mario Olivares.
“National debt and fiscal deficit problems can only be overcome by economic growth,” Olivares, a Portuguese academic, told IPS.
The harsh austerity programmes prescribed by the International Monetary Fund (IMF), the European Union and the European Central Bank (ECB) are dragging Greece and Portugal into a downward economic spiral.In these two southern European countries, and more recently in Spain and Italy as well, “growth and investment are being sacrificed, creating an alarming increase in unemployment,” said Olivares, head of the economics department at the School of Economics and Management (ISEG) of the Technical University of Lisbon.
“There is colossal pressure on the Greek economy, which has already seen a fall in GDP far greater than forecast, due to an adjustment model that isn’t working because, in spite of wage cuts, exports are not increasing,” he said.
The crisis in Spain, Portugal and Greece, “with cuts in consumption and public spending, as well as slower growth in Germany, the Netherlands, France and Belgium, change the scenario, because the expected increase in exports is not happening,” Olivares stressed.
In the case of Portugal, public accounts are being regulated with iron discipline in order to meet the fiscal deficit goals demanded by German Chancellor Angela Merkel, whom Olivares describes as “master of the EU” in contrast with the weakness of the European Commission, the bloc’s executive arm.
Economic analysts agree that the wage cuts, longer working hours, cancellation of several public holidays and tax hikes have led people in Portugal to spend less and save more, not to create a solid foundation for stability, but to sink further into poverty.
The recession deepened in the last quarter of 2011 because of contraction in household consumption and only modest investment, factors that brought about a 2.7 percent fall in GDP that quarter, and an annual average shrinkage of 1.5 percent of GDP with respect to 2010, according to the National Institute of Statistics (INE).
The INE report predicted that “acceleration of the recession in the last three months of 2011 will set a trend that will also blight 2012, during which we expect a new fall in private consumption.”
The most recent estimates forecast a three percent drop in Portugal’s GDP this year.
A crucial factor is that Portugal’s 20 largest companies invested 23 percent less in 2011 than in 2010, which severely affected economic growth and produced drastic job losses.
In its report released Feb. 15, INE said unemployment in the fourth quarter of 2011 reached 14 percent, the highest jobless rate in Portugal since records began to be kept. Youth unemployment is even worse, at 35.4 percent.
But the situation is much worse than the official figures suggest, as INE recognises only 770,000 unemployed persons within an economically active population of nearly 5.6 million – a figure that only includes unemployed persons who were available for work, and actively seeking work, during the survey period.
It does not include those who have given up looking for a job, nor people with part-time jobs.
Thus, the real number is almost 1.3 million people out of work, which gives an estimated unemployment rate of 22.6 percent.
Given the fear of contagion of the crisis in the rest of the EU and other parts of the world, IPS consulted Professor Andrés Malamud, who holds a doctorate in social and political sciences and is a research fellow at the Institute of Social Sciences of the University of Lisbon. Like Olivares, Malamud is not at all optimistic about the future.
“In the best-case scenario, the European economy is going to stagnate for several years. The most probable outlook is simply recession, accompanied by social unrest, political radicalisation and institutional fragmentation, with some countries leaving the eurozone and even the EU itself,” said Malamud.
Asked what repercussions such a situation might have in Latin America, he said it would depend on “how far the European economy falls, and whether China has a soft or a hard landing (gentler or more abrupt deceleration of growth).”
Malamud contrasted Brazil, the largest economy in Latin America, “which is adjusting quickly and preparing itself for the shake-up, with Argentina, which is making tardy, inept adjustments that are unacknowledged in official discourse, as the government talks of ‘fine tuning’ the economy, not ‘adjustment.’”
Olivares, for his part, told IPS that “the European economy is feeling the effects of austerity, with several countries in recession, subjected to concrete austerity plans by the troika or of their own free will, because of higher interest rates on sovereign debt bonds.”
Credit rating agencies “are continuing to lower their ratings of countries and companies, which can be interpreted as a lack of confidence in the fundamental solution for the debt problem in countries in southern Europe, but also as a sign of sluggish economies.”
The repercussions that will be felt in the global economy and particularly in Latin America “have been, so far, a contribution to increased turmoil in financial markets, which in any case have benefited by speculation on sovereign debt bonds,” he said.
Latin America “is at a unique juncture since the 2009 crisis, as the region has gradually shifted its trade towards the Asia Pacific area.”
The region has plumped “primarily for China, its top trading partner at the moment, and has also received enormous amounts of investment from the Asian giant, so that the impact of a European recession can be faced with greater peace of mind,” Olivares concluded.