Portugal loses patience with Europe
by Ambrose Evans-Pritchard
Posted July 18th, 2011
AT LAST, SOME RAW EMOTIONAL GAULLISTE PATRIOTISM FROM THE VICTIMS of Europe’s Maquina Infernal? Portugal’s new premier Pedro Passos Coelho — a free marketeer — began to growl over the weekend. “We want to take part in an ambitious European project and make our contribution so Europe can confront its problems in the most ambitious way, but as prime minister I will not stand by and wait for Europe to govern Portugal,” he told the party faithful.
For Portuguese readers: “Nós queremos participar num projecto europeu ambicioso e queremos dar o nosso contributo para que a Europa saiba encontrar respostas mais ambiciosas para os problemas, mas como primeiro-ministro nunca ficarei à espera do que a Europa tenha que fazer para governar Portugal”
Please correct me if my loose translation is wrong.
So, it has begun: last week Greece’s premier George Papandreou launched two angry broadsides against EU magnates. How could he do otherwise after Eurogroup chair Jean-Claude Juncker told a German newspaper that Greece’s sovereignty would be “massively limited”?
“Massively limited?” Mr Juncker should be clamped in irons if he dares set foot on Greek soil. Now the leader of what is arguably Europe’s oldest nation state (foundation 868, under Vimara Peres) has shown the first hints of frustration.
Just to remind you: unemployment in Portugal is 12.4pc (youth: 28.1) and about to rise much further as the fiscal punch hits. The figures for Spain are 20.9pc (44.4), Greece 15pc (38.5), Ireland 14pc (26.5), Latvia 16.2pc (32.9). Yet the these countries are all facing further headwinds of fiscal and monetary tightening.
For a serving prime minister to make such remarks at this delicate juncture might be taken by some as a cloaked threat to walk away from the EU project, if the country continues to be treated in a humiliating and damaging fashion. Mr Passos Coelho is fencing with a double-edged blade. Even to hint at misgivings over EMU is to set matters in motion. The markets were very quick to pick up on political body language during the ERM crisis in 1992. The Portuguese leader also said there was a “colossal” €2bn hole in the public accounts left by… well, somebody. He refrained from blaming the outgoing Socialists. They are needed to help pass laws in the Assembleia. Any other skeletons to be uncovered?
I have great sympathy for Mr Passos Coelho and for the Portuguese people. The German-led creditor states have treated the EMU crisis as if it were a morality tale, castigating Club Med and Ireland for alleged fecklessness. All that is required — goes the argument — is further austerity, a dose of 1930s wage and debt-deflation, and virtue will be its own reward. The Left-wing Bloco calls it “social terrorism”.
Adding injury to insult, Germany has insisted that Portugal, Greece, and Ireland pay a penal rate of interest some 200 to 300 basis point over the cost of funding paid by the EU’s bail-out machinery, though this may soon be cut somewhat. As former US Treasury Secretary Larry Summers said this morning in the pink sheet, such penal rates play havoc with debt dynamics and are driving a string of countries into insolvency and depression.
This Germanic view of events is self-serving and intellectually dishonest. Southern Europe is in trouble because Europe’s monetary union is and always was dysfunctional. The Maastricht process caused interest rates to plunge in the Club Med bloc, setting off credit booms. Portugal’s rates fell from 16pc to 3pc in short order.
The ECB poured further petrol on the fire by tilting monetary policy to German needs in the middle of the last decade, when Germany was in trouble. The ECB breached is own eurozone M3 and inflation targets for year after year. In the specific case of Portugal, the boom occurred earlier, in the late 1990s. No doubt a great many foolish errors were made in those halycon days. (I wrote about them at the time or shortly after, and was roundly reproached for my insolence).
Yet over the last eight years Portugal has been relatively frugal. It did not have an Irish banking bubble, or a Spanish property bubble. It did let social transfer costs creep up to 22pc of GDP — when they should have been falling — but it also passed a string of fiscal austerity packages. Yet at the end of the day it was punished anyway. It has failed to reap any worthwhile benefits. There has been no economic convergence or EMU catch-up effect. Productivity has remained stuck at 64pc of the core-EU average. Portugal switched from surplus on its external accounts in the early 1990s to a deficit of 109pc of GDP today.
Public and private debt has ballooned to 330pc of GDP, one of the highest in the world. Portugal will still have a current account deficit of almost 8pc this year and the budget deficit was still running at a 8.7pc rate in the first quarter. Such a profile two or three years into draconian cuts and demand compression is almost tragic. And now they must implement yet further austerity, without debt relief or offsetting monetary stimulus or devaluation. This policy is a near certain formula for economic asphyxiation..
In Portugal — as well as Greece, Ireland, and perhaps Spain in due course — we are moving closer to the point where national leaders must decide whether to satisfy EU demands, or placate their own citizens, for is it no longer possible to serve these two masters at the same time?
Can there really be any doubt as to the outcome of this tug-of-war