The final, bitter cost of austerity is yet to play out here
Published 20/05/2014 | 02:30
What do Portugal and Ireland have in common? (Besides the weather, obviously). Well, since 2011 both countries have been in adjustment programmes mandated by the troika. Both Ireland and Portugal have exited the official funding part of their programmes, neither with precautionary credit lines, and with their government bonds trading at pre-crisis yields.
Like Ireland, Portugal has imposed substantial austerity on its 10 million people, borrowed roughly €78bn from the EU and IMF once it was shut out of the bond markets in 2011, and has very high household, corporate, and public debt levels. Public debt in Portugal is nearly 130pc of national output, which is very, very high by international standards but projected to fall over the next few years.
The point of imposing austerity is to allow international funders to regain confidence in the economy, and to curb the increase in government debt levels in the process.
Mario Draghi's now famous, game-changing "whatever it takes" speech in July 2012 was what gave the markets confidence they would not lose money if they bet on peripheral European states like Ireland and Portugal, so, rather than the Portuguese austerity programme delivering confidence, really, it was Mario Draghi and the ECB's credibility that compressed peripheral yields.
And the debt levels? Well, they just shot up, from 84pc of national output in 2009 to over 130pc in 2014, and will only come down under high-growth conditions Portugal is unlikely to see in the short term.
Like Ireland, Portugal has high unemployment, and very high youth unemployment problems. The general unemployment rate in Portugal is over 15pc, while the youth unemployment rate is running at around 35pc.
The social damage austerity is causing in Portugal is immense. Unlike Ireland, in Portugal protests disrupted the economy. From June to November 2013 there were 473 strike days in the transport sector alone.
A report by Caritas, a network of charities, found a large change in the numbers of people at risk of poverty. In 2012 almost two million people were at risk of poverty or social exclusion. The young are bearing a large part of the pain of this adjustment. In 2009, the risk of poverty measure for those aged 18-24 was 16pc. In 2012, the year the last figures were collected, it is 22pc.
In fact, Portuguese households with the lowest 10pc of income have lost on average more than 5pc of their incomes from policy changes associated with austerity.
Emigration continues to be the safety valve in Ireland and in Portugal, which already has one of the highest early school leaving rates in the EU.
Portugal is also very close to a deflation, where the price level stays negative for a sustained period of time. Inflation is negative on a monthly basis, and only 0.06pc positive on an annual basis. This price decrease is good news for consumers, and bad news for those with assets to sell, and those paying back debt, which in the Portuguese case is pretty much everybody.
Ireland can be quite insular when it comes to thinking about its economy, and tends to see itself as exceptional in both the boom and bust phases of the past few years. I hope you can see the Portuguese story is very, very similar to ours.
We aren't that different as economies, and austerity has had almost the same effects in both countries. This should tell us something fundamental: applied across the eurozone, austerity has the same effects, and these are much more negative than positive.
Now we have two high unemployment, low growth, low inflation post-troika economies in Europe. They are both being claimed as success stories by the institutions that imposed austerity upon them. The economic, social, and political ramifications of the imposition of austerity have yet to play out fully, and are not yet understood fully.
It may take a generation to understand just how damaging austerity really was, and soon we will be able to compare Cyprus and Greece.
In the grand experiment that is the European project, the imposition of austerity on the peripheral countries is one of the most costly, and potentially, the most destabilising.
Stephen Kinsella is a senior lecturer at the University of Limerick