Friday 15 December 2017

Political machinations threaten to derail Portugal's tentative recovery

RONALDO: The face of Portugal.
RONALDO: The face of Portugal.

John Stonestreet

As Portugal's government toasts its exit from an international bailout that imposed years of austerity on its citizens, small business owner Alexandra Capelo is in no mood to join the celebrations.

A 42-year-old mother of two from Lisbon's poorer neighbouring city of Almada across the River Tagus, Capelo is one of the nearly 800,000 people, or 15 per cent of the workforce, still unemployed as the country re-takes control of its finances.

"Things have gotten worse since last year, business and job-wise," said Capelo, who has relied on a home-based business to supplement her benefits since being laid off as a designer in January.

Yesterday, Portugal became the second eurozone state after Ireland to exit a bailout, having stuck to the European Union's programme of austerity.

The €78bn rescue programme the EU and the International Monetary Fund assembled in 2011 for the nearly bankrupt country will conclude with Portugal's budget in much better shape and borrowing costs at eight-year lows. But a 0.7 per cent drop in its GDP in the first quarter points to the risks inherent in an economic recovery plan which, by focusing on fuelling export growth by cutting labour costs, has become dependent on volatile foreign demand.

That data, released on Thursday, also illustrated how far the country is from a lasting economic recovery.

Portugal's central bank said progress under the bailout was insufficient, and ensuring sustained growth and getting banks lending again would require further reforms.

But as a government no longer dependent on aid looks ahead to an election in 2015, these may fail to materialise.

For those who have lost their jobs or seen pensions or salaries cut, life in a post-bailout world raises painful questions. Were the reforms worth it, and will they ever deliver enough growth for jobs and better living standards?

Further south in the industrial city of Setubal – one of Portugal's poorest and plagued by high unemployment – there is little evidence of the growth that, before stalling, had returned to the country in the second quarter of last year.

"Levels of poverty keep getting worse, especially among people aged 25-40 who lost their jobs," said Constantino Alves, a priest who runs a "Social Restaurant" charity for the poor.

"We get young couples, parents with children seeking meals and aid. There are various small entrepreneurs who had shops here and are now in utter poverty eating here. Many have lost all faith to find jobs. It's a crisis of confidence," he said.

The problem, say economists, is that reforms already implemented during three years of wrenching recession and austerity will only have a delayed impact.

"These are political economies that are very difficult to reform. The only way to change is incrementally," said Antonio Barroso, senior vice president at the Teneo Intelligence consultancy in London.

The government has made it cheaper for firms to hire and fire. That has lowered the cost of doing business and helped bring unemployment down from its 2013 peak of 17.5 per cent.

But many observers say that because austerity during the bailout focused overwhelmingly on cost-cutting – like public sector wages and pensions – and tax hikes, deeper reforms that would have reduced the size of the state or made the economy even more export-oriented have not taken place.

"The (bailout) adjustment programme was basically based on internal devaluation," said Antonio Costa Pinto, political analyst at the University of Lisbon.

That has pleased the creditors. Labour costs in Portugal fell eight per cent since 2011 to €11.60 per hour in 2013. That brought competitiveness gains, with the value of exports rising to 41 per cent of GDP last year.

But the European Commission has said that after wages fell around five per cent between 2010 and 2013, Portugal is still only halfway to getting pay down to levels that could tangibly reduce unemployment.That creates a dilemma for a government who will want to give voters some hope before next year's national election.

"This government is looking like it is desperate to go for growth," said Nicholas Spiro, managing director at Spiro Sovereign Strategy in London.

"It is still a job half done. The danger is that the reforms grind to a screeching halt, there is a very high risk that that happens."

The government has already said it will partly reverse salary cuts in the public sector in the next few years and may cut taxes next year.

Perhaps that will give a push to growth in the short term, but will it help generate the high growth necessary to sharply reduce Portugal's high debts at around 125 per cent of GDP? Or to create jobs for those outside the few fast-growing sectors? (©Reuters)

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