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Dignified But Debt-Ridden, Portugal Faces Tough Choices

Proud of their quickly constructed but costly welfare state, the Portuguese have always wanted to play in Europe’s big league. Now that it’s time to pay the bill, they may have to reconsider.

Student protester in Lisbon (Pedro Simoes)
Student protester in Lisbon (Pedro Simoes)
Joëlle Kuntz

LISBON - It took Portugal only 36 years to build the social institutions and infrastructure that other European democracies needed 60 years to create. The result, however, is a national debt that has grown so cumbersome it recently brought down the Socalist prime minister, José Sócrates.

Portugal has three options, says Luciano Amaral, author of an essay on his country's economic deficiencies. First, it might get lucky and experience a sudden Irish-like miracle that brings in investors capable of promoting the kinds of highly productive activities that could actually interest global markets. A second possibility is that Portugal declare itself insolvent and run the risk, just like some Latin American countries did only a few years ago, of totally destroying its international reputation. The third and final option is that Portugal acknowledge its inability to cope with its own economic problems, accept the status of a simple European region, and wait for income transfers to offset its low productivity.

National pride would undoubtedly suffer, but, provided rich Europeans accept it, this third model would benefit Portugal the most. Nevertheless, Prime Minister Sócrates firmly rejected the option by resigning Wednesday. The move came after his package of savings, accepted only a few days earlier by the European Commission, was rejected by parliament.

In Portugal, political imperatives have always trumped economic ones. This old country, one of the oldest in Europe, has always wanted to prove its worth. Political parties have competed to succeed and government balance sheets are reasons for national pride or shame. At the moment, the budget deficit (7% of GDP) and a shortfall of 9 billion euros needed to pay a June debt bill make people blush with embarrassment.

Forthcoming elections will no doubt set the stage for a general display of nationalism. Ordinary people will question why they should be the ones to bear the brunt of pending budget sacrifices, and some will castigate those "who prevent Portugal from being a normal and prosperous country like the others."
The country will keep itself busy identifying the usual list of culprits: the mentality and culture of the Portuguese people "who live above their means," the state's exaggerated role in the economy, the rigidity of the labor market, poor quality in the labor force, wasted spending, corruption, and so on.

The people's hunger for dignity has been at the center of Portugal's democracy since 1974. Due to circumstances, however, that desire has come at a particularly high cost. Unlike most European countries, which built their welfare states during the postwar golden age, Portugal established its system during the oil shock and the ensuing recession.

"We owe our social state to a historical rupture," says Antonio Barreto, Chairman of Francisco Manuel dos Santos Foundation. "We wanted to seize the moment and align ourselves with the European model. And rightfully so. But the context at that time was far from propitious, both nationally and internationally."

The benefits are mixed, the researcher says. Universal health coverage can be considered a success, and the 7 to 8% of GDP spent on it has produced some remarkable results. Portugal, for example, has one of the lowest infant mortality rates in Europe. But the money spent on education has been less successful: the country's high enrollment rates have not boosted employment figures.

Education reform should be at the very top of Portugal's priorities. Too often, young graduates are condemned to working as taxi drivers and waiters; overqualified employees resign themselves to doing part-time and temporary work. Adults in their 30s have no choice but to live with their parents. Who is to blame for this? A faulty education system? Inappropriate university courses? Experts have yet to find an answer.

Young people are starting to protest. The Homens da Luta (The Men of the Struggle) rock band, best known for its song "I belong to the unpaid generation," will represent Portugal in the upcoming 2011 Eurovision Song Contest, set to take place in Dusseldorf, Germany.

"Our two biggest problems right now are low capital intensity in relation to labor, and also low productivity," says Luciano Amaral. "These two factors have encouraged the expansion of the non-market sector of the economy, as well as construction, health services and education."

The country has in fact become Europe's champion in terms of the number of highway miles per capita. Gigantic hypermarkets have mushroomed everywhere, and the number of cars is reaching impressive proportions, thus adding private debt to public debt. Cheap housing loans combined with shortages in the rental market has brought the total debt to a whopping 140% of GDP.

In the past, a national currency and the possibility to devalue it had allowed the country to improve access to export markets. The introduction of the euro has put an end to this practice, leaving Portugal with a currency that is much too expensive compared to its productivity.

As if this were not enough, several international events have added to Portugal's woes. The 2008 international financial crisis worsened the trade deficit. A related decline in remittances sent home by Portuguese emigrants coincided with an increase in remittances sent out of the country by Portugal's now larger communities of Eastern European or African immigrants. The eastern expansion of the European Union, meanwhile, has diverted foreign investment to other regions. The result was a situation of quasi-bankruptcy.

The budget deficit is deeply embedded in the history of this young and economically fragile democracy. The only budget cuts possible in the short-term are in the public sector. But they will be all the more difficult to implement since the social measures adopted these last 36 years have not been able to lower the income inequality gap. Alongside Lithuania and Bulgaria, Portugal today stands as one of the three most unequal countries in Europe.

Read the original article in French.

Photo - (Pedro Simoes)

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