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ECONOMY-PORTUGAL: Side Effects of IMF Medicine

Mario Queiroz

LISBON, Nov 14 2011 (IPS) - A European Union economic forecast for 2012 indicates Portugal is the EU country that will grow the least.

The document raises questions about the effectiveness of measures prescribed in May by the “troika” of the International Monetary fund (IMF), the EU and the European Central Bank (ECB) as the conditions for a 110-billion dollar financial bailout for Portugal under a three-year agreement.

The health of Portugal’s public finances has begun to improve, but the economy is showing worrying signs of weakening. The population is suffering from the austerity measures, and it is estimated that the middle class will lose 20 percent of its purchasing power in 2012.

Portugal’s parliament approved the first reading of the 2012 budget bill on Friday Nov. 11, providing for sweeping cuts in education and health spending, steep tax hikes, and the suspension of civil servants’ year-end and holiday bonuses. The final vote on the budget is due Nov. 29.

The economic forecast released Nov. 10 by the European Commission, the executive arm of the EU, says Portugal’s economy will shrink by 1.9 percent this year, and by three percent in 2012 – the steepest recession expected among the 27 countries of the bloc, greater even than Greece’s expected GDP reduction of 2.8 percent in 2012.

Portugal’s economy contracted for a fourth straight quarter in the three months through September, the National Statistics Institute reported Monday, Nov. 14, with GDP falling 1.7 percent from a year earlier. The country’s economic expansion has averaged less than 1 percent a year for the past decade.

Portuguese public debt is forecast to grow from the current level of 101.6 percent of GDP to 111.6 percent in 2012.

More bad news for the economy next year is that unemployment is set to rise from the current 12.6 percent to 13.6 percent, while inflation is expected to reach three percent.

However there is some good news from the financial sector for the IMF, the EU and the international markets, but not for the Portuguese people, who will only be able to rebuild their shattered standard of living through structural spending, according to leftwing opposition critics.

While the conditions imposed by the IMF and the EU have relegated Portugal to the last place in Europe according to every indicator of growth, Ireland, which did not accept the same conditions, is expected to post GDP growth of 1.6 percent in 2012.

Portugal’s fiscal deficit is expected to fall to 5.8 percent of GDP this year, and is projected to meet the target of 4.5 percent next year, as promised to the troika under the bailout agreement.

Hostage to the EU

Asked by IPS about the consequences of the conservative government’s economic decisions, economics professor Mario Gómez Olivares of the Technical University of Lisbon said “the country’s situation is deteriorating because the authorities are taking structural measures, like reducing the state’s share of GDP from the current level of 48 percent, to 40 or 42 percent.”

Portuguese Prime Minister Pedro Passos Coelho decided “to cut wages in order to boost competitiveness by about 30 percent, and improve trade and services deficits to manageable levels of six or seven percent, half their present levels, which Ireland did not have to do as it has a trade surplus,” said Gómez Olivares.

As for private investment, the government’s forecast of 2.8 percent growth “is overly optimistic and will lead to more wage cuts, and probably withdrawal of benefits from private sector employees,” as has already happened to civil servants.

Some economists argue that Portugal could adopt an approach similar to Argentina’s, but in Gómez Olivares’ view the comparison makes no sense.

“Argentina gained a measure of economic independence when it freed itself from the dollar peg; it devalued its currency (the peso) and began to export again, substituting imports and diversifying its export markets, none of which are options for Portugal,” he said.

“Portugal does not have its own currency; its market is basically European, with a strong euro that is not very competitive outside of the EU, which means that its recovery depends on the EU’s,” he said.

In conclusion, Gómez Olivares painted a gloomy future scenario, in which the pretext of increasing competitiveness may be used to “further reduce wages, which is known to fuel recession.”

The government’s policies “have the effect of seriously contracting family consumption, and over and above the loss of available income, they could provoke social panic,” the academic warned.

Contingent on Greece?

Praise for Passos Coelho from those who approve of the swingeing cuts in public spending is voiced almost every day.

Meanwhile, Luxembourg Prime Minister Jean-Claude Juncker, chair of the Eurogroup, a monthly meeting of eurozone finance ministers, denied press predictions that Lisbon would require a further 35 billion dollars in aid.

“I don’t think Portugal needs a larger,” said Juncker. He added that there may be some “technical adjustments” for the implementation of the programme, but not a revaluation, because Portugal is showing that “the goals are being met.”

The IMF and the EU both maintain that only a collapse of Greece would cause Portugal to request more aid.

IMF adviser Estela Barbot acknowledged “we have to be open to all the possibilities,” but insisted that “we must wait and see what happens in Greece.”

Amadeu Altajaf, European Commission spokesman for economic affairs, said Portugal was “sufficiently financed” and “a gradual return to market confidence is hoped for.”

Positive assessments of Portugal by EU leaders “open the doors to new financing” if the country continues to comply strictly with the bailout conditions, he said.

In August, after positive evaluation of the Portuguese government’s actions, the troika transferred 16 billion dollars, and a further tranche of 11.6 billion dollars is expected in under two weeks’ time, when experts sent by the creditors finish the second assessment.

In spite of the country’s evidence of good behaviour provided to the IMF and the EU, Altafaj said “some things are beyond Portugal’s control,” like the performance of the Greek economy.

Portuguese President Aníbal Cavaco Silva took the opportunity of his visit to U.S. President Barack Obama to stress the distance between Portugal and Greece on this issue.

Ending his meeting with Obama on Wednesday Nov. 9 in Washington, the Portuguese president said his country is fully complying with the bailout agreement and will “continue to have the support of international institutions.”