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A report on a sick man of Europe, Portugal

  1. May 19, 2015 #1
    I'm from Portugal, and I'm going to present our situation in the last years by not only my perspective, but from a perspective shared by many other Portuguese people, with backing off of data whenever possible.
    As you may know, in 2011, after 6 years of having a socialist government, we were on the verge of bankruptcy and had to request external aid from the Troika (IMF, European Commission and ECB) to be able to pay short-term debt and avoid defaulting. This was actually after 14 years of socialist rule, only interrupted by 2 years of a social-democrat government, in which our economic growth was near zero (http://www.tradingeconomics.com/portugal/gdp-growth). None of the economic issues that foreign organizations such as OECD and WEF were pointing out as our biggest issues preventing growth, like excessive bureaucracy, tax rates, tax regulations and restrictive labor regulations were addressed, and they still rank right on top (http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2013-14.pdf). Labor unions constantly did strikes requiring higher wages for public workers, where they were already paid a much higher salary than the private workers in the same job, and the minimum wage grew constantly even though there was no significant growth in productivity (http://www.voxeu.org/article/wages-and-productivity-eurozone - this is for 2011). The last socialist government (2005-2011) was marked by public spending above our possibilities, but which wasn't accounted in the deficit at the time by creative accounting, which was already made public (http://oinsurgente.org/2014/02/03/a-falacia-do-aumento-da-divida-publica/). Most of it were partnerships between public and private building companies, with contracts with ridiculous clauses, clearly made to help out the private companies at the expense of public money (http://www.publico.pt/parcerias-publico-privadas). This was just 1 of the corruption scandals in the last government, and the former prime-minister José Sócrates is in jail with an ongoing trial for corruption and other crimes. Another fun fact is that there were other 2 external government bailouts by the IMF since our democracy started in 1974, and these were also requested by the Socialist Party, both in the 80s. Mário Soares was the prime-minister at the time, and who now spends his days publicly defending Sócrates and visiting him in jail.

    The social-democrats, the other big Portuguese political party, and in office since 2011, made many mistakes back in the 90s too, lead by Cavaco Silva, but since then have changed their policies to rigorous fiscal responsibility and less government intervention in the economy, something refreshing and that was needed for Portugal IMO. They also cracked down on the judicial system, which made it possible to lead many suspected corrupt politicians to the courts, such as our friend Sócrates, and which is something new in Portugal. The widespread notion here was that politicians can never go to jail, and this was actually pretty accurate - well, they're not immune anymore and some are deservedly in jail now. By the pressure Troika did, many necessary cuts were made, such as reducing the wages of public workers to the level of private wages, cuts in social spending, privatizing public companies in competitive sectors, among others. There are many policies missing though, such as a true reform of the private investment bureaucracy, which is still excessive and leads to many investment projects being closed down due to either a long time awaiting the decision of the various regulatory institutions or by bad regulatory decisions in one of the various institutions. This contrasts with most developed countries, where private investment is welcomed and where there is an effective and quick regulation. There were political reforms needed too that weren't made, so the politicians would have more accountability, because unlike in the American system, where each politician is attributed x number of people he represents, here they don't have to give justifications to anyone but the party.

    Our elections will be in October/2015, and the Socialist candidate is António Costa, someone with tight connections to Sócrates and who will have Sócrates supporters inside the Socialist Party in his government, if elected. He's already promised he'll revoke the cuts on the public worker's wages, pensions, among other things he obviously wouldn't be able to fulfill. He also made statements such as "the actual government can't stand the socialists success", which was a very sad statement indeed since they bankrupted the country, and "no economy can grow if it lets the building sector die off". With the socialists history of corruption with that sector in costly government building projects, and him bringing back Sócrates crew, it's already obvious he wants to bring back the old socialist policies that lead us to this point. This guy is tied in the polls with the coalition of Social-Democrats + Conservative Party, so anything can happen.

    Well, this was just to give you a glimpse of what's happening in this small country, on the corner of Europe, called Portugal :)
     
  2. jcsd
  3. May 20, 2015 #2

    Svein

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    And Portugal was brought to its current state by a professor in economics - Salazar.
     
  4. May 20, 2015 #3
    Salazar brought order after the chaotic 1st Republic, and made the country grow and consequently improved the life of millions. His biggest mistake was trying to keep the colonies in Africa at all costs, in a lengthy and bloody war, which eventually made the government leftist coup in '74 happen. Since then, the economic growth rate fell consistently, only stopped by Cavaco's two mandates between '85 and '95. Socialism and leftist ideologies are dangerous demagogic weapons, and show yet another success in Portugal...

    TaxaCrescimentoAlizadaMediaMovel10Anos_PIB_Portugal_1900-2010.PNG
     
  5. May 20, 2015 #4
    I think that he would be offended by such suggestion because of his tendendcy to generate budget surpluses ;)

    Anyway, I to some extend I think that you try to put exclusively blame on one political group, when I think it would be possible to find a few more factors to blame (no, I don't defend those politicians)

    I think that you used to have big apparel industry that was leveled by cheap imports from China.

    I also think that you had a housing bubble, on which you can partially blame low euro interest rates. (sure, theoretically a local banking supervision could have dealt with it)

    I remember that recently I used your country constitutional ruling in class for my students. (Our consitututional court accepted unpopular, but minor, austerity measures that targetted some retirement money) To show how more active constitutional court protects citizens... and whether that's really what they ask for.
     
  6. May 22, 2015 #5
    Great part of the blame are in them, but also in the people who vote for them. And this isn't only because they're socialists, because the socialists in Spain and Italy did a fairly better job than here - the problem is that most of them are corrupt and use government spending to enrich themselves, while leaving the country's real economic problems amount. Another problem is that there is a generalized deficit in education in older generations, so when we passed from a dictatorship to a free-market economy, we weren't able to continue increasing the productivity and amassing capital as we used to. This contrasts with Spain, that ended their dictatorship at roughly the same time as us, but their population had a fairly higher education level than ours (and continues to). Looking at the graph, Portugal is clearly an outlier in education levels comparing to other European countries.

    HK.png
    You're right about China, but the same could be said about every other Western country. Another factor is that when we entered the European Union, we suddenly faced competition, in the same currency, from much more productive markets. We didn't have a significant housing bubble like Spain did though.

    Can I ask you where are you from Czcibor? That's actually funny, because our Constitutional court here came under heavy criticism, for not allowing necessary cuts to be done, and for protecting public workers at the expense of private workers (they let the taxes be raised freely, but rejected several cuts in public workers' wages and pensions). I find that our Constitution is actually deeply flawed, because it assumes we're a fast growing country with no budget problems, that can handle all the obligatory benefits that the government is supposed to hand out.
     
    Last edited: May 22, 2015
  7. May 22, 2015 #6
    Watching a few countries, I started to wonder whether "socialistic leaning" parties are the problem. I rather perceive expectation of masses that gov should provide [insert long list of goodies] and in the same time no one wants to discuss cost of policies nor how to finance it. (some Americans try to get a right wing version, with huge tax cut which are supposed to finance themselve) Goodies are high priority, good governance low. And it ends up not well.

    Good to know, I wasn't good at being able to show precise differences between Spain and Portugal.


    There is one difference - high tech production from Germany, Switzerland, etc. So far Chinese were able to corner all low tech production, but not high tech. In consequence top developed countries did not feel this blow as seriously.



    Poland.
    But it was:
    [slide about Polish constitutional court ruling]
    -Unhappy about the decision? So more active Constitutional Court would be the solution?
    [slide about Portuguese]
    -would you REALLY consider that as better idea? (I placed also Portuguese public debt/GDP ratio; and that technically speaking there was an IMF bailout which put stringent condition, so if implementing them would be illegal, then what?)

    Funny, after I said that slashing civil servant salary was against constitution, one of my student commented that there is something wrong with such constitution. :D
     
  8. May 23, 2015 #7
    I agree, here that is a prevalent mentality, although with the recent crisis that is rapidly changing: everyone wanted the government to guarantee jobs, guarantee benefits, but rarely do they spoke about how to finance it. Many people also seem to think we're living in a sort of Soviet state, where government has a total control over production, jobs and wealth distribution. The arguments are mostly demagogy, like citing expenses the government had bailing out banks, while those were just loans, and the fact is that the great majority of the government spending is in Social Security, pensions and public workers' wages. Looking at fast-growing countries today, with a GDP/Capita similar to ours, like the Eastern bloc (including Poland), Malaysia, Chile, among others, they have a much more free-market economy than we do, that promotes private investment, without all these parasite policies. Socialist countries on the other hand, are utter failures, like Venezuela, Cuba, etc... Italy and Spain which had many socialist governments like us, aren't so well either, and in a much worse position than other Western European countries. Greece was lead to their current state also by the socialists, PASOK, who took corruption to a whole other level.

    Ok, that's true. We had a lot of low-tech industry indeed, and continue to. And strong currency like the Euro even made it worse, since the already cheap Chinese products became even cheaper.

    Lol, give that student an A :D Hope this topic can give you more ideas about Portugal to compare to Poland, in your classes :)
     
  9. May 23, 2015 #8

    Bandersnatch

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    Don't we (Poland) have something along similar lines in the constitution when it comes to teachers and their salaries?
     
  10. May 23, 2015 #9
    Tomorrow we have second round of presidential election. So I had to hear quite many very beautiful promises...

    Don't think about us being so great, think rather that we eagerly hear such stuff too, just we're quite often able to block that.


    You know, if you speak about "socialist", then I think that the usual counter example would be Scandinavian countries. They theoretically have very generous safety net. However, they also:
    -understand that those goodies cost, pay high taxes and keep balanced budget (Sweden even had recently surplus);
    -have ultra low corruption;
    -try to keep business climate as good as possible except of taxes (and partially labour regulation), what lead to quite funny conclusion that ultra free market Heritage Organization, in their Economic Freedom Ranking gives them top grades.



    By occasion do you know how Balts dealt with too strong Euro? ;)


    Generally speaking analysing foreign countries helps people to understand their own. Look at this in the following way:
    you don't have the favourite political party in Poland, you don't have private interest in keeping any policies, you don't look through it through any national pride.
    Plus foreigners may try something original ;)


    Teacher's Charter (Karta nauczyciela)? It's just a law. It is not protected directly by constitution, but by vested interest of teachers. Slashing it overnight may be challenged in constitutional court as depriving someone of his earned rights. Minor and medium sized cuts here and there would not be a problem from law point of view.
     
  11. May 24, 2015 #10
    Exactly, here they want socialism but without doing the hard work of keeping a balanced budget and to allow businesses to invest more freely, and very rarely did a politician here leave the government without a reasonable amount of money in his bank account. One of the last corruption scandals involved a private bank (BES), where many politicians and politicians' wealthy friends kept their money, and took their money out before the bank went bust. Another bankruptcy in a private bank, BPN (in 2008 if I remember right), was even handled in a much worse fashion by the ex-PM who's in jail now - he nationalized the bank, that didn't pose any systemic risk since it was an investments and not-so-big bank, and which of course made the deficit soar and let many politicians' bank accounts safe. Corruption here is rampant and highly underestimated by international economic organizations - but then again, we're a small country in the corner of Europe, with our own language, that nobody else speaks in this continent (even Spaniards have much difficulty understanding it), so many things go unnoticed to foreign countries.

    No I do not, but would like to hear! :smile:
     
  12. May 24, 2015 #11
    One woman from my country explained me what she expects from politicians - she can accept them being corrupted, but expects them take care about people and paying generous pensions.

    I have to admit it, that her candidness was impressive. ;)



    They used internal devaluation, so adjusted the prices in economy accordingly. Very nice euphemism on slashing salaries.
    http://www.bruegel.org/nc/blog/detail/article/814-blogs-review-the-baltic-experience/

    Because side effect of such policies was temporary high unemployment and GDP contraction, I'd say that better idea was having own currency that in such emergency case could have been debased. (yes, in both cases salaries would be lower at the end, but in case of depreciation of currency there would be less unemployment/GDP reduction)


    To some extend there is a governance problem in the EMU. ECB should have had more Keynesian policy during the crisis, but it was infeasible for Germans.
     
  13. May 24, 2015 #12
    It seems that we in Poland are somewhat jealous of Portugal achievements and decided to elect for president someone who in campaign promised everything for everyone and would give us a chance to go in your direction.

    http://www.bbc.com/news/world-europe-32862772
     
  14. May 25, 2015 #13
    I see, here we avoided that at all costs, until Troika forced us. Another mafia here are the unions, that organized strike after strike even though the salaries kept rising faster than productivity. In a way I'm glad ECB didn't intervene more, because we needed extreme measures to compensate for all the bad policies that we had for decades.
    Odd for a conservative nowadays! How do Poles see socialism, from your unique point of view of being a former soviet republic? Do they get significant amount of votes?What about your neighboors to the East?
     
  15. May 25, 2015 #14
    First I thought that your stances is somewhat harsh, then I thought what I think about EU commission, that forbade us to subsidize shipyards another year. (because those mismanaged companies with huge trade unions could allegedly distort competition ;) )

    I still miss some kind of carrot in German offer. They should have offered some kind of goodies (ex. ECB buying bonds) to countries that implement good governance policies.


    We were not a former Soviet Republic, but a Soviet satellite (vassal state).

    At this moment in Poland, after around 2005 post communist left wing went effectively extinct, we don't have classical right wing vs. left wing. Theoretically we have 2 right wing parties, which split between themselves also big part of left wing electorate.

    Civic Platform - started as business minded liberals (British English), moved to the centre while kept some moderate fiscal responsibility
    Law and Justice - started as crime fighting right wing, become a mixture of nationalism, religious stuff, and generous social promises

    L&J electorate officially are ardent anti-communist (especially in rhetoric). However, if you'd ask big part of them, you'd learn that communism like system would have been good, if only it had been properly religious and nationalistic. And openly would tell you that system transformation destroyed our great industries which were bought for pennies by evil foreigners.
    (it's a bit tricky how they really govern, because were damn lucky to rule in boom years of 2005-2007)


    Our eastern neighbours? Each of them is actually an absolutely different story.

    Balts (Lithuania, Latvia, Estonia)
    -very serious reforms, disciplined societies
    -pro EU nationalism... weird? In their history in WW2 Germans were their liberators from Soviet occupation (technically speaking true); Russian minority - colonizers, perceived now as 5th column (in Latvia there is problem of locally living Russian who are merely permanent residents)
    -EU, NATO, Eurozone - convinced that either they cling to the west or would be occupied one more time


    Belarus:
    -strong Russian ties
    -lack of national identity
    -lack of intelligentsia or any civic society
    -has for something like 20 years a dictatorship, no oligarchs (in Poland we often erroneously consider him as pro-Russian, while he is a pure blood opportunist)
    -threatens Russia from time to time that would join the West to get some subsidies from Russia
    -WW2 history according to Russian mould


    Ukraine:
    -used to be a split society (in western part Russians are new conquerors, and were worse than usual Polish or Austro-Hungarians), in the east the identity was unclear;
    -now Russians worked hard to become public enemies and building national identity on fight against their invasion (including even abandoning Russian leaning orthodox churches for national ones)
    -gov property was plundered during transformation by emerging oligarchs, like in Russia, Yanukovych tried to be their Putin, but failed
    -was subject to high scale Soviet genocide (Holodomor)
    -mixed feelings about WW2 (recently some pro-Axis resistance become national heroes, but is more complicated)
    -society active enough to overthrow gov, but not organized enough to provide good governance (yes, an explosive mixture)
     
  16. May 26, 2015 #15
    Thanks, very informative.

    Interesting. With a country like Russia in their doorstep, I think they did well joining EU and NATO. I find Eastern and Southeastern Europe very interesting to study, because historically there were many small countries surrounded by great powers like Russia, Hungary, Commonwealth, and later Austro-Hungary Empire.
     
  17. May 28, 2015 #16
    378vk3y.jpg
    Not all is bad, we rose 7 places in the Global Competitiveness Index :)

    "After falling in the rankings for several years, Portugal decisively inverts this trend and climbs 15 positions to reach 36th place. The ambitious reform program the country has adopted seems to have started paying off as gains appear across the board, most notably in areas related to the functioning of the goods market: Portugal now has less red tape to start a business (5th), and its labor market shows increased flexibility, although more remains to be done (119th). In addition to these improvements, the country can continue to leverage its world-class transport infrastructure (18th) and highly educated labor force (29th). At the same time, Portugal should not be complacent and should continue with a full implementation of its reform program in order to keep addressing some of its persistent macroeconomic concerns (128th) caused by high levels of deficit (107th) and public debt (138th); strengthening its financial sector (104th) so that credit can start flowing (108th); further increasing the flexibility of its labor market; and raising the quality of education (40th) and innovation capacity (37th) to support the economic transformation of the country"

    http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014-15.pdf
     
  18. Jun 6, 2015 #17
  19. Jun 6, 2015 #18
    We have such (exactly 60% of GDP) limit in our constitution.

    However:
    -Gov already discovered that in our case the definition of "debt" and "GDP" is placed in law that can be easily changed...
    -In our case law is poorly written - it allows to make as much debt / implicit debt (in form of social security promises) in good years as one want, while in moment of exceeding the threshold it demands to makes overnight very severe austerity.


    I'm not convinced gov debt/GDP is a good indicator. I'd rather think in line of something like dealing with structural deficit:
    (http://en.wikipedia.org/wiki/Stability_and_Growth_Pact#Medium-Term_budgetary_Objective_.28MTO.29)
    Or at best also an indicator including also implicit debt.
     
  20. Jun 10, 2015 #19
    Here the debt on public-private construction partnerships were hidden for years, which was seen by the public debt increasing much more than the deficit value in the recent years (amounts to 15% of Portuguese GDP). I agree that just placing a limit on public debt is unsuficient and SGP seems to be a good improvement, lacking an improvement as you said, of including implicit debt. That's hard to account for though, so other fiscal monitoring laws would have to be passed before making a more reliable SGP criteria. In any case, EU should be stricter in applying this criteria, and it should monitor member-states closer, especially the infamous ones like Portugal, Greece, etc... Socialist Party recently made a proposal so that public investment isn't included in the deficit; measures like that that aim hiding public debt should also be prohibited.
     
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