By Chris Graeme chris.graeme@theresidentgroup.com
Portugal leaving the Euro and embarking on currency devaluation are not options to attract long-term sustainable growth and inward foreign investment, said an economist last week.
Addressing businessmen at the International Club of Portugal in Lisbon, former Industry Minister and current President of Banco BIC Português, Professor Luís Mira Amaral said that Portugal could not go back to past economic models because Europe was now too open and competitive.
By this, he meant that other countries both in Europe, such as Central and Eastern European countries like Romania, Bulgaria, Hungary and the Czech Republic, and outside Europe, such as Morocco, Tunisia and Turkey, could produce the same kind of goods Portugal once excelled at with cheaper labour costs and a more educated and productive workforce.
“Our economic models are unsustainable. If we can’t cope with the Euro now, how are we going to cope any better without it?” he said, calling for a radical reform of the public sector and reduced government spending.
By entering the Euro, Portugal had a golden opportunity to develop but the country often wasted those opportunities and didn’t always act with “common sense”.
In his presentation on The Future of the Euro and the Portuguese Case, the one-time government minister said that he could understand Germany’s reticence to bail out Greece and warned that if Spain got into trouble, the European Union simply wouldn’t be financially able to come to the rescue of such a large economy.
He said he believed the next few months could be decisive for the future of the Euro and added that the US dollar would continue to be the overriding international currency.
He said that former Warsaw Pact bloc Euro newcomers like the Czech Republic were “better disciplined, more productive, better educated and more highly organised” than Portuguese workers.
Prudence
Professor Amaral distilled Portugal’s current woes down to two key points: its external deficit, which was running at almost 70 per cent of GDP (an estimated total of 507 billion US Dollars in 2010, up by 4.6 per cent on 2009) and Portugal’s large public deficit, which is running at 9.3 per cent of GDP and total public debt at 85.4 per cent of GDP – both of which meant that borrowing on the international money markets would cost more with interest rates and debt servicing expected to run at 13 per cent. “Seventy per cent of our debt is concentrated abroad, worse than Italy, so the external ratings agencies are obviously paying close attention to that,” he said.
The economist proposed a cut in public sector salaries by 10 per cent in order for Portugal to bring her public deficit back down to reasonable levels. “If we don’t do it, nothing will change,” he said.
“We are too dependent on outside financial markets. Either we deal seriously with the situation or someone else (The European Central Bank) will do it for us.
“If we don’t act with prudence and wisdom, I doubt that we can cut our deficit, and if we carry on spending like we have been, we could face the risk of bankruptcy and default,” he added.
“The simple truth is that we have to work hard if we want to have the same standard of living as Germany.”
Professor Amaral accepted that Portugal was not the same as Greece, that the Greeks had lied about the true extent of their debt and financial problems but stressed that Portugal’s situation just couldn’t go on.
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