Portugal and Greece: the odd return to markets
In the past few weeks, Portugal and Greece have returned to the markets in moves seen in Brussels as heralding a rebound in Southern Europe. In reality, a fragile recovery has barely begun and will take years.
On Sunday (4 May), Portugal’s Prime Minister Pedro Passos Coelho announced that his government will not seek a precautionary credit from the Troika lenders: the European Commission (EC), the International Monetary Fund (IMF), and the European Central Bank (ECB). Instead, Lisbon seeks to rely only on markets for financing.
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After it shortly takes its final installment of a €78 billion bailout package, Portugal hopes to have a “clean exit” from its three-year rescue programme.
In Brussels, Coelho’s announcement was welcomed with a sigh of relief. It was timed well; just a month before the European Parliament election, which is expected to squeeze the political middle but strengthen the minorities of radical left, eurosceptics and extreme right.
At the EC, the IMF and the ECB, the hope is that Portugal’s “great turnaround”, along with the Greek “return to markets” will make the impending election protest just a little less painful.
Yet, the simple reality remains that neither economy stands on firm ground. Both will suffer from drastic social dislocation for years to come. And in the course of the past half a decade, each has fallen further behind peer economies in Europe and worldwide.
From Greek bailouts to bond sales
After more than half a decade of devastating economic policies, harsh austerity rule, bailouts, a plunge in living standards, and soaring unemployment, Greece did not return to markets in the late 2013, as Brussels had announced in spring 2010.
Historically, Greece is a relatively new advanced economy. It joined the developed-markets stock index only in May 2001, shortly after it adopted the euro.
True, some bullish fund managers believe that the “worst is over” in Greece and, in early April, a Greek bond sale was hailed as a success after Athens raised €3 billion. Nonetheless, the current expectation is that growth is likely to linger at around 0.5 percent in 2014-15.
That is a result of huge bailouts: €73 billion ($102 billion) and €164 billion ($228 billion), and, if necessary, talks about a possible third bailout of €20 billion ($28 billion).
Athens’s successful bond sale represents barely 1 percent of the bailout total. It may reflect as the fund managers’ taste for gambling much as a turnaround in Greece. After all, it was not philanthropy that made the bailouts possible, but a sense of survival in Brussels.
If Greek contagion was not contained – or so the argument went in 2010 – it could spread to Italy and Spain. Greece, along with other small ailing euro area economies, such as Portugal and Ireland, represents less than 3 percent of the euro area GDP. In contrast, Italy and Spain account for almost 30 percent of the region’s economy.
What was downplayed about the bailouts were the massive social dislocation and political turmoil, which have ensued with the progressive deterioration of living standards in Southern Europe.
Even today, signs of sustainable recovery remain absent in Greece. Given the weak domestic demand, export sectors would have to grow strongly, but only tourism shows the necessary strength. If the government were to collapse, the political risk would only be alleviated with new funding via Brussels.
Now, where does all this leave Portugal?
Portuguese austerity blues
Officially, Portugal is expected to regain its financial sovereignty over the economy by mid-May, after three years of austerity programmes by the Troika.
Exports are far more vital to Portugal (40 percent of GDP) than, say, to Greece (less than 30 percent), but not as critical as to Ireland (110 percent). For a year now, Portugal’s economic prospects have steadily improved on the back of exports and tourism, which remain sensitive to negative shocks. But deleveraging has barely started, and it will keep domestic demand subdued, while export performance may not be replicable in the near-term.
Meanwhile, private debt remains excessively high. Whereas corporate debt burden is almost three times the economy, household debt remains at 130 percent of gross disposable income. Credit conditions are very tight, which is making it hard for manufacturers to compete, or even to survive.
Portugal’s unemployment is likely to remain above 15 percent. Despite stronger exports, employment has declined. Concurrently, youth unemployment has climbed to 40 percent.
If the Constitutional Court rejects the required fiscal measures in the budget, the government may have to resort to tax hikes. The latter would fulfill the EU fiscal targets, but further penalise Portugal’s lingering growth.
At the end of 2014, Portugal’s debt to GDP could exceed 150 percent, which will mean challenges to banks, new non-performing loans and recapitalization needs. Even with legislated structural reforms, Lisbon will face challenging times for years to come.
Erosion of living standards
During the past two years, EU leaders have occasionally predicted that “Europe is back” or “the worst is behind us”. Despite Brussels’ optimism, the elusive stability in the European markets has much more to do with the pledge of the ECB chief Mario Draghi to defend euro “whatever it takes”.
A sound, self-sustained fiscal recovery is years away.
In Ukraine is not taken into account, a new, though cautious market mantra suggests that Europe is slowly on the mend. But it will be a different Europe, particularly in the south.
In 1980, Portugal’s per capita income was twice as high as that in Malaysia or South Korea. By the end of this decade, it is currently projected to be 40 percent behind South Korea but only 15 percent ahead of Malaysia. Portugal’s per capita income will rank behind that of Oman, the Czech Republic, and Estonia.
In 1980, the Greek per capita income was almost four times as high as that in Malaysia or South Korea. By 2020, it will be only 25 percent ahead of Malaysia, but 30 percent behind South Korea. It will rank behind Slovakia and Lithuania and barely ahead of Poland and Gabon.
In the coming years, any progress in Southern Europe will be penalised not only by the continued deleveraging, but by the adverse impact of aging populations on productivity, growth and prosperity.
Structural reforms and inclusive growth – as well as a reassessment of current fiscal policies in the euro area – are needed. There is no easy way out any more.
The writer is Research Director of International Business at India, China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more, see www.differencegroup.net