Portugal: A Case Study of Austerity

In ‘99 Portugal adopted the Euro (“€”) after joining the EU in ’86. At the time the country’s Gross Domestic Product (“GDP”) per capita was 80% of the EU average versus 38% forty years earlier. The Global Competitiveness Report (2005) ranked Portugal 22nd out of 134 countries, and the Economist Intelligence Unit’s Quality of Life survey (2005) ranked Portugal 19th in the world and ahead of France, Germany, the UK, and South Korea.

Two years later, in mid 2007, the Economist magazine Described Portugal as “a new sick man of Europe.”

In December 2009 Standard & Poor’s lowered Portugal’s long-term credit assessment from ‘stable’ to ‘negative’.

It is instructive to note that unit labor costs (“ULC”), according to Standard and Poor’s (S&P), during the early-to-late 2000s increased 19% for Portugal versus 17% for Euro-area ULCs, excluding Germany. Importantly, wage discipline in Portugal, as well as in Greece, Ireland, and Spain, over the past decade only partly explains the countries’ widening external deficits; the direct drivers of imbalances were principally volume trade effects, not unit labor costs.

In May 2011 Portugal received a €78 billion bailout from the European Union/IMF.

The country may require a second bailout in 2012, when analysts predict Portugal’s Gross Domestic Product (GDP) will drop by 3%.

Portugal is suffering its worst economic slump in over 30 years, but the handwriting for this was on the wall a decade ago when world trade talks lowered tariffs on cheap textile imports from Asia, hurting Portugal, then the EU’s sweatshop, and secondly, with China’s entry into the World Trade Organization in 2001, Portuguese firms were further pressured by substandard labor competitiveness via China.

Meanwhile, the country bathed in a steady inflow of cheap credit, pushing net foreign debt to more than 100% of GDP.

As of today, Prime Minister Coelho’s budget for 2012 provides for a “national emergency,” which will require additional, a second round of, austerity measures directed at workers: (1) shift work in the private sector may be extended half an hour daily without corresponding overtime pay, (2) yearly bonuses are abolished for public sector workers who earn over €1,000/month. (3) The VAT tax will increase on gas and electricity from 6% to 23% (4) health and education spending will be slashed. (5) reduce holidays by 4 days per year (6) slash overtime pay by 50% (7) eliminating rest breaks (8) reducing unemployment benefits

Henceforth, the EU, IMF, and ECB (European Central Bank) control the country’s budget.

The new budget, combined with earlier cuts for workers, will see public sector take-home pay cut by 27% next year compared to 2010. Further, and in order to accommodate EU/IMF dictates, the government is transferring €6 billion in assets from the state pension fund to the state balance sheet to plug holes in the budget, a one-time shot in the arm, taking away from pensioners to satisfy EU/IMF demands.

The Accord between the country and the EU/IMF requires Portugal to reduce its annual public deficit from 9.8% of GDP in 2010 to 5% by year-end 2011. However, the figure stood at 8.3% when last analyzed in 2011. The EU upper limit is set at 3% in 2013. It is questionable whether this target will be met.

Most likely, more austerity measures will be required to meet the prescribed limit for deficit spending; otherwise, the economy must grow like a weed to ‘grow out’ of the hole… but the protagonists in this drama are insisting upon more, and more, austerity measures… not growth plans! Evidently, the EU/IMF believe the country first requires a hardnosed dose of pulling itself up its own bootstraps before growth is re-emphasized.

According to the Dow Jones Newswire, Feb. 14, 2012, commenting on 4th quarter GDP of -2.7%, “… a sharp fall in activity in the fourth quarter signaled austerity measures are increasingly hitting the country… The fear is that, as in Greece, cuts in public wages, higher unemployment and continued tax rises could create a deep recession….”

The ‘fear’ mentioned in the Dow Jones Newswire is being monitored by investors and neoliberal wonks, the same parties that shoved austerity measures down the throats of the Portuguese citizenry, and now, their own austerity measures are causing the crash in the economy. Maybe they should consider changing course… to pro growth policies rather than the pro austerity policies, which shrink the economy. Although, it is possible they know of no other alternative outside of cutting worker’s benefits, and in the final analysis, some of that may be necessary to right-the-ship, but are the extreme measures they have gone to really necessary?

Here’s more proof of the dire consequences of the austerity plan: According to Moody’s, February 2012, after downgrading Portugal’s sovereign debt again, “The unemployment rate is likely to remain high and nominal wages will remain under pressure due to cutbacks in public-sector bonuses and staff levels, thus depressing domestic demand.”

The very cutbacks Moody’s references are part and parcel of the medicine prescribed to heal the country. Evidently, the EU/IMF grabbed the wrong pill bottle out of the medicine chest, and/or maybe, the country needs a new doctor. They appear to be poisoning the patient… unless poisoning was their proactive intent from the onset.

The government has admitted it cannot find jobs for 700,000 unemployed, specifically

teachers and recent college graduates. The government blames the austerity measures

imposed by the IMF, EU, and ECB when the country was granted €78 billion last May.

In December 2011 the country’s unemployment hit 14%; the highest level ever!

Miguel Relvas, Minister for Parliamentary Affairs in Portugal, is recommending unemployed citizens leave the country to find jobs in former colonies where Portuguese is spoken… emigrate!

Prime Minister Pedro Passos Coelho has openly advised unemployed teachers to search for work in Brazil or Angola… leave the country!

The country has given up on its own citizens and likewise has tossed in the towel on its ability to manage a modern nation-state competitively in the world market place.

Further, in order to fill the void, the bankers of the world, in harmony with policy wonks for extra-governmental policy organizations, like the IMF, have prescribed the only drug in their medicine cabinet… austerity… austerity… austerity, and if that does not work with the first dosage, then, try another dosage of austerity!

All of the authorities are throwing in the towel, including the Prime Minister, because austerity measures have overwhelmed the economy’s capability to function at a level consistent with respectful levels of employment and domestic demand. Well… well… well… surprise, surprise… they cut wages and lowered benefits across the board and the economy is slumping. You’ve got to wonder who really thought it would be any different than this… or, was this really the plan all along?

How did Portugal get to this point?

In the beginning, two things happened: (1) the government overspent public funds on pet projects and (2) international bankers loaned the country money like drunken sailors on shore leave.

Additionally, international trade agreements opened up new competition to Portugal’s previously competitive industries, an example of the invisible hand of the free market at work, called ‘globalization’, searching for the lowest bidder of substandard wages and substandard worker benefits, producing substandard products, the neoliberal answer to capitalism-in-motion.

In reality, capitalism feeds upon itself as demonstrated by Portugal’s loss of trade relations to Far Eastern competitors who pay rock bottom wages because they can get away with it, similar to dumbing down the news, this is dumbing down Portuguese worker’s benefits to meet substandard labor conditions elsewhere on the planet. Is this good or bad for capitalism? And, is the goal of capitalism substandard working conditions? It must be because this is precisely what is happening around the world, substandard worker conditions/benefits/wages grease the pathway to substandard domestic economies in formerly competitive nation-states, like Portugal was in 2005, when The Global Competitiveness Report ranked Portugal 22nd out of 134 countries,

In the end, and in concert with the 2008 economic breakdown by Western democracies, Portugal could no longer service its debt.

In order to fix this conundrum, it was decided to cut back on worker benefits, i.e., austerity. Thus, the invisible hand of free market capitalism worms its way through the system, rewarding capitalists for their mistakes by taking from innocent workers both in the real world of very harsh competitiveness and in the dictatorial world of debt settlements.

Woe to the workers!

AND, woe to the assets of the country as an all-out privatization (world’s largest country asset sale) gets underway, the sale of state enterprises, kicked off in December 2011 as part of the Accord with the EU/IMF neoliberal policy wonks. The country is selling its best assets, and this is happening with a weak economy when assets are the most undervalued in the market.

1) The state sold off all but 4% interest in Energias de Portugal (“EDP”) the state-owned utility that brings in major profits to the country. A Chinese company purchased the majority stake.

2) Next up for sale will be the highly lucrative airport authority, Aeroportos de Portugal and sale of the national airline, Transports Aereos Portugueses.

3) The state’s oil company GALP will be sold.

4) Red Electrica Nacional, the national power grid will be sold.

5) CTT, the national postal service, must be sold by early 2013.

6) A partial sale of Radio e Televisao de Portugal is planned.

7) A partial sale of Aguas de Portugal is planned.

Parpublica- the state holding company for state-owned enterprises will be dismantled in 2013

A financial coup d’etat has taken control of the entire country. The people of Portugal no longer own, nor control, their own country; they have effectively lost control to foreign interests.

There is real irony to this story as Portugal was a colonial power only a couple of centuries ago. Today, Portugal is a colony.

The dignity of Portugal has been sacrificed on the chopping block of neoliberal interests without any say whatsoever by the people of the country… other than in the streets!

Portugal is a prime example of capitalistic globalization at its most proficient, and the common denominators are: (1) The cheapest way to build and sell products is the neoliberal way, which means the invisible hand of the free market searches the globe for unregulated, substandard labor conditions to produce unregulated products with the lowest worldwide labor costs to grow more profits, and (2) if something goes wrong with a country’s economy, penalize the workers but protect capitalists/creditors.

The net result of neoliberalism’s fix for Portugal is a collapsing middle class; however, it is the middle class that is the mainstay for a healthy capitalistic democratic country. Already, the country has a new class of citizen supplanting the middle class, the “New Poor,” people who marginally earn too much, i.e. €620/month, to qualify for social welfare programs but do not earn enough to meet mortgage payments, health, and education costs (similar to what America is experiencing as reported by Time Magazine, the New York Times, The Washington Post, Atlantic Monthly, and the LA Times.) This is how democracy fails… by losing its middle class, falling/failing at the feet of neoliberalists’ ideals as capitalism and democracy crumble apart like an ancient tomb.

Hopefully, we can live with these hallmarks of advanced civilization, because the process of state-owned privatizations, stripping away state assets to benefit private interests, and undercutting worker benefits has only started, and with it, rugged, individualistic capitalism is finally reigning supreme throughout the world… can democracy survive?

Only the bottom line counts!

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Robert Hunziker is a former hedge fund manager, is a professional independent negotiator for worldwide commodity actual transactions and a freelance writer for progressive publications as well as business journals with several articles published in Counterpunch, The Firebrand Magazine, and Engineering & Mining Journal. Mr. Hunziker earned an MA degree in economic history at DePaul University/Chicago, and he resides in Los Angeles. He can be contacted at: rlhunziker@gmail.com.
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