FEPS Fresh Thinking

Portugal negotiated without much noise its bail-out deal with the EU and the IMF. Portugal will receive €78 billion in loans, including up to €12 billion for the banking sector. The loans will span until 2013, after which Portugal is expected return to the markets to finance it. The interest rate Portugal will pay on the loans will be set by euro zone finance ministers at a meeting in mid-May.

The intention is to give Portugal more time to meet the budget deficit targets previously set by the government. Portugal intends to cut this year’s deficit to 5.9 percent of gross domestic product, compared to government’s previous target of 4.6 percent. Last year the gap was 9.1 percent.

It is foreseen that the deficit will be further cut to 4.5 percent in 2012 (previously, the target was 3 percent) and to 3 percent in 2013 (previously 2 percent). The Portuguese economy is expected to shrink 2 percent this year under the programme, with a similar contraction forecast for next year. The government had previously forecast a contraction of 0.9 percent for this year.

Do these measures represent a step in the right direction for Portugal or for Europe? We should probably look very carefully at the austerity programme. The programme seems to be one of these classical well known austerity programmes with the results we all know. First of all, there will be enthusiasm that the measures bring the foreseen results. After some time, we know that the “markets” (whoever this is) will realize that the targets are not reached and speculation will start again with dramatic consequences for the ordinary employees. Tax increases, higher fees for health care, frozen public wages and pensions etc. So the ordinary citizen is paying the price!

What is more painful in all of this is that Portugal is also obliged to privatise public services such as, for example, electricity supply, the freight branch of the railway company and other additional state owned companies yet to be identified. Privatization of public services is the worst thing one can do. In the middle and long run all the services will become much more expensive for the consumer and less “effective”. The consequences to learn are simple: Big private equity companies are making huge profits in buying state owned companies at low prices. They then do the so called “necessary reorganization and restructuring” with suppression of jobs. After a couple of years they are knocking at the door of the state to ask for funding for necessary investments to maintain the service. The argument is that we need to assure the service for the citizen. They haven’t done anything to invest for the maintenance of the services in the long term. Their interest is the short term high profitability for the stakeholder, nothing more! (see for this Tony Judt’s Ill Fares the Land on the British railway system).

This is one of the long term problems of the Portuguese bail-out. The other will be the unanimous vote of the European finance ministers. It is not assured that the then new appointed Finnish finance minster can vote in favour. Perhaps he will be under pressure from the “True Finns” to do otherwise! All of a sudden we will have a populist identity crisis in Europe – the last debate we should have. This will bring down the European project!

 

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