Why Portugal shouldn't be the "P" in PIIGS

PORTO, Portugal — It’s no surprise that a beautiful spring day brings out the crowds for a stroll along the Atlantic beach that forms the western edge of Portugal’s second city.

But on a workday morning, what’s striking is the number of young men and women among the retirees and new moms enjoying the sun. Unemployment in this northern region, which was long Portugal’s economic powerhouse, is running at a record 11 percent, with 55,000 jobs lost in the last quarter of 2009.

Among the under-24 set, almost one in five does not have a job.

For months now, the Portuguese have been bombarded with an almost daily barrage of such bad economic data.

The national bank just downgraded growth predictions to 0.4 percent this year, and 0.8 percent in 2011; the statistics office says the deficit is up to 9.4 percent of GDP and the national debt is creeping toward 90 percent of GDP.

Figures like these have inevitably led to comparisons with another small, sun-drenched eurozone nation at the other end of Europe’s southern flank.

“You’re the next victims,” Greece’s Deputy Prime Minister Theodoros Pangalos warned the Portuguese in an April 5 interview with the business daily Jornal de Negocios.

The scenario haunting the 16 nations that use the euro as their currency is that investors scared by the near collapse in Greece’s public finances will start to flee other weaker members of the zone, with Portugal the first in a line of dominoes that also includes Spain, Ireland and Italy. If those nations start to face Greek-style difficulties raising money on the markets to re-finance their swelling public debt there’s a real danger of a renewed banking crisis.

Portugal, however, is not Greece. Although grim, Lisbon’s public finances are nowhere near as bad as those in Athens, where the national debt tops 120 percent of GDP and the deficit is running at about 14 percent. Successive Portuguese governments have also carried out reforms to overhaul social security and pensions, cut the state wage bill and privatize the economy that the Greek government is only now embarking upon.

“The situations are radically different,” said Cristina Casalinho, chief economist at Banco Portugues de Investimento. “We just have to look at levels of public debt, the deficit, at the reforms which the Portuguese economy has carried in recent years, for the way past and present Portuguese governments have worked to achieve fiscal consolidation,” she told GlobalPost.

Still, Portuguese Prime Minister Jose Socrates must be hoping that the name of the ancient Athenian philosopher is the only thing he shares with Greece. He drew international praise after his election in 2005 for cutting the budget deficit from 6.1 percent to 2.6 percent in just two years, but he has been unable to keep public finances under control as the global financial crisis hit Portugal hard.

In the latest effort to bring the spending gap under control, Socrates last month introduced a new Stability and Growth Plan (known by the suitably muscular acronym PEC) that aims to slash the deficit to below 3 percent by 2013 without stifling the fragile signs of economic recovery.

The European Commission gave qualified support to the austerity plan on Wednesday. EU Economic Affairs Commissioner Olli Rehn called the plan "ambitious" from 2011, but warned that additional measures might be needed to cut the deficit this year in the light of continued risks to economic growth.

The plan, involving privatizations, wage freezes and tax hikes, brought a ripple of protest but nothing like the mass strikes that greeted the Greek government’s austerity measures. However, while Socrates' Greek counterpart George Papandreou enjoys a solid parliamentary majority as he seeks to implement tough measures, Socrates’ minority Socialist administration has to rely on the acquiescence of the opposition. The main center-right opposition party abstained in parliament to allow the austerity package to pass, but may take a tougher line under an ambitious new leader elected in early April.

“We have the advantage of an economy that’s incomparably more liberalized than that of the Greeks,” said Eva Gaspar, journalist at Jornal de Negocios. “But we do have the disadvantage of a minority government.”

Portugal does enjoy more credibility. The scale of Greece’s deficit came as a shock after revelations that the authorities had long hidden the true state of its public finances and had failed to use the benefits of a sustained economic boom through the late 1990s and early 2000s to bring them under control.

“We didn’t deliberately try to fool ourselves or anybody else,” said Gaspar. “There are no reasons to suspect the credibility or the independence of the national bank or the Court of Audit, or the national statistics office, in contrast to the situation in Greece.”

So far, the markets have recognized the differences, allowing Portugal to borrow at interest rates of about 4.5 percent, higher than the benchmark rate of just over 3 percent enjoyed by Germany, but well below the over 7 percent rate inflicted on Greece, which forced Athens to appeal to the eurozone and International Monetary Fund for help.

“We are seeing clear blue water between Portugal and Greece. There’s big difference, and the markets are increasingly realizing that,” said Casalinho, the economist. “The risks are of a different dimension.”