Austerity ‘too fast and too deep’ has left Portugal’s economy staggering

The Praça da Figueira in Lisbon is a reminder of Portugal’s glorious past. Situated near the shores of the River Tagus, it is dominated by a statue of João I, the benign, learned king who took the throne in the late 14th century and laid the foundations for the country’s age of discovery and global expansion.

But a closer look at this part of Lisbon hints at the economic stagnation that has kept modern Portugal in recession for three years, and given it a jobless rate of nearly 18 per cent.

Several businesses in the area have closed. Angry graffiti can be seen in nearby back streets. The slogan “IMF out!”, painted on the wall of a shop, is a reminder that these days, the country relies on outside help to keep its economy afloat. The prosperous Portugal of João I seems a long way away.

“People just haven’t got money to spend. They’re cutting spending as much as they can, especially on things they don’t really need. That’s what I’m doing,” says Mário Pepe (36), who works in a nearby store.

He is speaking shortly after the European Union granted Portugal a seven-year extension to the €78 billion bailout it requested in April 2011.

That rescue, he says, “is not a good thing, but we have to do something. These are problems that have been building up for a long time and only now we’ve noticed we have to pay loans back – not only us, but our children too.”

Ballooning debt
Portugal's private debt started to balloon after the country joined the EU in 1986, and even more in the late 1990s, with the low interest rates of euro membership. When public debt also soared, after the international crisis hit in 2008, the economy could not take the pressure.

Two years on from the rescue, a common view here is that although the bailout may have been necessary, its gains are still hard to see.

"Right now you can't ask for a loan," says Teresa Botelho of the Association of Portuguese Businesswomen (APME). "We don't see any benefit [from the bailout] in real terms, for the little business or even the medium-sized business."

She says rapidly shrinking domestic demand is a concern for the private sector, which is having to look abroad – particularly to former colonies in Africa and South America – for business.

The conservative government of Pedro Passos Coelho, which took power in June 2011, has pushed ahead with a policy of austerity that seeks to slash the deficit in line with targets laid out by the IMF and European authorities. Savings of €4 billion have been planned for the next three years.

But opposition to the cuts and tax rises is rising, and not only in the form of street protests. On April 5th, the constitutional court struck down four austerity measures introduced by the government, creating a €1.3 billion hole in the public accounts.

Concern
The court's decision prompted the German government and the European Commission to voice concern about Portugal's finances. Mr Passos Coelho promised to cover the shortfall.

“It’s not so much that we’ve gone too far [with austerity], it’s more a question of going too fast and too deep in a short time,” says Rui Bárbara, an asset manager at Carregosa bank. “You can’t contract an important part of the economy in two or three years without the economy shrinking. Something has to grow to compensate.”

He sums up the current mood among many Portuguese as a blend of cautious hope and resignation: “With the extension, at least we’ve got a chance of avoiding another bailout.”