Portugal is set to become the third Euro zone country, after Greece and Ireland, to require emergency funds. The Portuguese economy has been overwhelmed by low growth and poor competitiveness making Portugal joins Greece and Ireland in the euro zone’s intensive-care ward. It has succumbed because of a failure to restraint in wage increases and to modernize its bureaucracy and the inability of its upstanding family companies into competing with the Chinese.
But the timing of Lisbon’s request for support makes the situation more awkward than expected, as a political crisis has left Portugal with a caretaker government whose authority to agree to a major financial rescue package is questionable. Moreover the EU will surely not lend money to Portugal without the fund alongside or without tough reforms attached.
Getting Portugal’s reform package right is the priority. But its main problem is a lack of competitiveness indeed the problems of weaker countries are not only their debt, but also the lack of competitiveness in Europe. Without the nations’ restoring competitiveness and selling more goods abroad, which can come only through a longer-term process of reducing wages and taxes to encourage private sector investment, economists are not optimistic about prospects for new growth soon.
European politicians’ responsibilities do not stop there. The debts of Greece, Ireland and Portugal must be restructured. With all three countries now being “rescued”, the politicians at Europe’s core should start work without delay on an methodical restructuring of their debt. But it is a prerequisite for drawing a line under the European debt mess.
Greece, Ireland and now certainly Portugal have access to hundreds of billions of dollars in emergency European aid to help them with their debt. But the helps are loans, and the interest rates the countries are paying are still high and those countries are caught in a “debt trap.” Escape from the trap generally requires devaluation of the currency, which cannot happen among countries that use the euro as their common currency, or strong economic growth, which none of the three have, or some kind of bankruptcy process, which all three reject.
The crisis in Portugal also raises new questions about whether the European Union will overcome the issues faced in the bank sector. Banks in well-off countries like Germany, France and the Netherlands, hold a lot of Greek, Portuguese and Irish debt. And if these countries cannot pay their debts, they would have to reschedule them, reduce them or default, causing a major banking crisis in the rest of Europe.
While some began to think that the EU was spirited out of its financial crisis, the Portuguese situation has revived all the economic problem of the European Union with a financial crisis that has now no end in sight making the EU definitively under pressure.
– The third bail-out. Economist, 00130613, 4/9/2011, Vol. 398, Issue 8728