The Corner

Doomed to Disaster

With Portugal stumbling towards a bailout that will, like those of Ireland and Greece, merely postpone the day of reckoning until the moment (fingers crossed) that these unfortunate countries can default without taking down a large swath of Europe’s banks, this excellent Wall Street Journal piece provides some useful background, not only on the immediate mess, but on some of the underlying structural reasons that meant that Portugal would have had little or no chance of flourishing under a ‘one size fits all’ currency regime,inconvenient  facts that are a vivid reminder of the dangerous financial irresponsibility of those who structured the eurozone in the way that they did:

The state of Portuguese education says a lot about why a rescue is likely to be needed, and why one would be costly and difficult. Put simply, Portugal must generate enough long-term economic growth to pay off its large debts. An unskilled work force makes that hard. Cheap rote labor that once sustained Portugal’s textile industry has vanished to Asia. The former Eastern Bloc countries that joined the European Union en masse in 2004 offer lower wages and workers with more schooling. They have sucked skilled jobs away. Just 28% of the Portuguese population between 25 and 64 has completed high school. The figure is 85% in Germany, 91% in the Czech Republic and 89% in the U.S.

“I don’t see how it is going to grow without educating its work force,” says Pedro Carneiro, an economist at University College London who left Portugal to do his postgraduate studies in the U.S.

The education woes in Portugal show the extent of Europe’s challenge as it tries to right itself amid the sovereign-debt crisis.

 Rapid and painful budget-cutting, which is being enforced across the Continent, is the first step. But the second is far harder and will take far longer. The 17 countries linked via the euro have vastly differing levels of economic performance. Unless the gulf is narrowed, the pressures that caused the weaker among them to pile up huge volumes of debt, and have trouble repaying it, will doubtless re-emerge.

Better schooling in Portugal won’t come quickly. Sharp cuts in its education spending make the task harder. And even if there are improvements, reaping their benefits could take years.

Greece and Ireland, the two EU countries that got bailouts, reached the brink relatively rapidly: Greece came undone after revelations it had grossly underestimated the government’s parlous fiscal state; Ireland self-immolated in an orgy of property speculation.

Portugal’s crisis, by contrast, has come to a boil slowly. For a decade, Portugal’s growth trailed the euro-zone average. Traditional industries like cork harvesting and shoe stitching couldn’t energize the entire country. The tech boom of the mid-2000s largely passed Portugal by. The Portuguese spent nonetheless. The economy—government and private sector together—has run cumulative deficits with the rest of the world of more than €130 billion over the past decade. The state hasn’t had a balanced budget, let alone a surplus, for more than 30 years.

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