The Corner

The Perpetual Euro Crisis Comes to Portgual

Last night the president of Portugal addressed the nation on television to announce that, in effect, the nation’s economic and political crisis is to be extended indefinitely. He had previously appealed to the major political parties to form a “National Salvation” administration to sustain the austerity program of government-spending cuts that is needed if Portugal is to get its next tranche of money from Brussels which is itself needed to keep Portugal solvent inside the euro. Bodies with names such as “National Salvation Front” are ominous. They signify that the usual operation of democracy is in trouble. The parties are ganging up on the people to impose an unpopular policy that they might reject if they got the chance.

So it may not be a wholly bad thing that the parties failed to agree. The reason, however, is interesting. It is that the opposition Socialists could see only too well that supporting these cuts would doom their chances of winning the next election. Unemployment is 17 percent; youth unemployment is far higher; and the predicted 0.3 per cent growth next year is looking highly doubtful. Why should a sane opposition voluntarily take on the responsibility of defending that record — especially when they lost the last election precisely because they had brought in the policy in the first place?

Faced with this refusal, the president ruled out early elections last night, and asked the shaky center-right coalition to continue in office. Bravely, the conservatives agreed to bear the burden of austerity alone. But they know they are almost certainly sacrificing their electoral future for the sake of the euro — and that future may arrive quicker than they and the president calculate if the economy continues to worsen.

As it happens I was in Portugal exactly a month ago at the annual Estoril Political Forum put on by the Institute of Politics at the Catholic University of Lisbon. The politics of the euro was a main topic on the agenda, and I appeared on a panel discussing it. (My remarks are reflected in what follows.) The debate was vigorous and contentious — in sharp contrast to the rest of Europe, then undergoing one of its regular bouts of groundless optimism. European leaders, notably France’s President Hollande, were arguing that the euro crisis was finally over. The euro-zone leaders had succeeded. No country had defaulted. And those countries threatened with insolvency were now climbing out of debt.

Well, readers, please pay the greatest attention to everything President Hollande says in future. As C. Northcote Parkinson observed, there is no one who is always right, but there are a few valuable people who are always wrong. They are great assets to the organizations in which they work. They should always be consulted, but they should probably not have the top job. It seems fair to say, though, that the Portuguese took a less confident view than President Hollande. They are a sober people at the best of times, and the signs of crisis were already germinating. Peaceful protests were being held in Lisbon. An air-traffic controllers’ strike forced the conference’s foreign guests to remain longer on the beaches, fretting. Newspapers were reporting that Portugal and Ireland were having their loan-repayment schedules extended and that Italy would probably request a further Euro bailout within six months. And since future bailouts depended on Germany’s continued willingness to provide the funds, its election later this year added another uncertainty to the mix. Besides, too many Euro bailouts had been promptly followed by the next crisis for this latest boast to be credible.

But the unkindest cut of all is that even if the funding crisis of the euro were to be finally solved — and as the Portuguese crisis shows, there is very little sign of that — the second crisis of the euro would rumble on indefinitely. This is that the single currency locks the Mediterranean countries into a vertiginously unfavorable exchange rate. The only way to solve that problem within the euro is for the workforce in Greece, Portugal, Spain, and Italy to improve their productivity and/or to reduce their incomes in a process known as “internal devaluation.” The scale of these internal devaluations is quite dramatic. Greece would have to devalue its putative exchange rate — to reduce its price and wage levels relative to Germany — by about one third. No economist thinks that this can be done quickly, if it can be done at all. And while these countries are struggling to reach this receding objective, they will be locked into economic austerity. 

It sounds weird to write this, but in the economics of the euro, endless recession (a.k.a. austerity) is not a problem. It is a solution — indeed, the solution. Austerity is what you have to do in order to keep countries with very different productivity levels and price levels within the same currency. Let me quote Martin Wolf of the Financial Times on the similar situation of Greece:

According to the OECD . . . real private demand fell by 33 per cent between the first quarters of 2008 and 2013, while unemployment rose to 27 per cent of the labour force. The only justification for such a depression is that a huge fall in output and a parallel rise in unemployment is necessary to force needed reductions in relative costs on to a country that is part of a currency union. Since the Greeks want to remain inside the eurozone, they have to bear the resultant pain.

Let me repeat Mr. Wolf’s words: “They have to bear the resultant pain.” Now, you sometimes hear political leaders say that they want to remain in the euro but to reject austerity. But this choice does not exist. For Portugal, Greece, and other countries similarly placed to remain in the euro is to choose austerity. For their governments to make the same choice is to choose election defeats — when elections can be postponed no longer by such devices as foisting technocrats on them. And for the governments of northern Europe it is to choose higher taxes in order to maintain a potentially endless flow of loans and subsidies to Europe’s new poor. 

What are the benefits that compensate for this deliberate policy of mutual impoverishment? And who are its beneficiaries?


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