Fall of Another Domino

By JIANG SHIXUE

Fall of Another Domino

By JIANG SHIXUE

Portugal follows other PIGS countries to seek international aid to cope with its economic crisis

No one loves the messenger who brings bad news.But recently, bad news items have arrived one after another from Europe. On April 6,Portugal asked the EU for financial aid, becoming the third euro-zone country after Ireland and Greece to request a bailout.

Deep-rooted crisis

Portugal’s current economic crisis can be traced back to the 1980s. On January 1, 1986,Portugal joined the European Community (EC),the EU’s predecessor. This not only expanded its international market, but also increased its attractiveness to foreign investors. For many years in the 1990s, Portugal’s economic growth rate was much higher than the average level of EC members.

Portugal joined the European Monetary Union in 1998, and became one of the 11 euro founders in the following year. Hence it bene fi ted greatly from a stable exchange rate, declining inflation and low interest rates. Many Portuguese believed they had finally bidden farewell to underdevelopment and embraced a prosperous future,thanks to European integration.

This brilliant prospect was accompanied by risks. For instance, the Portuguese Government implemented a policy of de fi cit spending. In addition to increasing social welfare, it invested heavily in infrastructure,constructing subways, highways and ports.Ordinary people boldly made use of bank credit to improve their living conditions. But Portugal’s economic structure did not change fundamentally. Textiles, shoemaking and winemaking remained its pillar industries. It had few hi-tech industries, and its industrial base was still weak.

Despite Portugal’s burgeoning trade ties with other countries, Portuguese small and medium-sized companies failed to become more competitive internationally. Unlike most EU members, Portugal has few big companies. Small and medium-sized companies were major players in its national economy. These companies, weak in hi-tech innovation, lacked competitive edge in the international market.

Worse still, after the EU’s eastward expansion in 2004, new members replaced Portugal to become favorite destinations of foreign investment. Portugal’s advantages in this regard gradually disappeared.

All these problems not only undermined Portugal’s economic potential but also led to unbearable deficit and debt. As a result,Portugal’s GDP growth rate dropped from 5 percent in 1998 to 0.7 percent in 2002 and-0.9 percent in 2003. Since then, this fi gure has been lingering between 1 percent and 2 percent, and there was even negative growth at times.

The global financial crisis in 2008 dramatically deteriorated the external conditions for Portugal’s economic growth.In the meantime, the heavy national debt of Portugal, Ireland, Greece and Spain sparked global concern. Media outlets even labelled them PIGS by abbreviating their fi rst letters. International credit rating agencies—Moody’s, Standard and Poor’s and Fitch—lowered the credit ratings of these countries. This made it more difficult for Portugal to get loans.

Timely bailout

Portugal was not willing to accept aid from the International Monetary Fund (IMF).This may be because of its painful memories from history. In 1977 and 1983 respectively,caught in economic crises, Portugal was forced to accept IMF assistance. As a precondition, it carried out a series of fi scal austerity measures requested by the IMF, including reducing social welfare, cutting public expenditure and freezing wage increases.

This time, to reduce fiscal deficit,Portuguese Prime Minister Jose Socrates carried out a package of anti-crisis measures. Of them, the most prominent was a “crisis tax,”which was implemented beginning May 2010.

But the government’s fiscal austerity plan, aimed at further cutting public spending, met with resistance from the opposition.On March 23, the plan, which had been endorsed by the EU, was rejected in parliament for the fourth time, forcing Socrates to resign. Eight days later, Portuguese President Anibal Cavaco Silva accepted his resignation and announced elections for a new government on June 5.

The political crisis triggered by Socrates’resignation worsened Portugal’s shaky economic situation. The country’s credit rating in the international fi nancial market was further lowered.

What’s more, Portugal must pay back a 9-billion-euro ($12.99 billion) loan due in the second quarter of 2011. But the government has only 5 billion euros ($7.21 billion) at its disposal. So the government is on the edge of bankruptcy. State-owned companies may even be unable to pay wages in the second half of this year.

The IMF said it was willing to provide aid for Portugal. Many Europeans questioned Portugal’s refusal to ask for help. They worried if the bailout was delayed, the debt crisiswould spread to Spain, devastating the entire euro zone.

Given its deteriorating political and economic situation, Portugal finally conceded.On April 6, Portugal said it had requested aid from the EU. At a meeting held in Hungary on April 8-9, euro-zone finance ministers said Portugal could get an 80-billion-euro($116 billion) relief package by mid-May as long as it agreed to take further austerity measures.

Spain’s future

Of the four PIGS nations are three that have fallen. Therefore, the world is watching whether Spain will be the next domino to fall. In other words, will the bailout for Portugal be a good beginning of the easing of the European debt crisis, or will it be a precursor to further deterioration?

If we call Portugal, Ireland and Greece peripheral countries of the EU, as their economies are relatively small, Spain should be considered as one of the countries at the center of the EU. The Spanish economy ranks 15th and fifth in the world and the EU respectively. Its GDP is almost twice as much as the total amount of the other three PIGS countries (see table).

Spain’s economic problems will therefore have serious repercussions for the EU economy. In addition to huge debt and fi scal de fi cit, the Spanish economy also faces other challenges, including a high unemployment rate of 20 percent, a large trade deficit, a fragile banking system and mounting in fl ationary pressure.

These problems result not only from the global financial crisis, but also the Spanish real estate bubble bursting off. Although it is difficult for Spain to improve its economic situation in the short term, the country is unlikely to be mired in a debt crisis.

In March, Spain issued treasury bonds at a low interest rate of 5.16 percent. In addition, the government’s fiscal austerity policies and labor market reforms have achieved good results. Analysts believe Spain has successfully helped itself out.

Eurostat, the EU’s statistical of fi ce, has predicted the growth rate of the Spanish economy will rise from -0.1 percent in 2010 to 0.7 percent in 2011 and 1.7 percent in 2012.

The author is a research fellow with the Institute of European Studies of the Chinese Academy of Social Sciences

CRISIS FOCUS: Portugal’s caretaker Prime Minister Jose Socrates (right)talks with EU Council President Herman Van Rompuy during an EU summit in Brussels on March 24, 2011