the economy: run aground and underground

Passos Coelho pede aos portugueses “boas ideias para o país”

Yesterday the Portuguese prime minister was asking for good ideas from the people, for the good of the country. He’s not specific about saving the economy, but obviously that’s where we should start.

“We are making important changes in Portugal and it is important that during this period, we can broaden and deepen the democratic debate and this can not happen without the participation of all citizens,” said the prime minister in a video of 90 seconds published today on the Facebook page “o meu movimento”.

Zombie Europe

Portugal’s problem, in short, is that it cannot afford the repayments on its IMF debt. The EU policy of demanding growth and increasing employment while balancing the budget is simply more than the government can handle. The failure of this policy is being called “Zombification” by this economics blogger, in which nations “can’t grow out of their debts yet aren’t being allowed to fail on them either.”

Portugal is on life support, fed artificially by the IMF but kept in a coma by the EU conditions. Is the solution to let Portugal’s euro-based economy die and rebuild “from the ashes”? Do we return to the escudo?

The prognosis looks bleak.

Greece lines up Portugal

“This year Portugal enters its third year under a bailout and this year is expected to be the toughest with more tax hikes and the elimination of two months of pay for civil servants. The government is already calling for a economic contraction of 3%, but a look at the latest stats from the central bank suggest much worse.”

and

Portugal’s economic mess worsens

As Portugal’s economy deteriorates, a second bailout, Greek-style debt restructuring or even exodus from the euro zone loom as possibilities. “Not only will a second aid package be required, but the recognition that a debt restructuring may be necessary is increasing,” Marc Chandler, chief currency strategist at Brown Brothers Harriman, said in a Jan. 24 report.

Almost all of Portugal’s key economic indicators are going in the wrong direction. Unemployment is climbing relentlessly. The national jobless rate is 13.2 per cent and the youth unemployment rate, at almost 31 per cent, is the euro zone’s fourth highest.”

Commentators are not just worried for Portugal per se, but concerned about the complete collapse of the euro and the shockwaves that would cause in their own economies.

Portugal’s borrowing rates rise to record 19.4%

New high arrives amid fears that bailed-out country will not be able to break free of financial crisis

The worsening crisis in the eurozone has hit the British economy, and analysts fear that the contagion from Greece may spread throughout the eurozone and drag Britain and the rest of the world into a prolonged recession.

Although this article suggests that Portugal may not be able to avoid defaulting on its loan, it recognises that there is an effort being made to restore fiscal health and therefore it may not be so difficult for Portugal to renegotiate the bailout deal. The government so far has denied it would try. The government is in denial.

The same point of view, this time from the American perspective:

Portugal Suffers as Loss of Confidence in Bonds Sends Yields Higher

Investors fled out of bonds of weaker European countries on Monday, sending yields on Portuguese government bonds to a record high over concerns that the euro zone debt troubles were spreading beyond Greece.

The higher yields means that the Portuguese government has to pay significantly more interest than, for instance, Spain, whose yields on 10-year bonds were around 4.98 percent on Monday.

Portugal, which is in a recession and has been lowered to junk grade by ratings agencies, has less debt than Greece but there was still a growing belief that the country would have to ask for a bigger bailout than initially expected.

But other analysts noted that Portugal was in far better shape economically than Greece. It has 100 percent debt-to-gross domestic product ratio compared with a ratio of about 160 percent for Greece, said Charles Diebel, head of market strategy at Lloyds Banking in London.

“To a degree, yes, Portugal’s in trouble,” Mr. Diebel said. “But the problems there are nothing like in Greece.”

So things are not all that bad, compared to Greece. Why, exactly?

A Bluffing Game

The Greek economy is not productive enough to generate growth. Aside from olive oil, textiles and a few chemicals, there are hardly any Greek products suitable for export. On the contrary, Greece is dependent on food imports to feed its population.

According to a study by the German Institute for Economic Research, a key cause of the problem is the relatively poor price/performance ratio. In Mediterranean tourism, (for example) Greece has to compete with non-euro countries like Croatia, Tunisia, Morocco, Bulgaria and Turkey, which can offer their services at significantly lower prices. The per-hour wage in the hospitality industry was recently measured at €11.39 in Greece, as compared with only €8.49 in Portugal, €4 in Turkey and as little as €1.55 in Bulgaria. The study arrives at grim conclusions, noting that the drastic austerity programs will not only remain ineffective, but will also stigmatize the country as “Europe’s problem child” for a long time to come.

Portugal’s problem is not that it is uncompetitive or unproductive. Portugal’s problem is its lack of growth. It is stifled by an internal fiscal policy that cripples medium sized business with beaurocracy,  punishes entrepreneurship and small business with taxes and allows corruption and cronyism in big business to run rife. The mother stymie of them all is 23% IVA, a tax which keeps mums and dads from spending and fails as substantial government revenue.

Here’s why. I encourage you to follow the link and read the whole article. It describes the reality of the failure of the Portuguese economy. The Portuguese will not riot on the streets as the Greeks have. Theirs is a quiet revolution, another carnation revolution, through civil disobedience and non-compliance.

Portugal: Going Underground in Hard Times

The underground economy in Portugal is booming thanks to the steep increases in taxation and prices demanded by a ‘troika’ of international creditors to address the country’s economic crisis. 

Sheer survival instinct among those most affected by the austerity measures is driving them further into the parallel economy, which according to recent official figures amounted to 24.8 percent of GDP in 2010.And it is continuing to grow, owing to the severe economic crisis from which there seems to be no way out, a study from the Faculty of Economics of the University of Porto concludes. There are still no statistics for 2011, but economists who have analysed the situation and made their findings public concur that the informal economy grew last year, and is expected to grow again in 2012.

The rise of the informal economy mirrors the ongoing decline of the formal economy, amid rumours of a probable new tax hike that has still not been confirmed or denied by the right wing government of Prime Minister Pedro Passos Coelho.Rising prices, taxes, social security contributions and unemployment, along with cuts in social benefits and health care, are the main drivers behind the flight to the underground economy.

Activities in the parallel economy are not registered in the statistics tracking the country’s wealth. One-quarter of economic production is left out of Portugal’s GDP, which is nominally 223.7 billion dollars a year, says the University of Porto study, released this month.

The underground economy generates more than 52.6 billion dollars a year – half the amount of the international troika’s bailout plan.

Portugal has the third largest underground economy relative to GDP in the EU, after Italy and Greece. What all three countries have in common, and helps to explain the state of their economies, is high indirect taxation, high direct taxes on consumption and high unemployment, the study says. 

In 1970, when the first studies were done on the black economy, its activities had a value of 9.3 percent of GDP. By 2010 it had grown to 24.8 percent of GDP.

My message to you, Peter Rabbit.

First, reduce the debt. Renegotiate the bailout deal. Sell the submarines (€500 million) and freeze defence spending (€2 billion-ish – all governments in recession should do it). Install 1000 speed cameras on the roads (cost €20 million, annual revenue €20 million)

Then reduce IVA by 10% and introduce mandatory tax compliance and auditing by a new centralised finanças body: start with big business. Legislate to make hearings and penalties for tax avoidance immediate and severe. Create incentives & tax breaks for the self employed and small business. Create a grant scheme for medium business to take on employees.

Fundamentally, what this country needs is an active Ombudsman and an ongoing war against corruption and conflicts of interest. Royal Commission/Committee style investigations into the Police force, the Judiciary and local government should result in a cleanout of the protectionist, unethical and ultimately obsolete modus operandi which binds Portugal to its past and to a development stalemate.