Portugal exposed

PORTUGAL IS bottom of the European growth league with GDP at 1.3 per cent, according to a report published in last week’s Economist magazine.

According to the magazine, since 2000, Portugal has been overtaken by the Czech Republic, Greece, Malta, and Slovenia, while Portuguese GDP per capita has plummeted from just over 80 per cent of the EU 25 average in 1999 to just over 70 per cent in 2006.

Portugal was the first country threatened with EU Commission sanctions for breaching the Euro Zone’s stability and growth pact, which sets ceilings for Euro member budget deficits at three per cent of GDP.

The European Commission has criticised Portugal for letting government and public spending soar out of control in the past 10 years, pushing the forecast deficit in early 2005 up to 6.8 per cent of GDP.

The magazine says the government is still struggling to bring the deficit down below three per cent and also wants to shake off its image among economists of “being a prime example of how not to behave when joining the Euro.”

However, it does concede that José Socrates has been “getting to grips with reform in Portugal since he took office two years ago with some success.”

After commissioning a central bank audit that revealed the alarming state of government finances, Socrates broke an election pledge and raised value added tax from 19 to 21 per cent.

The article also points out that his administration has attacked public-sector privileges by holding down pay, raising the minimum retirement age from 60 to 65 and sharply cutting sick pay.

It goes on to say that “this year the focus is on streamlining the bloated public administration, which costs more in terms of its share of public spending than any other Euro Zone country.”

Doctors, nurses, police and public sector workers have all taken to the streets in protest, although Socrates’ tough approach is “bearing fruit.”

The deficit fell to 3.9 per cent in 2006 (better than the initial forecast of 4.6 per cent) while exports have showed some signs of recovery.

However, when viewed alongside Spain, whose economic growth has been consistent in the past 10 years at three per cent, Portuguese commentators have been understandably asking why Spain is doing so much better.

In a poll last autumn, 28 per cent of respondents said they would prefer to be part of a united Iberian Confederation under Spanish governance.

The Portuguese Central Bank has given several reasons as to why Spain is outperforming Portugal in nearly every sector of the economy.

Apart from her size and larger industrial complex, Portugal has suffered more than Spain from higher oil prices, Portugal’s unit labour costs have risen sharply, while its construction boom – now enjoyed by Spain – is largely over.

However, the Economist says the largest reason is that, unlike Portugal, Spain reformed its public administration and disciplined its public finances before joining the Euro, something Portugal failed to do.

This is the bitter pill Socrates and his government is now belatedly trying to force the Portuguese to swallow.

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