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Positivity in Portugal

Jochen Faget sgb
November 28, 2016

As Portugal posts cheery economic figures, economists debate the link between strong growth and rising debt. But like in other eurozone nations, there's no consensus as to the right economic policy.

Portugal - "Ascensor da Bica" in Lissabon
Image: picture alliance / J. Woitas

With the EU's strongest economic growth - 1.6 percent - over the past quarter, the number of unemployed declining by 10 percent in recent months, and now another tranche of its debt to the troika repaid, Portugal looks like it is on its way out of crisis. That, at least, is the cautiously positive message from Prime Minister Antonio Costa, backed by the European Commission.

Portuguese Prime Minister Antonio Costa
Prime Minister Antonio Costa is bullish on Portugal's growth prospectsImage: Getty Images/AFP/T. Charlier

But there's a downside: The national debt has risen to 133.1 percent of GDP, and the interest rate Portugal has to pay to borrow money is now almost 4 percent and climbing. Economists warn the banks aren't working and the economy urgently needs investment. There is, they say, much to be done before the country is on the right path.

Tourists aren't enough

"We do not have any exact data yet, but the most recent economic growth is likely to have been caused by tourism in the summer," economics professor Aurora Teixeira explained. Not least because of the uncertain situation elsewhere in the world, the travel industry in Portugal is booming. Tourists and convention visitors are flocking to the country and spending millions.

But this will quickly change again in the winter, Teixeira said, showing Portugal's need for more even growth: "We also have to produce and export more goods if our economy is to function again - and not just rely on services in the tourism sector."

Less cost-cutting, more growth

Portugal, Castelo beach
The Algarve brings in the tourists - at least in the summerImage: picture-alliance/ZB/J. Kalaene

The government says the growth in tourism is sustainable and is the result of far-sighted political decisions. Officials say a large amount of money has flowed into diversifying the industry - and that means Portugal no longer offers only summer sun and beaches, but has become an all-year destination.

"There is still a lot of room for improvement," said sociologist and left-wing politician Joao Teixeira Lopes, whose party supports the minority Socialist government in parliament.

Above all, Teixeira Lopes said, the situation had brightened after many austerity measures adopted by the previous government had been scrapped. Lower taxes and a slight increase in purchasing power, especially for public servants, had stimulated domestic consumption and tax revenues: "Portugal has shown that it can improve its outlook and heal its economy even without the fetters of austerity."

Demonstration in Lisbon
Public servants went on strike on November 18, demanding higher wagesImage: Picture-Alliance/dpa/N. Fox

Should the state save?

But here there are deep divisions. The dispute over austerity policy has broken out again, with the fronts hardened: Socialists, communists and the left-wing bloc want to bring about growth through more government spending. The conservative opposition and many economists are warning against this, calling instead for greater discipline to be the priority: "We cannot spend more money than we have," Teixeira said. "It is better to make certain sacrifices now, so that the economy can work again and the state can later distribute wealth more fairly."

Portugal's employers agree. They have now declared war on the government - and especially on its prestige project, the minimum wage. The Socialists have promised to raise the figure to 600 euros ($635) a month by the end of the legislative period, with it climbing next year from 530 to 557 euros.

The employers' association is livid. For exports to be competitive, it says industry needs low labor costs - and many of the small and medium-sized companies in particular cannot afford the higher wages. It says they threaten to nip Portugal's growth in the bud.

Only structural changes can help

"We have to save for many years if we want to make our way out of the crisis," Teixeira said. Only thoroughgoing structural changes can lift Portugal out of its permanent misery, she said - and that also includes cutting government spending.

But spending has been rising steadily since austerity was abandoned. And because the economy is not growing as strongly as forecast, the shortfall can only be compensated for by new taxes, she said.

This in turn frightens away foreign investors, bringing Portugal back to the economic abyss, Teixeira said - warning that not even the rosy recent figures could change this.