Greece has rightly tended since the beginning of the euro zone crisis to attract as much or more attention than any other euro zone economy as the weakest link in the chain. Portugal has of the vulnerable countries attracted much less attention except at the time when its financial rescue programme was being negotiated and elections were held in the first half of 2011. This reflects the fact that Portugal’s sovereign debt burden, though rising steadily, still significantly less than that of Greece (even after the latter has seen private sector debt written down). And Portugal’s government deficit has been a perennial problem rather than, as in the case of Greece, one which suddenly shocked financial markets by the revelation in 2009 that previous deficits had been dramatically under-estimated.
Portugal does however have some similarities to Greece. Its population at 10.6m in 2011 is almost exactly the same as Greece’s estimated 10.8m. The two countries’ GDP at purchasing power parities are both at the bottom of EU and euro zone countries other than those taken in from the enlargement of the EU in 2004 and the more recent enlargements of the euro zone to include Estonia, Slovakia and Slovenia. In 2010 Greek GDP per head at purchasing power parities (PPPs) was €21,900 and Portugal’s €19,600, compared with a euro zone average of €26,400, according to Eurostat figures. As Greece’s GDP fell much more than that of Portugal in 2011 and is likely to do so again in 2012, the two countries’ GDPs this year are likely to be close to each other.
Both countries have been running high external current account deficits in recent years although Greece’s has been the higher of the two. These deficits should be given as much attention as fiscal deficits since they measure the viability of the countries’ economies as a whole, not just the public sector. In the case of Ireland, which, despite continuing major problems with its banks and public sector, remains a much richer country, the current account deficit has already been eliminated. Current account deficits can be reduced mainly by two methods, reducing imports of goods and services or raising exports. As long as there are free economic exchanges, a decline in imports in the short term mainly requires that domestic demand falls. There is also the longer term possibility of substituting for imports with domestically produced goods and services, but unless protectionist measures are introduced, this implies the gaining or regaining of market share in turn implying improved competitiveness. Such improvements could in theory be through either higher quality or lower prices but in practice with incomes constrained are more likely to occur through cutting prices.
Raising exports would be the ideal way out of recession. The difficulty of vulnerable south European member states raising exports is intertwined with the difficulty of coming out of the vicious circle whereby attempts to reduce public and private sector deficits and debt weaken overall demand and tax revenue, thereby negating much of the impact of deficit reduction measures. If exports could be increased, they could offset declines in the domestic economy, and furthermore export earnings should feed through into the domestic economy.
One problem is that with the EU in recession, demand for exports is weak but the more fundamental problem is the export potential of the countries concerned due to the limited diversification of the economies and lack of brand recognition of most Greek and Portuguese merchandise products. Portugal and Greece are both well known as tourist destinations. There are however capacity limits at the more favoured tourist destinations during the peak season so expanding demand for holidays in Greece and Portugal would require increasing the range of favoured destinations and attracting visitors outside the peak season. While value for money is important a sharp reduction in prices would not necessarily boost demand by more than the loss of income from lower prices. Greece also has large earnings from shipping but much of these do not reach the domestic economy and the competitiveness of the Greek shipping industry is only to a limited extent dependent on conditions inside Greece.
The performance of exports of goods and services in the last few years puts Portugal in a much better light than Greece. Portugal has seen its exports rise in the last three years to €67.3bn from €60.7bn in 2008 while those of Greece have fallen €56.2 to €51.7bn. The increase for Portugal game mainly from goods while the fall in Greece’s case was entirely of services, though the latter still accounted for half of the country’s exports compared with just over a quarter in the case of Portugal. Judging from recent performance the opportunities for goods exports look better for both countries than for services.
The political situation is also hugely better in Portugal than that in Greece. It has a majority government and main opposition both committed to complying with the EU/IMF conditions in the financial rescue programme. Indeed the government in some respects wants to go further and certainly gives the impression in for example planned reforms of commercial law, competition and bankruptcy law—all currently major weaknesses—that it is taking the initiative rather than just doing what it is told to.
Nevertheless Portugal still has a long road to climb, which will not be helped by the impact on exports of recession across much of the EU this year. Public debt continues to rise rapidly and the nominal government deficit of 4.2% of GDP in 2011 was highly misleading and would have been 7.7% without a credit being given by the state adding substantially to its pension liabilities. Portugal also has a longstanding overhang of private sector debt (higher than Greece’s) which is a worry for its banking sector and there is little possibility that the Greek government could help the banking sector without making itself insolvent. EU negotiators have insisted that the write-down of private sector Greek government debt held by the private sector in the financial rescue package for the country, that was finalised in March 2012, was unique. Though Portugal is in a somewhat better position than Greece, it is not yet certain that it can pull through and get on top of its debt without any write-down.