Euro Obscured, Amplified Portugal's Problems.
The euro, instead of locking in the country's path toward economic growth, appears to have helped derail it.
"Joining the euro was supposed to be the first reform," says Jorge Braga de Macedo, who was finance minister during Portugal's early steps toward euro membership in the early 1990s. Instead, "it was the last."~
online.wsj.com
Euro Obscured, Amplified Portugal's Problems.
By BRIAN BLACKSTONE
VILA NOVA DE FAMALICAO, Portugal—This country was Europe's darling when it entered the euro: With strong growth, falling inflation and declining deficits, Portugal showed how a common currency could unite a disparate region.
S&P's downgrade of Portugal's credit rating on Tuesday brought a rude awakening: The euro, instead of locking in the country's path toward economic growth, appears to have helped derail it.
More than a decade ago, the low interest rates that came from the euro's imminent creation were supposed to propel investment and efficiency gains. Instead, it created the appearance of prosperity. Underlying problems, such as low productivity and a bloated public sector, went ignored.
At the same time, membership in the common currency left the onetime textile powerhouse unable match the prices of China and Eastern Europe, but also unable to equal the sophisticated products of euro-zone stalwarts like Germany and France.
Economic reforms initiated in the early 1990s were shelved. With no opportunity at home, Portugal's best and brightest started fleeing to better opportunities abroad.
"Joining the euro was supposed to be the first reform," says Jorge Braga de Macedo, who was finance minister during Portugal's early steps toward euro membership in the early 1990s. Instead, "it was the last."
The cautionary lesson from the euro zone's 10th-largest economy—that monetary union and a common currency are no substitute for a skilled and productive work force and budget discipline—is apparent here amid once-busy clothing factories and fabric mills in the hills outside the coastal city of Porto. Textiles make up 22% of Portugal's manufacturing employment and 11% of its exports.
Unlike Germany, which produces high-value capital goods that aren't overly sensitive to price, Portugal is stuck competing against countries with lower wages and devalued currencies. The average monthly wage for many Portuguese textile workers is low for the euro zone—just €600 ($790) a month—but still higher than in China and other competitors.
Pedro Marques Pereira, export manager at one of the thousands of companies in Portugal's fashion and textile heartland, has watched the country's competitiveness erode. He is seeing nightwear and pajamas that compete with his Mira Lingerie line coming in from China for as little as €5, about half of what he can do. Even if he were to use the cheapest fabric, he said, he can't match that.
"Now all the customers speak about prices," Mr. Pereira says from the offices of his company, Constantino Carneiro de Sousa, in the town of Vila Nova de Famalicao. Five percent is about as much a discount as he can stomach. "I can't do more."
Textile exports have fallen steadily in recent years. The sector's production is down about 25% since 2004, and employment is down about one-fifth.
To find work, Portugal's skilled workers are increasingly looking overseas, robbing the economy's long-term productivity. Nearly 20% of Portuguese workers with some university training are working abroad—"a huge amount" and many times higher than in France, Germany and Spain, says Frédéric Docquier, a professor at Université Catholique de Louvain, who studies migration patterns.
Just as Portugal's pre-euro boom of the 1990s preceded those of others on Europe's fringe by more than a decade, its bust has preceded others', too.
Portugal has grown just 0.5% per year since 2001, half of the euro-zone average. It was one of the only economies in Europe to contract at the end of 2009. Lisbon's slow action in reining in public spending, meanwhile, has contributed to larger deficits. Portugal is the only country to be hit with excessive deficit warnings by the European Union three times.
Lisbon "did not maintain fiscal discipline" after the euro, says Mr. Macedo, the former finance minister. "We were not alone in this ... but we did it with enormous gusto."
Portugal has less government debt than troubled Greece and other European economies, and smaller amounts of it are held by banks in the euro zone. Its budget deficit is the lowest of any country on the euro zone's vulnerable fringe—a group that also includes Ireland, Greece and Spain—at 9.4% of GDP.
But Portugal does provide a preview of how neighboring economies might fare given limited opportunities to repair their balance sheets. Spain, Greece and even Ireland are at risk of following Portugal's slow-growth path, economists say, delivering a crushing blow to a euro zone already reeling from its biggest fiscal crisis in decades. |
