Sources: European Commission (AMECO database); own calculations. Mr. Papadia is the author of a number of publications in the fields of International Economics and Monetary Policy. The book, and the film, crackles with atmosphere and fine dialogue. Countries currently in the euro-area are in blue, non-euro-area countries are in yellow, average European figures[2] are in green and Italy and Greece are in red, for reasons that will sadly become clear below. It provides up-to-date information for policymakers and supports the exchange of ideas for the improvement of policy approaches. Review of 'Monetary policy in times of crisis: a tale of two decades of the European Central Bank' published in the Central Banking. A closer look at the financial balances of the private sector (corporations and households) also reveals striking differences among Greece, Portugal and Spain: This insight makes it clear that the private sector is mainly and, in Spain, alone responsible for the rise in the net borrowing balance up to 2007. Should we be concerned about inflation in Portugal?
On the other hand even the Greek trade balance reached a breakeven, due to lower imports. What is more, the combination of this and the former current-account perspectives illustrate bluntly that the net capital inflows largely flowed into consumption instead of investment in Greece and Portugal. This is the case mainly in Greece and Portugal. As far as Italy and Greece are concerned, the explanation must be specific to these countries: no other country lost as many positions as they did over the entire period. Instead, the share of total government expenditure remained largely constant in Greece fluctuating around 45% of GDP up to 2005. Given the country has one of the best climates in Europe, high numbers of English speakers, good infrastructure, political stability and a reputation as being safe, there is no reason why Portugal could not eventually be the California of the EU, or even the Switzerland of southern Europe. It is interesting to extend the growth comparisons of EU countries beyond Belgium and Italy. Government interest rate expenditure in Portugal fell from more than 8% of GDP in 1991 to below 3% in the mid-2000s. The hike after 2008 is largely due to the impact of the financial crisis on GDP. This is reflected in the net borrowing-lending balance (NBL) with the rest of the world, for which a negative sign implies a net capital import. Unlike Greece, its public accounts are credible and it has a record of taking tough fiscal measures when necessarybetween 2005 and 2007, it cut its budget deficit in half, from 6.1% of GDP to 2.6%. As the current account deficit can also be expressed (from a total economy viewpoint) as the difference between savings and investment (equation (3)) this perspective allows us to view economic imbalances from a more fundamental perspective. A new framework for macroeconomic surveillance is in the making. Several other studies which focus on the structural determinants of current account imbalances are also highly policy relevant. Nevertheless, a constantly negative NBL over time results in a significant build-up of foreign debts.
In Greece, this ratio rose massively from 17% in 1991 up to nearly 25% in 2007 (and to more than 28% in 2009). Prominent candidates among these causes are Italys dismal record when it comes to economic flexibility and competitiveness, resource misallocation[4] as well as the inability to efficiently adopt Information and Communication Technology (ICT) due to poor management hiring practices.[5]. Such a scenario is particularly relevant for poorer countries that tend to converge in economic terms towards richer countries. Intereconomics is published by ZBW Leibniz Information Centre for Economics and CEPS Centre for European Policy Studies. Also the taxes have increased, as a percentage of GDP, seven points in Greece and four in Portugal. All rights reserved. A similarly huge increase of nearly 8 percentage points of GDP (and to about the same level) was attained by Portugal between 1991 and 2007. First, we focus on economic policy failures: An additional and highly important driver of the consumption and absorption booms was massively declining real interest rates due to entry into EMU. In short, Portugal is indeed different from Greece. When looking at 2007, both the government and private households shared equally in the negative financial balance. Anthony Beachey is a former BBC World Service journalist now working on a freelance basis in Portugal, where he specialises in economics and finance. Yet it simply requires the type of political ambition and determination seen in the Asian tiger economies of Singapore, South Korea and Hong Kong, all of which were poorer than Portugal prior to the 1974 revolution. A brief look at the trade-income balance (equation (1)) clearly shows that a large share of the current account deficits can be explained by a self-inflicted loss of competitiveness due to rapidly and excessively increasing labour costs and export prices. Greece started 11th in the ranking in 1990 and was 17th in 2017, having heavily suffered during the Great Recession in particular after 2010. [1] The paper is also forthcoming in the Journal of Common Market Studies. For Spain, Figure 8 shows again that in 2007 the government did not contribute to the economy-wide net borrowing from the rest of the world.
The monetary policy of the ECB was too lax for the countries under examination so that real short-term interest rates became negative for several years between 2002 and 2005. Though it doesn't help much, Portugal's already slow growth also made it less vulnerable to the global recession.
The result is that GDP per capita (measured in purchasing power parity) of Portugal, which in 2008 was less than the Greek one by 15%, while in 2014 it exceeds 8.3%. Up to now we have been looking at the economy as a whole. On the other hand domestic expenditure (absorption) boomed. This analysis has shown that the responsibility for high current account deficits can largely be assigned to the three countries analysed themselves.
In one particularly memorable exchange, a well-educated, young communist supporter asks the journalist: Am I a stupid man? In 2016, this was estimated to be 30% lower than GDP. Instead, increasing government transfers and consumption even supported the spending booms in Greece and Portugal (see below).
Household debt is now the equivalent of almost 100% of GDP and the debt of non-financial companies is nearly 140%. The deficit between savings and investments i.e. Thus, domestic absorption exceeded production for a prolonged period. Looking deeper into important categories of government expenditure, in both countries12 mainly consumption related expenditures were increased: To sum up and put it in a nutshell, the governments in Greece and Portugal more or less used savings from interest expenditures to finance substantial increases in consumption-related social transfers or for public employment. In Table I you can see the variations between 2009 and 2014 of a series of magnitudes: So the budget package imposed by the Troika was much heavier than in Greece and Portugal, in terms of public spending cuts (note that Greece faced a reduction of almost twenty points of pensions while there is an increase of seven points in Portugal).
The book, later turned into a film starring Mel Gibson, tells the tale of a novice Australian foreign correspondent trying to uncover a communist plot to take control of Indonesia in the mid-1960s. [5] Bruno Pellegrino and Luigi Zingales. Therefore, the leading question of this article is how the three countries examined here have utilised low interest rates and high net capital inflows: mainly for investment or for consumption? Intereconomics Perhaps the first thing to look at is the reduction of the deficit from 2009. whether countries with current account surpluses and deficits would have to submit to the same discipline. 28 June 2016. They were hardly used to increase the productive capacity of their economies.
Berthold Busch, As private households boasted a surplus in 1999, their contribution to the change in the financial balance was more negative than that of the Greek government. Bearing in mind the results of this study, it appears more appropriate to rely mainly on asymmetrical discipline in the future, as the largest policy failures happened in current account deficit countries.
As CA is negative, a positive CapTr renders NBL less negative for the depicted countries (equation (4)). At the same time, however, Portugal is losing some of its EU structural funds to the club's newer, poorer members from eastern Europe. As I argued in a post in 2015, the devastating GDP drop in Greece was caused by the interaction between the particularly intense fiscal contraction, driven by the programmes agreed with the troika, and the inability of the Greek economy to substitute reduced public demand with increased private demand, in particular investment and exports. Economic divergences in the euro area have been the focus of intense academic and policy oriented debates.1 This article joins this discussion against the background of important policy reforms which are underway. Volumes/ Then why should I live like a poor man all my life, when stupid people in your country live well? It is surely a question that the many hard-working, bright Portuguese, earning low salaries compared to their counterparts in other European countries, ask themselves every day. The loss of price competitiveness can be strikingly illustrated by looking at the development of unit labour costs and their underlying drivers. in comparison to Germany, where the compensation of government employees only amounted to about 7% of GDP in 2007 (down from around 9% in the early 1990s). Bearing in mind the interest rate impulses, this lack of investment momentum is striking. Surplus countries, like Germany, have certainly benefited from the economic boom in these countries and have, via international financial markets, partially provided the required financing for their net borrowing balances. Thus, interest rate risk premia also declined significantly. The decrease in competiveness resulted in losses of export market shares. One consequence is that the Portuguese, once exemplary savers, have been borrowing heavily abroad. It is only in the last few years that some central European countries such as the Czech Republic, Estonia and Slovenia climbed towards the median country in the ranking. The current account imbalances in the euro area as well as the unpalatable economic situation in the three countries examined here have led to new reform initiatives.
The country is gaining ground as an investment destination in Europe, according to the consultants Ernst & Young, who add that the country is capturing higher quality investment that prove Portugals success in transitioning to a more innovative and knowledge-intensive economy. However, since the mid-1990s, productivity growth has stalled as a result of low investment in information technology, labour market rigidities and the allocation of labour and capital to industries partly dominated by state-owned firms or those less open to competition, according to the economist Ricardo Pinheiro Alves. In 2014 the Greek defict had fallen to 3.5, the Portuguese at 4.5. Nominal consumption lay at 90% of nominal GDP in Greece and at 85% of GDP in Portugal in 2007 while in Spain it amounted to 76% (about the same level as in Germany). The same is true to a lesser extent for negative net current transfers (CurTr) to the rest of world (except for Portugal). Looking at the economic imbalances from these different angles5 renders it possible to deduce meaningful insights for the policy debate.6 In a first step, the analysis focuses on the economy as a whole and later also on individual sectors (government, corporations, households). The OECD indicator of export performance measures the development of export volumes relative to the specific (weighted) import growth of a countrys export markets. Obviously, problems with Greek NA statistics also prevail here. One answer is that Portugal's biggest problem is not primarily fiscal. This aspect is mirrored by a closer financial market integration in EMU, as pointed out by B. This article appeared in the Europe section of the print edition under the headline "The importance of not being Greece", Discover stories from this section and more in the list of contents, Turkey has helped broker a deal to resume food exports, American ships dock there. [1] In 1990 the two countries were very similar in terms of income per head. Spain fares considerably better in these respects, but here an investment boom which was mainly driven by a real estate bubble was the main driver of the rising current account deficits, as the savings ratio stayed relatively constant. Michael Grmling, In Portugal, deficits increased up to 2005, but were reduced significantly by 2007 despite a lagging economy with growth rates significantly below those in Greece and Spain. Hopefully, the economy will recover sharply as the shackles are lifted and proportion of debt to GDP will resume the downward trend seen in recent years. In addition, the Irish trade balance was in big surplus (8.8! It is, however, sufficient to suggest that some interpretations are more likely than others. In Portugal, government expenditure as a share of GDP declined somewhat after the mid-1990s, when EMU entry was on the agenda, but rose considerably up to 2005, when a phase of moderate consolidation began. Portugals high debt burden weighs heavily on the government finances, limiting its capacity for investment, and debt will undoubtedly rise as a result of the economic lockdown. A similar relation is CA = Y - A with Y = GDP + Inc + CurTr. Thus, as soon as the economy gathers momentum again, the strain which fiscal consolidation exerts on the social fabric in these countries should be tolerable. Moreover, Greece and Portugal continuously lived beyond their means, as private and government consumption were excessive in comparison to productive capacity or government revenues. GNI-per-head rankings: The sad stories of Greece and Italy, Book notes: Monetary policy in times of crisis, An alpine divide? By clicking on Replay, the rankings and the underlying GNI per capita levels move between 1990 and 2017. Exemplary urban renewal in old town Lagoa, Judge accused of trying to destroy emails to protect former minister, Construction of Castro Marim-Praia Verde bike path begins, Preparing your rental strategy for post-summer bookings, ECB raises interest rates by twice as much as forecast, Second Russian oligarch has Portuguese nationality, https://www.youtube.com/watch?v=xGISj50ZKEQ&t=8s. supply) causes rather than originating with demand factors. via interest payments, and the related negative flow of the net primary income (Inc) is part of the current account balance (CA) and pushes it further into the red (see Figure 1).
A richer future? So, life for many families is very tough indeed. Among other things, they point to factors like net foreign assets, convergence effects, real interest rates, fiscal balances and financial deepening, which also play an important role in our article. A sleepy Greek port has become vital to the war in Ukraine. Mr Scrates sees himself as the modern face of a country in transition from low-cost manufacturing to knowledge-based industries.
If you look at Table IITable II 2009 - 2014 Changes. The focus is laid on the period 1999 to 2007, as from 2008 onwards the impact of the financial crisis could be felt. Particularly in the framework of the new macroeconomic surveillance mechanism for reducing and avoiding imbalances in the EU, the question has arisen whether the EU should impose more discipline symmetrically, on deficit and surplus countries alike, or asymmetrically, mainly on deficit countries. This pertains to a limited extent to the category compensation of government employees. Economist - Professor of "Scienza delle Finanze" at University "La Sapienza" Roma; Member of the Economic Board of Insight - ruggero.paladini@uniroma1.it.
Hopefully, the labour market and other reforms, initiated in the wake of the economic crisis, could boost productivity growth in the future. Moreover, Portugal has one of the highest percentages of English-speakers in the world (among non-native English-speaking countries), a huge advantage given that English is the lingua franca of the business world. However, such hopes have proved too optimistic. In fact, there were significant hopes that the poorer eurozone countries would rapidly converge in economic terms towards the living standards of the richer eurozone countries. Again unlike Greece, the centre-left government of Jos Scrates is a pioneer of reform. Far from having the next sovereign-debt crisis, as predicted by several economists, politicians are painting Portugal as a well-behaved member of the euro, in no way comparable to wayward, mendacious Greece. Figure 3 depicts A, C, I and S and shows that A exceeds the 100%-line by exactly the amount of the deficit of net exports of goods and services as a percentage of GDP (compare Figure 1). In Spain about two thirds, and in Portugal and Greece nearly four fifths, of the overall deficit result from the trade deficit (Figure 1). Therefore, it is important to understand the main reasons for the huge economic divergences within EMU. A firm with Russian ties wants to buy it, Published since September 1843 to take part in a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress.. In addition, the share of low-skilled workers is one of the highest in Europe (46% in 2017 compared to 17% in the EU). This is largely due to a steady rise in unit labour costs, as wage increases outstripped productivity growth (see chart). Taking (positive) net capital transactions (CapTr) also into account and looking at the data for 2010, net exports would have to reach more than +1.7% of GDP in Spain, +1.6% in Greece and +1.3% in Portugal to bring down foreign debts in these countries. Thus, the above-mentioned high level of the consumption ratio (total economy) to GDP was partly sustained by government policies. It is investing over 1.5% of GDP in research, much more than Spain. This resulted in significant increases in nominal unit labour costs. Much of the high growth over the last decade was driven by unsustainable credit bubbles. Portuguese economic growth outpaced both the euro area and the EU 28 over the past four years, bolstered by previous structural reforms. Thus, fiscal consolidation strategies can only be one part of rendering the economic courses of the these countries sustainable in the medium to long term. The problem lies in the characteristics of exports of the two countries: Greece exports to a greater extent to the EU, while Portugal over Atlantic (Brazil, not only US).
NBL is defined as CA plus net capital transactions with the rest of the world (CapTr) which are positive in the countries examined here. Portugals poor productivity reflects low investment in new technologies and, historically, high levels of bureaucracy that have limited entrepreneurship.
After the crisis set in, the ensuing deep and enduring recessions cut off former convergence effects to a substantial degree and will probably continue to do so. As well as bearing down on debt, the government must do more to encourage foreign investment and, in particular, attract high-tech companies, improve education, reduce bureaucracy and tackle corruption. Moreover, productivity enhancing structural reforms imposed from the outside against notoriously strong vested interests are an important lever for these countries to regain lost competitiveness in the medium term. A discussion of Italian and German macro-economic cultures and performances. However, between 2006 and 2008 nominal increases of more than 11% per year led to a sharp rise in this ratio to nearly 50% in 2008. However, to maintain that this was the main driver of the current account deficits in Greece, Portugal and Spain does not appear to be appropriate. FORGET slogans about golden beaches or vinho verde.
In particular there is no prima facie evidence that the euro caused their losses. In Portugal there was an increase to more than 14% in 2002 which was reversed to around 12% of GDP for 2007 onwards. Since Italy is characterised by poor flexibility and competition in both product and labour markets, resource misallocation and poor implementation of ICT, the growth bonus that could be brought about by a robust, well-targeted and sequenced programme of structural measures could be significant and capable of stopping (and hopefully reversing) the long-term Italian decay. The loss in competitiveness on the one hand weakened the production basis in the three countries. In five years, he claims, Portugal has become a European leader in renewable energy. Both these sectors also solely contributed to the change in the financial balance between 1999 and 2007.
This should have given room for a substantial consolidation of government finances. Nevertheless, in order to use common terminology, the term current account balance will be used throughout the article also to capture the balance of current transactions with the rest of the world. Thus, with similar long-term nominal interest rates and higher inflation rates in these three countries, real long-term interest rates were very low and briefly even negative in Spain. A slow-moving bureaucracy, inefficient courts, poor schools and state-supported pockets of the economy protected from competition combine to hold Portugal back. On the other hand, it is well-known by now that in Greece, although the country similarly profited from an economic boom, fiscal profligacy led to highly negative financial balances. But it was not the mythical structural reforms, namely the de-regulation of the labour market, to count, as the structure of export. Government fiscal balances have contributed rather differently. It is hardly surprising that Greece has triggered a dramatic fall in consumption and private investment.
A similar finding is obtained when broader cost developments are included by considering the REER based on export prices of goods and services.8 This measure increased by 15% in Spain, 11% in Greece and 5% in Portugal. This is done in Chart 1, reporting the rankings according to Gross National Income per head of the EU countries. For arguments against the contention that Germany shares a substantial part of blame for the economic imbalances in the eurozone see B. Italy was 6th in the ranking in 1990, very close to Belgium. In Greece, the decline was even larger, from nearly 12.5% in 1994 to slightly above 4.5% of GDP in 2005 to 2007. Intereconomics is a platform for the publication of policy relevant aspects of economic research. My summary assessment was that, because of the weakness of the private sector, Greece was not capable of moving from an economic model dominated by public demand and the production of non-tradable goods, to an economy with a more vibrant private sector producing tradable goods. Low real interest rates also contributed to a decline in savings absolutely and relative to investment (Figure 3).
According to the European Commission, age-related public spending will rise by only 2.9% of GDP in Portugal over the next 50 years, compared with a euro-area average of 5.1% and a startling 16% in Greece. Jrgen Matthes. In light of the shortcomings of the Stability and Growth Pact, there has been a recognition that a surveillance framework is needed which goes beyond fiscal issues to cover wider macroeconomic factors.
It is clear that the so called expansiv austeritymade in Berlin and in Brussels did not work all that great even in Portugal, but there is no doubt that in Greece things went much, much worse. Intereconomics represents over 50 years of economic policy oriented publishing. European Economic Advisory Group: EEAG Report on the European Economy, Munich 2011. As a consequence of continuously negative net borrowing balances from the rest of the world, Greece, Portugal and Spain built up a considerable amount of foreign debt. Due to obvious data problems, however, this is not the case for Greece, where the balance on current transactions with the rest of the world (NA) is substantially larger than the current account balance (BOP) for most years covered here. As far as Italy and Greece are concerned, the explanation must be specific to these countries: no other country lost as many positions as they did over the entire period. The question arises whether the surveillance and connected reform criteria should be applied symmetrically, to all members of the eurozone, or whether they should specifically target countries with current account deficits.
This would have enabled them to repay their debts out of the growth premium. Following the revolution in 1974, productivity growth in Portugal grew at a pace similar to that seen in developed economies. Governments in both countries as well as in Spain significantly benefited from lower interest rates. Referring to the current account context, this balance between production (GDP) and absorption (A = C + I) equals net exports of goods and services (see equation (2)).9. In contrast, in Greece and Portugal the savings ratio declined significantly between 1999 and 2007 (and further up to 2009) and ended up at rather low levels below 10% of GDP, particularly in Greece. Much more pronounced was the increase in the share of social transfers. In this context, the question arises whether the high foreign indebtedness of these three countries is still sustainable.
These data limitations mostly affect the lower part of the rankings. They have told me that older employees or public servants often shirk responsibility, constantly referring decisions up the chain of command, the legacy of a time when it was best not to raise your head above the parapet. In contrast, when countries with sustained current account deficits increase consumption as a reaction to capital inflows and neglect to foster their export basis, debt sustainability can be at risk due to notoriously increasing net foreign debt positions. What the Portuguese government wants the world to know is simpler: Portugal is not Greece.
On the other hand even the Greek trade balance reached a breakeven, due to lower imports. What is more, the combination of this and the former current-account perspectives illustrate bluntly that the net capital inflows largely flowed into consumption instead of investment in Greece and Portugal. This is the case mainly in Greece and Portugal. As far as Italy and Greece are concerned, the explanation must be specific to these countries: no other country lost as many positions as they did over the entire period. Instead, the share of total government expenditure remained largely constant in Greece fluctuating around 45% of GDP up to 2005. Given the country has one of the best climates in Europe, high numbers of English speakers, good infrastructure, political stability and a reputation as being safe, there is no reason why Portugal could not eventually be the California of the EU, or even the Switzerland of southern Europe. It is interesting to extend the growth comparisons of EU countries beyond Belgium and Italy. Government interest rate expenditure in Portugal fell from more than 8% of GDP in 1991 to below 3% in the mid-2000s. The hike after 2008 is largely due to the impact of the financial crisis on GDP. This is reflected in the net borrowing-lending balance (NBL) with the rest of the world, for which a negative sign implies a net capital import. Unlike Greece, its public accounts are credible and it has a record of taking tough fiscal measures when necessarybetween 2005 and 2007, it cut its budget deficit in half, from 6.1% of GDP to 2.6%. As the current account deficit can also be expressed (from a total economy viewpoint) as the difference between savings and investment (equation (3)) this perspective allows us to view economic imbalances from a more fundamental perspective. A new framework for macroeconomic surveillance is in the making. Several other studies which focus on the structural determinants of current account imbalances are also highly policy relevant. Nevertheless, a constantly negative NBL over time results in a significant build-up of foreign debts.
In Greece, this ratio rose massively from 17% in 1991 up to nearly 25% in 2007 (and to more than 28% in 2009). Prominent candidates among these causes are Italys dismal record when it comes to economic flexibility and competitiveness, resource misallocation[4] as well as the inability to efficiently adopt Information and Communication Technology (ICT) due to poor management hiring practices.[5]. Such a scenario is particularly relevant for poorer countries that tend to converge in economic terms towards richer countries. Intereconomics is published by ZBW Leibniz Information Centre for Economics and CEPS Centre for European Policy Studies. Also the taxes have increased, as a percentage of GDP, seven points in Greece and four in Portugal. All rights reserved. A similarly huge increase of nearly 8 percentage points of GDP (and to about the same level) was attained by Portugal between 1991 and 2007. First, we focus on economic policy failures: An additional and highly important driver of the consumption and absorption booms was massively declining real interest rates due to entry into EMU. In short, Portugal is indeed different from Greece. When looking at 2007, both the government and private households shared equally in the negative financial balance. Anthony Beachey is a former BBC World Service journalist now working on a freelance basis in Portugal, where he specialises in economics and finance. Yet it simply requires the type of political ambition and determination seen in the Asian tiger economies of Singapore, South Korea and Hong Kong, all of which were poorer than Portugal prior to the 1974 revolution. A brief look at the trade-income balance (equation (1)) clearly shows that a large share of the current account deficits can be explained by a self-inflicted loss of competitiveness due to rapidly and excessively increasing labour costs and export prices. Greece started 11th in the ranking in 1990 and was 17th in 2017, having heavily suffered during the Great Recession in particular after 2010. [1] The paper is also forthcoming in the Journal of Common Market Studies. For Spain, Figure 8 shows again that in 2007 the government did not contribute to the economy-wide net borrowing from the rest of the world.
The monetary policy of the ECB was too lax for the countries under examination so that real short-term interest rates became negative for several years between 2002 and 2005. Though it doesn't help much, Portugal's already slow growth also made it less vulnerable to the global recession.
The result is that GDP per capita (measured in purchasing power parity) of Portugal, which in 2008 was less than the Greek one by 15%, while in 2014 it exceeds 8.3%. Up to now we have been looking at the economy as a whole. On the other hand domestic expenditure (absorption) boomed. This analysis has shown that the responsibility for high current account deficits can largely be assigned to the three countries analysed themselves. In one particularly memorable exchange, a well-educated, young communist supporter asks the journalist: Am I a stupid man? In 2016, this was estimated to be 30% lower than GDP. Instead, increasing government transfers and consumption even supported the spending booms in Greece and Portugal (see below).
Household debt is now the equivalent of almost 100% of GDP and the debt of non-financial companies is nearly 140%. The deficit between savings and investments i.e. Thus, domestic absorption exceeded production for a prolonged period. Looking deeper into important categories of government expenditure, in both countries12 mainly consumption related expenditures were increased: To sum up and put it in a nutshell, the governments in Greece and Portugal more or less used savings from interest expenditures to finance substantial increases in consumption-related social transfers or for public employment. In Table I you can see the variations between 2009 and 2014 of a series of magnitudes: So the budget package imposed by the Troika was much heavier than in Greece and Portugal, in terms of public spending cuts (note that Greece faced a reduction of almost twenty points of pensions while there is an increase of seven points in Portugal).
The book, later turned into a film starring Mel Gibson, tells the tale of a novice Australian foreign correspondent trying to uncover a communist plot to take control of Indonesia in the mid-1960s. [5] Bruno Pellegrino and Luigi Zingales. Therefore, the leading question of this article is how the three countries examined here have utilised low interest rates and high net capital inflows: mainly for investment or for consumption? Intereconomics Perhaps the first thing to look at is the reduction of the deficit from 2009. whether countries with current account surpluses and deficits would have to submit to the same discipline. 28 June 2016. They were hardly used to increase the productive capacity of their economies.
Berthold Busch, As private households boasted a surplus in 1999, their contribution to the change in the financial balance was more negative than that of the Greek government. Bearing in mind the results of this study, it appears more appropriate to rely mainly on asymmetrical discipline in the future, as the largest policy failures happened in current account deficit countries.
As CA is negative, a positive CapTr renders NBL less negative for the depicted countries (equation (4)). At the same time, however, Portugal is losing some of its EU structural funds to the club's newer, poorer members from eastern Europe. As I argued in a post in 2015, the devastating GDP drop in Greece was caused by the interaction between the particularly intense fiscal contraction, driven by the programmes agreed with the troika, and the inability of the Greek economy to substitute reduced public demand with increased private demand, in particular investment and exports. Economic divergences in the euro area have been the focus of intense academic and policy oriented debates.1 This article joins this discussion against the background of important policy reforms which are underway. Volumes/ Then why should I live like a poor man all my life, when stupid people in your country live well? It is surely a question that the many hard-working, bright Portuguese, earning low salaries compared to their counterparts in other European countries, ask themselves every day. The loss of price competitiveness can be strikingly illustrated by looking at the development of unit labour costs and their underlying drivers. in comparison to Germany, where the compensation of government employees only amounted to about 7% of GDP in 2007 (down from around 9% in the early 1990s). Bearing in mind the interest rate impulses, this lack of investment momentum is striking. Surplus countries, like Germany, have certainly benefited from the economic boom in these countries and have, via international financial markets, partially provided the required financing for their net borrowing balances. Thus, interest rate risk premia also declined significantly. The decrease in competiveness resulted in losses of export market shares. One consequence is that the Portuguese, once exemplary savers, have been borrowing heavily abroad. It is only in the last few years that some central European countries such as the Czech Republic, Estonia and Slovenia climbed towards the median country in the ranking. The current account imbalances in the euro area as well as the unpalatable economic situation in the three countries examined here have led to new reform initiatives.
The country is gaining ground as an investment destination in Europe, according to the consultants Ernst & Young, who add that the country is capturing higher quality investment that prove Portugals success in transitioning to a more innovative and knowledge-intensive economy. However, since the mid-1990s, productivity growth has stalled as a result of low investment in information technology, labour market rigidities and the allocation of labour and capital to industries partly dominated by state-owned firms or those less open to competition, according to the economist Ricardo Pinheiro Alves. In 2014 the Greek defict had fallen to 3.5, the Portuguese at 4.5. Nominal consumption lay at 90% of nominal GDP in Greece and at 85% of GDP in Portugal in 2007 while in Spain it amounted to 76% (about the same level as in Germany). The same is true to a lesser extent for negative net current transfers (CurTr) to the rest of world (except for Portugal). Looking at the economic imbalances from these different angles5 renders it possible to deduce meaningful insights for the policy debate.6 In a first step, the analysis focuses on the economy as a whole and later also on individual sectors (government, corporations, households). The OECD indicator of export performance measures the development of export volumes relative to the specific (weighted) import growth of a countrys export markets. Obviously, problems with Greek NA statistics also prevail here. One answer is that Portugal's biggest problem is not primarily fiscal. This aspect is mirrored by a closer financial market integration in EMU, as pointed out by B. This article appeared in the Europe section of the print edition under the headline "The importance of not being Greece", Discover stories from this section and more in the list of contents, Turkey has helped broker a deal to resume food exports, American ships dock there. [1] In 1990 the two countries were very similar in terms of income per head. Spain fares considerably better in these respects, but here an investment boom which was mainly driven by a real estate bubble was the main driver of the rising current account deficits, as the savings ratio stayed relatively constant. Michael Grmling, In Portugal, deficits increased up to 2005, but were reduced significantly by 2007 despite a lagging economy with growth rates significantly below those in Greece and Spain. Hopefully, the economy will recover sharply as the shackles are lifted and proportion of debt to GDP will resume the downward trend seen in recent years. In addition, the Irish trade balance was in big surplus (8.8! It is, however, sufficient to suggest that some interpretations are more likely than others. In Portugal, government expenditure as a share of GDP declined somewhat after the mid-1990s, when EMU entry was on the agenda, but rose considerably up to 2005, when a phase of moderate consolidation began. Portugals high debt burden weighs heavily on the government finances, limiting its capacity for investment, and debt will undoubtedly rise as a result of the economic lockdown. A similar relation is CA = Y - A with Y = GDP + Inc + CurTr. Thus, as soon as the economy gathers momentum again, the strain which fiscal consolidation exerts on the social fabric in these countries should be tolerable. Moreover, Greece and Portugal continuously lived beyond their means, as private and government consumption were excessive in comparison to productive capacity or government revenues. GNI-per-head rankings: The sad stories of Greece and Italy, Book notes: Monetary policy in times of crisis, An alpine divide? By clicking on Replay, the rankings and the underlying GNI per capita levels move between 1990 and 2017. Exemplary urban renewal in old town Lagoa, Judge accused of trying to destroy emails to protect former minister, Construction of Castro Marim-Praia Verde bike path begins, Preparing your rental strategy for post-summer bookings, ECB raises interest rates by twice as much as forecast, Second Russian oligarch has Portuguese nationality, https://www.youtube.com/watch?v=xGISj50ZKEQ&t=8s. supply) causes rather than originating with demand factors. via interest payments, and the related negative flow of the net primary income (Inc) is part of the current account balance (CA) and pushes it further into the red (see Figure 1).
A richer future? So, life for many families is very tough indeed. Among other things, they point to factors like net foreign assets, convergence effects, real interest rates, fiscal balances and financial deepening, which also play an important role in our article. A sleepy Greek port has become vital to the war in Ukraine. Mr Scrates sees himself as the modern face of a country in transition from low-cost manufacturing to knowledge-based industries.
If you look at Table IITable II 2009 - 2014 Changes. The focus is laid on the period 1999 to 2007, as from 2008 onwards the impact of the financial crisis could be felt. Particularly in the framework of the new macroeconomic surveillance mechanism for reducing and avoiding imbalances in the EU, the question has arisen whether the EU should impose more discipline symmetrically, on deficit and surplus countries alike, or asymmetrically, mainly on deficit countries. This pertains to a limited extent to the category compensation of government employees. Economist - Professor of "Scienza delle Finanze" at University "La Sapienza" Roma; Member of the Economic Board of Insight - ruggero.paladini@uniroma1.it.
Hopefully, the labour market and other reforms, initiated in the wake of the economic crisis, could boost productivity growth in the future. Moreover, Portugal has one of the highest percentages of English-speakers in the world (among non-native English-speaking countries), a huge advantage given that English is the lingua franca of the business world. However, such hopes have proved too optimistic. In fact, there were significant hopes that the poorer eurozone countries would rapidly converge in economic terms towards the living standards of the richer eurozone countries. Again unlike Greece, the centre-left government of Jos Scrates is a pioneer of reform. Far from having the next sovereign-debt crisis, as predicted by several economists, politicians are painting Portugal as a well-behaved member of the euro, in no way comparable to wayward, mendacious Greece. Figure 3 depicts A, C, I and S and shows that A exceeds the 100%-line by exactly the amount of the deficit of net exports of goods and services as a percentage of GDP (compare Figure 1). In Spain about two thirds, and in Portugal and Greece nearly four fifths, of the overall deficit result from the trade deficit (Figure 1). Therefore, it is important to understand the main reasons for the huge economic divergences within EMU. A firm with Russian ties wants to buy it, Published since September 1843 to take part in a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress.. In addition, the share of low-skilled workers is one of the highest in Europe (46% in 2017 compared to 17% in the EU). This is largely due to a steady rise in unit labour costs, as wage increases outstripped productivity growth (see chart). Taking (positive) net capital transactions (CapTr) also into account and looking at the data for 2010, net exports would have to reach more than +1.7% of GDP in Spain, +1.6% in Greece and +1.3% in Portugal to bring down foreign debts in these countries. Thus, the above-mentioned high level of the consumption ratio (total economy) to GDP was partly sustained by government policies. It is investing over 1.5% of GDP in research, much more than Spain. This resulted in significant increases in nominal unit labour costs. Much of the high growth over the last decade was driven by unsustainable credit bubbles. Portuguese economic growth outpaced both the euro area and the EU 28 over the past four years, bolstered by previous structural reforms. Thus, fiscal consolidation strategies can only be one part of rendering the economic courses of the these countries sustainable in the medium to long term. The problem lies in the characteristics of exports of the two countries: Greece exports to a greater extent to the EU, while Portugal over Atlantic (Brazil, not only US).
NBL is defined as CA plus net capital transactions with the rest of the world (CapTr) which are positive in the countries examined here. Portugals poor productivity reflects low investment in new technologies and, historically, high levels of bureaucracy that have limited entrepreneurship.
After the crisis set in, the ensuing deep and enduring recessions cut off former convergence effects to a substantial degree and will probably continue to do so. As well as bearing down on debt, the government must do more to encourage foreign investment and, in particular, attract high-tech companies, improve education, reduce bureaucracy and tackle corruption. Moreover, productivity enhancing structural reforms imposed from the outside against notoriously strong vested interests are an important lever for these countries to regain lost competitiveness in the medium term. A discussion of Italian and German macro-economic cultures and performances. However, between 2006 and 2008 nominal increases of more than 11% per year led to a sharp rise in this ratio to nearly 50% in 2008. However, to maintain that this was the main driver of the current account deficits in Greece, Portugal and Spain does not appear to be appropriate. FORGET slogans about golden beaches or vinho verde.
In particular there is no prima facie evidence that the euro caused their losses. In Portugal there was an increase to more than 14% in 2002 which was reversed to around 12% of GDP for 2007 onwards. Since Italy is characterised by poor flexibility and competition in both product and labour markets, resource misallocation and poor implementation of ICT, the growth bonus that could be brought about by a robust, well-targeted and sequenced programme of structural measures could be significant and capable of stopping (and hopefully reversing) the long-term Italian decay. The loss in competitiveness on the one hand weakened the production basis in the three countries. In five years, he claims, Portugal has become a European leader in renewable energy. Both these sectors also solely contributed to the change in the financial balance between 1999 and 2007.
This should have given room for a substantial consolidation of government finances. Nevertheless, in order to use common terminology, the term current account balance will be used throughout the article also to capture the balance of current transactions with the rest of the world. Thus, with similar long-term nominal interest rates and higher inflation rates in these three countries, real long-term interest rates were very low and briefly even negative in Spain. A slow-moving bureaucracy, inefficient courts, poor schools and state-supported pockets of the economy protected from competition combine to hold Portugal back. On the other hand, it is well-known by now that in Greece, although the country similarly profited from an economic boom, fiscal profligacy led to highly negative financial balances. But it was not the mythical structural reforms, namely the de-regulation of the labour market, to count, as the structure of export. Government fiscal balances have contributed rather differently. It is hardly surprising that Greece has triggered a dramatic fall in consumption and private investment.
A similar finding is obtained when broader cost developments are included by considering the REER based on export prices of goods and services.8 This measure increased by 15% in Spain, 11% in Greece and 5% in Portugal. This is done in Chart 1, reporting the rankings according to Gross National Income per head of the EU countries. For arguments against the contention that Germany shares a substantial part of blame for the economic imbalances in the eurozone see B. Italy was 6th in the ranking in 1990, very close to Belgium. In Greece, the decline was even larger, from nearly 12.5% in 1994 to slightly above 4.5% of GDP in 2005 to 2007. Intereconomics is a platform for the publication of policy relevant aspects of economic research. My summary assessment was that, because of the weakness of the private sector, Greece was not capable of moving from an economic model dominated by public demand and the production of non-tradable goods, to an economy with a more vibrant private sector producing tradable goods. Low real interest rates also contributed to a decline in savings absolutely and relative to investment (Figure 3).
According to the European Commission, age-related public spending will rise by only 2.9% of GDP in Portugal over the next 50 years, compared with a euro-area average of 5.1% and a startling 16% in Greece. Jrgen Matthes. In light of the shortcomings of the Stability and Growth Pact, there has been a recognition that a surveillance framework is needed which goes beyond fiscal issues to cover wider macroeconomic factors.
It is clear that the so called expansiv austeritymade in Berlin and in Brussels did not work all that great even in Portugal, but there is no doubt that in Greece things went much, much worse. Intereconomics represents over 50 years of economic policy oriented publishing. European Economic Advisory Group: EEAG Report on the European Economy, Munich 2011. As a consequence of continuously negative net borrowing balances from the rest of the world, Greece, Portugal and Spain built up a considerable amount of foreign debt. Due to obvious data problems, however, this is not the case for Greece, where the balance on current transactions with the rest of the world (NA) is substantially larger than the current account balance (BOP) for most years covered here. As far as Italy and Greece are concerned, the explanation must be specific to these countries: no other country lost as many positions as they did over the entire period. The question arises whether the surveillance and connected reform criteria should be applied symmetrically, to all members of the eurozone, or whether they should specifically target countries with current account deficits.
This would have enabled them to repay their debts out of the growth premium. Following the revolution in 1974, productivity growth in Portugal grew at a pace similar to that seen in developed economies. Governments in both countries as well as in Spain significantly benefited from lower interest rates. Referring to the current account context, this balance between production (GDP) and absorption (A = C + I) equals net exports of goods and services (see equation (2)).9. In contrast, in Greece and Portugal the savings ratio declined significantly between 1999 and 2007 (and further up to 2009) and ended up at rather low levels below 10% of GDP, particularly in Greece. Much more pronounced was the increase in the share of social transfers. In this context, the question arises whether the high foreign indebtedness of these three countries is still sustainable.
These data limitations mostly affect the lower part of the rankings. They have told me that older employees or public servants often shirk responsibility, constantly referring decisions up the chain of command, the legacy of a time when it was best not to raise your head above the parapet. In contrast, when countries with sustained current account deficits increase consumption as a reaction to capital inflows and neglect to foster their export basis, debt sustainability can be at risk due to notoriously increasing net foreign debt positions. What the Portuguese government wants the world to know is simpler: Portugal is not Greece.