Alexandre Abreu « Euro

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The European Periphery: Between a Rock and a Hard Place

20. February 2013, von Alexandre Abreu, Comments (1)

The strategy of the Portuguese government in the context of the current crisis, which is essentially aligned with the prescriptions of the ECB-EC-IMF troika, revolves around two axes that, indeed, were also typical of the policy packages implemented in the global south from the 1980s onwards: stabilisation, which in this case refers to slashing public expenditure and curbing the current account deficit; and structural adjustment, which basically refers to labour market deregulation and the privatisation of those companies that still remain(ed) within the public realm.

In the context of this strategy, the resumption of a growth trajectory (even while adopting a permanently contradictory fiscal policy) is presented as hinging on the latter structural reforms. The alleged mechanism, which will be well-known to the readers of this blog, is to undertake an internal devaluation by forcing wages down, in order to mimic the external devaluation of a no-longer existing Portuguese currency. Wage compression across the board, promoted through various mechanisms (the downward pressure of unemployment upon wages, the nominal freezing of the minimum wage, labour market deregulation, etc.) is expected to translate into an increase in the price-competitiveness of Portuguese exports, and these in turn are expected to drive growth.

So what is wrong with this story? Basically, the problem is that it misrepresents the determinants and obstacles affecting the competitiveness of the Portuguese economy. In a paper published in Voxeu in 2011, Jesus Filipe and Utsav Kumar have shown, among other things, that the competitiveness problems of the European periphery, and of Portugal in particular, cannot be traced back to the evolution of their aggregate labour costs, but rather to the composition of their export baskets: Portugal’s exports, much like China’s and those of the remainder of the European periphery, are concentrated in the product groups characterised by relatively lesser complexity (in the sense put forth by Hidalgo and Hausmann), while Germany’s and France’s, for example, are concentrated in the more complex categories.

In this context, the developments of the past 15-20 years have left the European periphery between a rock and a hard place: on the one hand, direct competition in the least complex product range has increased dramatically in the wake of the EU’s Eastern enlargement, China’s accession to the WTO and the EU’s trade agreements with Morocco, without there being any possibility of adjusting through currency devaluation; on the other hand, the possibility of upgrading the complexity features of the export basket has been denied both by Germany’s (and other core countries’) own wage compression in the past 10-15 years and by the fact that the instruments that make it possible to actively promote such an upgrade are effectively denied by EU and WTO rules, unlike what was the case when the most advanced industrialised economies undertook that upgrade themselves. Kicking away the ladder, indeed.

So that’s why this strategy will not work: becoming competitive through wage compression in the same product categories as China and Morocco, for example, without recourse to currency devaluation or trade protection at the EU level, would require cutting down wages to an extent that could only bring about massive immiseration – and even that would probably not do the trick, given such issues as economies of scale or differences in environmental legislation. That the benign alternative – upgrading export complexity – is not feasible, either, under the current EU and Eurozone constraints shows the scale and complexity of the predicament in which the European periphery currently finds itself, well beyond the temporal horizon of any stabilisation package or financial assistance programme – and, of course, does not bode well for the future of the Euro.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Euro crisis: a View from Lisbon

20. February 2013, von Alexandre Abreu, Comments (0)

In my first contribution to this blog, I would like to start with outlining what I’ll set out to do in the coming months. The readers of this blog will be quite familiar with the ‘orthodox’ account of the current crisis in the eurozone: profligate public spending by governments in the European periphery, which need to be brought under discipline from the outside, coupled with anaemic growth/recession largely caused by excessively high wages and excessive labour market regulation, calling for ‘structural reform’. Moreover, readers will also be well acquainted with some of the systemic aspects which have long been emphasised by the more politically-progressive accounts: the inability on the part of peripheral economies to adjust to asymmetric shocks after having forfeited most of their economic policy instruments; their dramatic loss of competitiveness due to an overvalued Euro and an overvalued implicit internal exchange rate; the ECB’s late, indirect and highly conditional assumption of its role as lender of last resort; not to mention the deleterious effects of austerity upon growth, employment, social cohesion… and even the budget deficit and the sustainability of public debt themselves.

I will not be rephrasing these arguments in detail. Rather, in addition to commenting on new developments as they occur, what I’ll try to do is to render all of the above a bit more vivid to you by showing how these rival accounts apply to the Portuguese case; how general factors and forces at the European level articulate with class interests in Portugal; what the effects of the prescribed medicine have been in this country; and what the balance of forces and the state of the public debate are at any given moment.

As an appetiser of sorts, here are some of the issues that I’ll be expanding on in my next few blog posts:

  • Seen from the left, burgeoning public debt is largely a consequence of the crisis, not a cause (Portuguese public debt stood at 72% of GDP in 2008, compared to over 120% at present). However, there have been, and continue to be, serious issues concerning the quality of public spending (including public-private partnerships that commit the Portuguese Government to ensuring internal rates of return in excess of 10% to major conglomerates for decades to come).
  • Seen from the left, rising labour costs in Portugal have not been the cause of deteriorating competitiveness (indeed, unit capital costs have increased more than unit labour costs over the last two decades). Rather, the overvalued (implicit and explicit) exchange rate, alongside the inability to upgrade the pattern of productive specialization (itself explained by structural factors), are what is to blame.
  • Seen from the left, the medicine that has been prescribed in tandem by the ECB-EC-IMF “troika” and the right-wing Portuguese government places all the burden of an “adjustment” which will not work upon those who are most vulnerable and least responsible: workers and popular classes. This involves dismantling a Welfare State that is barely 40 years old, having been a product of the 1974 democratic revolution – a settling of scores long sought by the most conservative sectors of Portuguese society.
  • Seen from the left, the way in which the crisis has been addressed so far by both the Portuguese and European authorities is not at all about bringing public debt under control or boosting competitiveness. Rather, it is about seizing a unique opportunity to re-engineer society in neoliberal fashion, by dismantling the Welfare State and sharply compressing direct and indirect wages.

These are critical, dangerous, but also very interesting times. I hope you’ll find my left-leaning views from Lisbon to be interesting and informative, too.

Europe For Citizens

“This project has been funded with support from the European Commission. This publication reflects the views only of the author, and the Commission cannot be held responsible for any use which may be made of the information contained therein.”

Blog Authors

Adriaan SchoutAdriaan Schout

Dr Adriaan Schout is Deputy Director Research/Europe at Clingendael, Netherlands Institute of International relations. (read more...)

Alexandre AbreuAlexandre Abreu

Dr Alexandre Abreu is a 33-year-old Portuguese economist with a PhD from the University of London. Currently he is a lecturer in Development Economics at the Institute of Economics and Business Administration, Technical University of Lisbon, and a Researcher at the Centre for African and Development Studies of the same University.

Almut MöllerAlmut Möller

Almut Möller is a political analyst in European integration and European foreign policy. She is currently the head of the Alfred von Oppenheim Centre for European Policy Studies at the German Council on Foreign Relations (DGAP) in Berlin. (read more...)

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