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2013: A Year in the Crisis

15. January 2014, von Alexandre Abreu, Comments (0)

So here we are in 2014. As this edition of the Euro Crisis blog draws to a close, it is time to say farewell to the readers and greet the new contributors who will take over and comment on the Euro zone crisis as it develops from here on in. Farewells are also an appropriate time for stock-taking exercises, however, so I think it is appropriate to end my contribution by reviewing what the latest year has meant for the bigger picture of the Euro crisis – at least the way I see it. What progress has been made in the various fronts? And how much closer are we to a resolution of the crisis?

Perhaps not surprisingly, my views are considerably less optimistic than those of most other analysts, many of whom seem to consider that the worse of the crisis is largely behind us. I, on the contrary, believe that we are still far from hitting the bottom, let alone from a resolution. And I also believe that we end the year 2013 in a worse position that we started it.

First, take the superficial element of the crisis: the sovereign debt levels of the eurozone countries. (Superficial in the sense that, as I and many others have argued before, they are a consequence, not a cause, of the crisis.) Between the second quarter of 2012 and the same quarter of 2013 (the latest for which Eurostat has available comparable data), in a context of widespread austerity, absolute public debt levels increased in Austria, Belgium, Cyprus, Estonia, Finland, France, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, Slovakia and Spain. That is to say, in every single eurozone country except for Germany and Latvia. As a percentage of GDP, government debt increased in all 18 eurozone countries except for Austria, Germany and Latvia – including to such remarkable levels as Greece’s 169%, Portugal’s 131%, Ireland’s 126% and Spain’s 92%. Not quite unexpected given the obviously recessive consequences of austerity, but certainly not a sign of progress towards a resolution: greater debt levels mean a greater burden constraining the possibility of counter-cyclical fiscal policy (particularly with the Fiscal Compact in place) and, at least in the Portuguese and Greek cases, a greater amount which will not, for it cannot, be repaid (whether this be through haircuts or sovereign defaults).

More significantly, though, the more fundamental economic variables which encapsulate the nature of the crisis have either deteriorated or remained unaltered during the course of 2013: the massively negative external debt, or international investment position, of the peripheral Euro zone countries (the ‘divergence’ component of the crisis) remained basically unaltered, save for some marginal improvement in the case of Ireland. As for the overall economic performance (the ‘stagnation’ element of the crisis), the outlook also continues to be profoundly depressing: annual GDP growth in the euro area as a whole in 2013 is estimated at -0.4%, while euro area unemployment remains at a record 12.1%. At the same time, the constraints weighing down on that performance have not alleviated: the deleveraging of the private (household and corporate) sector remains to be done, while the spectrum of deflation is an ever-more-present possibility, further worsening the debt overhang and giving rise to recessive debt-deflation dynamics.

At the political and institutional levels, we now have a Fiscal Compact in place which has basically banned counter-cyclical fiscal policy at a time when monetary policy has become well-nigh ineffective; a ‘banking union’ which has not broken the vicious links between troubled banks and troubled sovereigns; a minuscule EU budget slashing all hopes of a recovery led by counter-cyclical policy at the European level; unrelenting insistence on austerity as supposed way out; discontent with the European project growing steadily across the EU; the far right increasingly showing its ugly head as it takes advantage of the European leaders’ incapacity or unwillingness to address the real root causes of the crisis; and a full-fledged humanitarian crisis in large swathes of the European periphery. Hardly grounds for optimism.

Having said this, it is no doubt true that the eurozone crisis has changed its character during the course of 2013: in contrast to earlier on in the year, we no longer experience the crisis as a series of acute episodes, in which the possibility of a dénouement is just around the corner. Instead, we have entered a largely chronic stage, with neither collapse nor improvement in sight. A significant indicator in this respect consists of the interest rate levels on sovereign debt throughout the eurozone: even though the economic outlook has continued to worsen, interest rates, particularly in the eurozone periphery, have fallen significantly over the course of 2013, thus alleviating one of the most acute dimensions of the crisis. By and large a continuation of the ‘Draghi effect’ (the ECB’s manifest willingness to do whatever it takes to prevent defaults in the Euro zone, provided that austerity remains in place), but unintelligible without taking into account the extent to which resistance to austerity has so far failed to materialise at the political level (thus rendering this deleterious low-level political-economic equilibrium much more stable than it seemed 12 months ago).

But this equilibrium will not last, for austerity and deflation are exactly the key ingredients of permanent recession in our current debt overhang situation – and sooner or later the electorate, in at least one of the more chastised countries, will prefer default and the possibility of a euro exit, for all their risks, to the certainty of perpetual impoverishment. In 2013 the crisis turned into chronic stagnation, but we should not let ourselves be fooled by this apparent calm: it only takes one card to bring the house down.

May you have a happy 2014, dear reader – and in these times of crisis, may Europe and its peoples live up to the lofty democratic ideals which the continent has spawned throughout its history.

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.”

Too Much Trust in EU Institutions

9. January 2014, von Adriaan Schout, Comments (0)

The general impression is that the EMU zone (which gathers countries belonging to, or potentially belonging to, the euro) suffers from a crisis of trust. How can we move forward with European integration when people lack trust in EU institutions? The facts may however be quite different: there is too much trust in the EU institutions and too much trust in the reform capacities in the EMU countries.

The guiding rule for EU-leaders has been to restore trust in the EMU and to get economic growth in the EU back on track. Many steps are being taken to rebuild trust ranging from fiscal compact and banking union, to measures to increase the relevance of subsidiarity. Overall, these measures and the fight for trust will – optimistically – lead to deeper integration.

However, the EMU zone may not suffer from a lack of trust. Paradoxically, this is bad news. First of all, there is generally more trust in EU institutions than in national institutions. Over the past few weeks, I sat in meetings with senior officials and politicians from different parts of the EU. On the question whether they would like to see the EU institutions take over economic tasks and develop into an EU economic government, the answer was decidedly ‘yes’. According to the responses, national institutions (including central banks), have been the cause of the economic and banking problems.

This trust in EU institutions is in accordance with the Eurobarometer which indicates that the people in 17 euro countries have (much) more trust in EU institutions than in their national governments. The bottom of the list with trust in national governments shows euro countries Spain (8% trust national government), Greece (9%), Slovenia (10%), Portugal (10%) and Italy (11%). Other countries with low national trust and higher trust in EU institutions include France (only 24% trust national government) and Ireland (18%).

The consequence of this situation is that there is not so much a lack of trust in the EU (and the related euro institutions) but a national trust crisis – and EU institutions are trusted to manage national economies. If the discussions of the past week are anything to go by, there is a majority of countries in the EU that would like to see the development of stronger European economic governance because they are themselves too weak to run their own economies. In the words of a minister from a country preparing for joining the euro: “the Commission can better decide what is good for us”.

The second reason why there is not a lack of trust in EU institutions is that the EU seems to suffer from traditional over-optimism. Judging by the hope that the EU is better in taking economic governance decisions than national governments closer to their voters, this over-optimism still exists. Greece, Portugal and East European countries were allowed into the EEC/EU. Similarly, accession into Schengen also proved quite easy. Membership was assumed to lead to reforms. In the same vein, despite an argument between monetarist and economic governance economists, euro membership was granted ahead of economic reforms, trusting that membership would do the trick. Hence, the EU has been gambling with economic history based on naïve trust in EU reform mechanisms.

Thirdly, countries have been trusted to be flexible and to develop. However, the French competitiveness index fell from 15th position in 2000 to 22nd in 2013. Italy’s competitiveness eroded as underlined by the drop from 24th position to 49th. Greece managed a slight but hugely painful improvement from 33rd to the 31st position.

Deeper integration is on the agenda. The EU Council meeting of December 2013 concluded additional steps towards banking union and economic contracts. The basis of the economic governance, however, remains a collection of mostly week states; states that seem to have given up managing their own economies and that place their hope in the EU. The EU might as well be doomed with this trust in the EU to solve national reform problems.

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.”

The Eurozone Crisis: Finance 2 – Society 0

24. September 2013, von Alexandre Abreu, Comments (0)

An interesting and crucial feature of the eurozone crisis, which hardly ever gets mentioned, is the extent to which it corresponds to a massive, lengthy, disguised and undemocratic process of socialisation of debt relations. What started out as a massive build-up of debt/credit relations between private debtors and private creditors has been gradually converted into debt/credit relations between state debtors and state creditors, with the implication that those who will ultimately foot the bill for the inevitable restructuring of the massive ‘debt overhang’ holding the European economy back will be European taxpayers and peripheral-country citizens, rather than the financial sector and its shareholders. The aim of this post is to show why and how this is so, and to highlight the two main phases that have characterised this process.

By way of background, it is worth recalling that the 2007-2008 Global Financial Crisis and the ensuing Great Stagnation are very much akin to the 1929 Crisis and the ensuing Great Depression: in the build-up to both crises, capital-friendly growth regimes ensured the profitability of investments through direct and indirect wage compression; gave rise to increasing inequality and an increasingly central role of finance; and made up for the detrimental effect (upon aggregate demand) of this rising inequality through a massive increase in private debt. The expansion of credit served as a mechanism not only for recycling profits, but also for households to make up for their relatively stagnant incomes and for firms to expand, merge and modernise. The resulting credit-fuelled demand, again in the build-up to both 1929 and 2007, allowed for ‘roaring’ growth, but sooner or later it had to come up against its limits. And so it did when over-indebtedness reached its ceiling and surfaced as a ‘financial’ crisis, originally emerging in the system’s weakest links (in the first instance, the subprime housing credit market in the US), but ultimately exposing the unsustainable basis on which the entire growth regime was built.

In this sense, the current crisis is indeed global (or at least a crisis of advanced, mature economies as a whole), and it is indeed systemic (for it signals the unsustainability of the neoliberal growth regime). Another aspect to be noticed is the radically different character of this systemic crisis (and the one of the 1930s) vis-à-vis the crisis of the late ‘60s and ‘70s, which was the systemic crisis of a labour-friendly growth regime, brought about by the discouraging effect of declining profitability (in its turn arising out of the workers’ increasing bargaining power) upon investment. And the final background commentary concerns the key difference between the crisis of the 1930s and the current one: while they share the same underlying causes, the crisis of the 1930s took the form of the “Great Depression” because the process of deleveraging was relatively rapid, violent and uncurbed by government action; the current crisis, by contrast, has taken the form of a “Great Stagnation” (after the initial shock in 2007-09) because governments stepped in and halted the process of debt deflation (although the consequence is that there can be no sustained growth, absent inflation or major write-offs, because the ‘debt overhang’ remains in place).

In the eurozone context, this otherwise ‘merely’ socioeconomic process (which is the form it has taken in the US, for example) has taken on an especially serious and international character because of the inherently faulty features of the EMU (the inability on the part of deficit countries to undertake currency devaluations; the requirement that the burden of adjustment falls exclusively upon deficit countries, as opposed to being shared by deficit and surplus countries; the interwoven character of national financial systems and national public finances; and the ‘constitutional’ ban on inflation, which would otherwise provide the means for addressing the ‘debt overhang’).

From this perspective, the story of the eurozone crisis may be summed up in two main phases. Phase 1 corresponded to the socialisation of the debt relation on the debtors’ side: economies whose private sectors were up against the limits of unsustainable indebtedness when the process of debt deflation was triggered in 2007-08 (including Portugal, Greece and Spain) very quickly saw that private debt morph into public debt through two main mechanisms – the direct effect of financial sector bail-outs and the indirect effect of so-called ‘automatic stabilisers’ (declining government receipts and rising expenditures due to economic contraction). Recall that the eurozone’s peripheral economies currently being affected by the so-called ‘sovereign debt crisis’ include countries with vastly different public debt/GDP ratios as of 2007 (36% in Spain, 68% in Portugal, 107% in Greece); what they had in common was the unsustainable levels of net external indebtedness of their economies as a whole by 2007 (78% of GDP in Spain, 87% in Portugal, 115% in Greece). The escalation of peripheral countries’ public debt levels was a consequence, not the cause, of the crisis – and reflected the socialisation of the process of debt deflation on the debtors’ side.

Phase 2 is the one that we’re currently going through: it consists of the process of socialisation of the debt relation on the creditors’ side, as private creditors (particularly banks and other financial institutions in the European ‘core’) are gradually replaced by official lenders as the holders of peripheral countries’ ‘sovereign’ debt. After this debt was socialised on the debtors’ side as of phase 1, the impending inability on the part of the governments in question to service it meant that there were only two options on the table: either those governments defaulted, which would have meant losses for the private creditors, or official lenders like the EC-IMF-ECB troika stepped in (as indeed they did), lending just enough to support the continuing servicing of the debt while private creditors gradually rid themselves of these bonds (as indeed they have been doing over the course of the last 2-3 years).

Given that the public debt/GDP ratios in the crisis countries keeps escalating precisely because of the lethal combination of the dynamics of debt deflation and public-sector austerity (i.e. simultaneous deleveraging across all sectors of these economies, implying recession and decreasing ability to pay), it is increasingly obvious that the sovereign debt of peripheral eurozone countries will eventually and inevitably require a default or serious write-down (not like the Greek one in 2012, which did next to nothing to overcome these structural barriers). This is not a “whether-or-not” question; it’s a ‘when’ question. And when it is that this takes place is important for two reasons: (i) the later the default or write-down occurs, the more the burden will fall upon European taxpayers as a whole as opposed to private creditors; and (ii) the later it takes place, the more time peripheral country governments will have to hold their constituencies to ransom in order to undertake the neoliberal restructuring of their societies in a way which otherwise would never have been possible.

In sum, regardless of the uproar in 2008 against the financial sector, its reckless behaviour and the need to rein it in, the story of the eurozone crisis is a re-run of 2008 in a different, protracted and more subtle form: once again, finance tramples society and forces it to bear the burden of its losses.


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.”

Much Ado about Nothing

26. July 2013, von Alexandre Abreu, Comments (1)

As many readers will have heard or read through other media, the last few weeks have seen a political crisis emerge, develop and finally subside in Portugal. The plot has been a convoluted one, with much toing-and-froing and backtracking, as well as attempts to change the game altogether – but all it came down to in the end was next to nothing. Anyway, now that none of the key players seem to have any cards left to play in the immediate future, it seems like a good time to summarise the events which took place throughout the month of July.

Act 1.
The proximate cause of this political crisis was the resignation of the former Minister of Finance, Vítor Gaspar, on July 1st. Mr Gaspar, a technocrat, was the chief domestic ideologue and implementer of austerity and an all-powerful figure in the centre-right coalition government. His resignation immediately brought on a political earthquake because instead of claiming personal reasons and quietly leaving the stage (as is the standard practice in these cases), he was candid enough to write a public letter of resignation in which he acknowledged the failure of the strategy that has been adopted thus far. Then, on the following day, Paulo Portas, then Minister of Foreign Affairs and leader of the junior coalition partner (the Popular Party, or CDS-PP), seized the opportunity to tender his own resignation from the government. His allegedly irrevocable decision was driven by strictly tactical political considerations: up until now, his party has succeeded in playing a duplicitous role whereby it actively supports austerity measures while simultaneously criticising them in public for leaving insufficient room for “the economy”. As a result of this Janus-faced strategy, the CDS-PP has managed to maintain its poll ratings at around 12% even while the senior coalition partner, the PSD, has been plummeting in the polls (from 39% in the June 2011 elections to 25% at present). However, as even tougher times lie ahead (with the Troika demanding additional permanent budget cuts worth around 3% of GDP in the near future), and with local elections coming up in September of this year, Mr Gaspar’s resignation (and the alleged appointment of a new minister of finance by the prime minister without consulting with the junior partner) seemed like a good opportunity for the CDS-PP to leave the government and avoid the electoral erosion that would surely come about in the next few months.

Act 2.
The resignations of both Mr Gaspar and Mr Portas seemed to signal the government’s imminent downfall, but in fact the play had barely begun. The prime minister, Pedro Passos Coelho, responded by refusing to accept Mr Portas’ public resignation and offering to negotiate. In return for the continuing support of the CDS-PP, Mr Coelho offered the junior coalition partner the leadership of the negotiations with the Troika and control over economic decision-making, in addition to offering to appoint Mr Portas as “Deputy Prime Minister” (a hitherto-inexistent post). This was too much for a party worth 12% of the electorate to turn down, even at the cost of future electoral erosion, so Mr Portas backtracked on his “irrevocable” decision, and the cabinet reshuffling was publicly announced and officially proposed to President Cavaco Silva (who also hails from the PSD). Then, as analysts argued over whether the president would simply confirm the reshuffling or refuse to condone the change in the balance of power in favour of the CDS-PP (thus bringing down the government and calling an early election); Mr Cavaco Silva surprised everyone by attempting to change the game altogether. He refused to follow either option and instead called for broad-based discussions to be held between both coalition partners as well as the main opposition party (the Socialist Party, or PS), with a view to the signing of a “national salvation pact” which would commit all three parties to endorsing austerity regardless of the outcome of the next general election (which would be anticipated by a year to coincide with the formal conclusion of the Troika’s period of supervision in June 2014). Mr Cavaco Silva was thus offering the socialists the opportunity to move into power one year ahead of schedule in return for their formal commitment to maintaining the same political course as the current government.

Act 3.
The president’s surprising proposal was an attempt to set a booby-trap for the socialists. If the latter refused to negotiate, they could be accused of adopting an irresponsible and uncompromising stance in the face of national emergency; if they agreed to endorse the “national salvation pact”, they would be decisively compromised in their ability to simply carry on waiting for the government to fall, and contestation within the party itself would increase significantly. Therefore, it was quite obvious that accepting such a proposal would amount to political suicide on the part of the PS – so what followed was a week of mock negotiations, supposedly leading up to the signing of a pact that at least one of the concerned parties had really no interest in. Eventually, the various parties announced that the negotiations had come to nothing, and did their best to blame each other for the outcome. And the President, whose move failed to bring about the desired results, ended up confirming the cabinet reshuffling that had been proposed a week before and withdrawing the promise of an early general election in September 2014.

The ultimate cause of this political crisis was, of course, the country’s ever-worsening economic and financial situation and the increasingly obvious fact that austerity is spreading social and economic destruction without even bringing public finances under control. As the political fall-out from all this becomes increasingly imminent, cracks have begun to emerge in the ruling coalition and in this instance these were only overcome at the cost of offering the junior coalition partner effective control over economic policy (though this will change nothing of substance). The president seized the opportunity to try and tie the main opposition party to the same pro-austerity course of action through a formal long-term pact, but this was an ill-considered move that had little chance of succeeding. The final outcome is a government whose credibility and popularity, which were already in shambles, have been additionally shaken and whose downfall was only temporarily postponed through offering vastly increased powers to the junior partner. Given that the economic and financial strategy will remain virtually unaltered, the social, economic and political situation will continue to deteriorate, so sooner or later a new crisis will erupt. For the time being, however, it was really much ado about nothing.

Dangerous Fantasies and Really Existing ‘Adjustment’

15. May 2013, von Alexandre Abreu, Comments (1)

It has been two years to the month since the original Memorandum of Understanding (MoU) was signed between the ECB-EC-IMF Troika and the Portuguese Government. Elections followed shortly after, bringing into power a new conservative coalition government, which proceeded to implement the structural adjustment programme with unbridled enthusiasm. In the words of Prime Minister Passos Coelho in June 2011, the newly-elected government was “keen to surpass the Troika”.

And, as a matter of fact, it has: successive cuts in government spending, affecting in particular the health, education and social security areas (albeit not the police budget, as befits the ‘austeritarian’ model); sharp increases in user fees, VAT and income taxes; radical changes in labour laws (including slashing unemployment benefits, longer working hours and raising the age of retirement – significant choices at a time of hyper-unemployment); the ongoing privatisation of the remainder of the state-owned sector and numerous other measures in accordance with the austerity/privatisation/deregulation model. In sum, the full neoliberal package in compressed form, of which the economic and social effects have long been well-known from the experience of the global South in the 1980s, though it has to be kept in mind that the first-wave of Structural Adjustment Programmes (SAPs), unlike the current ones, at least made allowance for currency devaluations.

The results speak for themselves. In Portugal, U-3 unemployment shot up from 12% to 17.5% in the last two years, while broad unemployment is currently around 27% and unemployment protection coverage has been significantly reduced. Consumption, investment and therefore GDP have all been freefalling: in the case of GDP, the total reduction since the MoU entered into effect has been around -5%. The current account deficit has been significantly narrowed (in fact, almost eliminated), but that was due to the effect upon imports of the sharp compression of domestic demand and the closure of tens of thousands of SMEs (the brief spike in exports in 2012 was caused by the temporary external depreciation of the euro and was quickly reversed in mid-2012). And most tellingly of all, public debt has kept increasing in both absolute and relative terms (from 108% of GDP in 2011 to 126% at present); for the most part because fiscal revenues kept falling as a consequence of the (largely self-induced) recession. Not yet as catastrophic as the Greek case, but well on its way there – and with a fully compliant government in power.

Now, this is not quite how it was supposed to turn out, was it? Wasn’t the whole idea to bring public debt under control and to unleash the economy’s growth potential by getting rid of excessive regulation, protection and government interference? Wasn’t the slashing of ‘unit labour costs’ (that persistent fallacy, to which I shall return in my next post) supposed to have boosted competitiveness and brought about sustained growth? Well, maybe so in the fantasy world of expansionary austerity and supply-side economics. But of course we all know that austerity is not expansionary and by now we should all know that this crisis (not just in Portugal, but more generally in Europe and across advanced economies as a whole) is being driven by demand, not supply. So why do the Troika and governments across Europe keep insisting on the same recipe? Why have all seven revisions of the Portuguese MoU involved the acknowledgement of a complete failure to attain the targets that were previously set, while carrying on prescribing the same measures yet predicting an imminent recovery? Is it stupidity or malice?

Well, I certainly don’t think that either these decision-makers or their technical staff are stupid people. So, as Sherlock Holmes would put it, that leaves malice as the only plausible explanation. And we have good grounds for pinpointing exactly what malice means here. Studies of the effects of the first-wave SAPs (see here and here, for example) have shown that neoliberal structural adjustment has consistently failed to bring about growth, vastly increased poverty, but, crucially, significantly increased the capital share of national income at the expense of labour. In the Portuguese case and in 2012 alone, the labour share of income dropped from 65% to 62% ̶ and all the gains were concentrated in larger corporations, not SMEs.

This is really about getting a larger piece of a smaller pie and that is why you get a coalition of international and domestic interests pushing forth this agenda. Large capital is bent on increasing its power – even if it destroys the entire European project. There’s not much time left to rein it in and avoid such an outcome.

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.”

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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