Groenewolf
07-16-2010, 05:28 PM
The Wall street Journal (http://online.wsj.com/article/SB10001424052748704111704575355072331978794.html?m od=WSJEUROPE_hpp_LEFTTopStories)
BRAGA, Portugal—Indebted European countries from Greece and Italy to Spain have in recent weeks set off down a common path toward fiscal recovery, promising to slash spending and raise taxes.
One sobering scenario of what they may be up against comes from Europe's southwestern edge: Portugal, which embarked a decade ago on a similar journey of austerity, higher taxes and intermittent spending cuts, is still cutting—and still struggling.
On Tuesday, Moody's Investors Service cut Portugal's sovereign debt rating by two notches, to A1, citing the country's sluggish growth prospects and concerns that economic reforms in areas like labor markets won't bear fruit.
Moody's "remains concerned about the economy's medium-term growth potential," said Anthony Thomas, senior analyst at the rating agency, adding that Portugal's government debt, as a percentage of gross domestic product, has risen rapidly in the past two years.
The experience of Portugal—an early beneficiary of the euro zone's economic benefits and one of the earliest to experience the problems of being tied to a common currency—offers what some economists call a blueprint for what could be a long road to recovery for Spain, Greece and others.
"You have to be prepared that you are in for stagnant times," says Antonio de Sousa, who was Portugal's central banker in the late 1990s when the euro was created.
European Central Bank officials are optimistic that austerity is the right economic recipe for countries struggling to cope with the bursting of debt-fueled bubbles and a loss of competitiveness versus larger peers such as Germany. That contrasts with the prescription advocated by the U.S., of attempting to stimulate the economy with government spending, and pay debts as revenue grows.
"Fiscal consolidation and growth are not mutually exclusive," ECB President Jean-Claude Trichet said last week. "Prudent fiscal management provides the basis for balanced and sustainable growth."
Two decades ago, Portugal was regarded as an economic success. The country in the early and mid-1990s took steps to liberalize its economy, including an ambitious program of privatizing state companies, that led to rising wages and an investment-led boom.
Membership in the euro was expected to build on those gains by giving Portugal a stable currency, low interest rates and unfettered access to one of the world's largest trade zones. The country's booming economy left it in good shape to meet the common-currency zone annual budget deficit limit of no more than 3% of GDP.
But Portugal's boom contained the seeds of its own destruction. The rise in government tax revenue removed the urgency for unpopular spending cuts and economic liberalization. The government added workers, costs that would be hard to trim later.
Meanwhile, after Portugal adopted the euro in 1999, its dominant textiles industry wasn't able to use cheaper loans and a large common market to build a foundation for longer-term growth. Portugal's textiles were too expensive to compete with cheaper goods from China or Eastern Europe, but also lacked the high-fashion credentials of those from France or Italy.
(...)
Rest at the above link.
BRAGA, Portugal—Indebted European countries from Greece and Italy to Spain have in recent weeks set off down a common path toward fiscal recovery, promising to slash spending and raise taxes.
One sobering scenario of what they may be up against comes from Europe's southwestern edge: Portugal, which embarked a decade ago on a similar journey of austerity, higher taxes and intermittent spending cuts, is still cutting—and still struggling.
On Tuesday, Moody's Investors Service cut Portugal's sovereign debt rating by two notches, to A1, citing the country's sluggish growth prospects and concerns that economic reforms in areas like labor markets won't bear fruit.
Moody's "remains concerned about the economy's medium-term growth potential," said Anthony Thomas, senior analyst at the rating agency, adding that Portugal's government debt, as a percentage of gross domestic product, has risen rapidly in the past two years.
The experience of Portugal—an early beneficiary of the euro zone's economic benefits and one of the earliest to experience the problems of being tied to a common currency—offers what some economists call a blueprint for what could be a long road to recovery for Spain, Greece and others.
"You have to be prepared that you are in for stagnant times," says Antonio de Sousa, who was Portugal's central banker in the late 1990s when the euro was created.
European Central Bank officials are optimistic that austerity is the right economic recipe for countries struggling to cope with the bursting of debt-fueled bubbles and a loss of competitiveness versus larger peers such as Germany. That contrasts with the prescription advocated by the U.S., of attempting to stimulate the economy with government spending, and pay debts as revenue grows.
"Fiscal consolidation and growth are not mutually exclusive," ECB President Jean-Claude Trichet said last week. "Prudent fiscal management provides the basis for balanced and sustainable growth."
Two decades ago, Portugal was regarded as an economic success. The country in the early and mid-1990s took steps to liberalize its economy, including an ambitious program of privatizing state companies, that led to rising wages and an investment-led boom.
Membership in the euro was expected to build on those gains by giving Portugal a stable currency, low interest rates and unfettered access to one of the world's largest trade zones. The country's booming economy left it in good shape to meet the common-currency zone annual budget deficit limit of no more than 3% of GDP.
But Portugal's boom contained the seeds of its own destruction. The rise in government tax revenue removed the urgency for unpopular spending cuts and economic liberalization. The government added workers, costs that would be hard to trim later.
Meanwhile, after Portugal adopted the euro in 1999, its dominant textiles industry wasn't able to use cheaper loans and a large common market to build a foundation for longer-term growth. Portugal's textiles were too expensive to compete with cheaper goods from China or Eastern Europe, but also lacked the high-fashion credentials of those from France or Italy.
(...)
Rest at the above link.