The reason is actually pretty simple: its growth prospects are poor. Markets are forward looking, rather than backwards looking. Normally, debt and recent deficits are a good indicator of whether, going forward, the government will be able to service its debt. However, in some cases that relationship breaks down (for example, if the country just got out of a war, its future will look very different to its recent past). In Portugal’s case, the debt is not that worrisome, and its deficits are not that large, but growth has been stagnant and there is little indication it will change.

For decades now, the average yearly growth rate has been slowing down (especially if you disregard the period just before and after the 1974 revolution as exceptional). In the last decade, it has barely been above 1%.

Why? Here, unfortunately, it gets messy. It feels like a death by a thousand cuts.

1. The labour market is awful. Many are familiar with the sclerotic Spanish market and the division into overly protected cosy jobs and bad, underpaid, precarious ones. Portugal’s labour market is, in some senses, worst. A proposal to make it as liberal as Spain’s (!) is being resisted by the unions.

2. The bureaucracy of the state has improved in recent years, but it is still a drag on the productive economy. Especially at the local level, things take too long and are overly unpredictable. See this Bloomberg report for a good description. Lisbon has more vacant houses than houses where people live in! Most of the vacant houses are owned by people who have been waiting (often for many years) for permission to renovate and put them back on the market. The city does not approve them and Lisbon loses its vitality.

3. There is no large scale corruption like in Greece, nor the state-level corruption of France, but petty corruption is abundant. In general, corrupt politicians still get re-elected. A few years back, one of the social-democratic parties (there are two of them), withdrew support from its most corrupt mayors. It was a good start, but the party got rewarded by losing many seats, whilst the other social-democratic party supported their corrupt mayors and kept them. In a democracy, people get the government they deserve.

4. Since 1968, when the first programme of “democratic education” started, the population is increasingly well-educated, at least on paper. Unfortunately, during the 1980s there was a very large internal brain-drain as most of the college educated chose to work comfy jobs in the public sector rather than start new companies or modernise existing ones. This also meant that the upper middle-class that rules the country (the sort of people a journalist at an important newspaper might encounter at a dinner party) are beholden to the state. Many small private companies, on the other hand, are run by the people with the least education.

5. Speaking of education, it’s not very good. Culturally, it is still not valued enough, with parents caring more about grades themselves than whether their children are learning anything at all (for example, trying to get teacher to dumb down so that their kids get better grades by learning less is common).

6. Large corporations, even when nominally private, are, almost without exception, dependent on the good favours of the state and protected from competition. The exceptions are export-oriented, but there are not many of them.

7. The demographic situation is horrible: there are too many people retiring for the number of workers. Demographics is like a slow moving freight train: it takes forever to get to you, but, when it does, it crushes you. Social security is now partially dependent on the value-added-tax. It will not get better, more general taxes will need to be diverted for it. For as long as I remember it, the pension system is in a process of “reform” (i.e., slowly breaking its promises, slowly increasing its take in taxes). The young are increasingly called to pay more to the older generation (who, in general, have no savings). As their taxes increase, many, the more productive, opt out of the system altogether (Portuguese emigration has picked up again in recent years). Atlas is shrugging.

8. The euro needed to be much looser. Portugal simply adopted a strong currency without the cultural adaptation that revealed itself to be needed.

Frankly, I just don’t see an easy way out for this little country in the short term. The political economy is warped by the older generation which works for the state and will fight for its perceived due. The economic culture is Keynesian even as they keep pulling on the string of public works (the plan is to have 3 parallel freeways from Lisbon to Oporto!). The idea of private initiative is too tainted by the pervasive crony capitalism (while at the same time, the state’s prerogative to choose winners is unquestioned—as if the two were unrelated). Meritocracy is resisted by the mediocre who have cushy jobs (with egalitarian leftists intellectuals serving as useful fools supporting them).

There will not be a catastrophe. I’d be surprised with a radical populist up-rising. Portugal just does not like radicals and there are not enough young people. Instead, at least during the next 5 to 10 years, we’ll see a muddling along.

The intervention of the IMF (which still seems inevitable) will buy the country some time, but there is too much wrong with its economy for the fix to be the miracle that some expect.

In "http://www.mutualinformation.org" February 6th, 2011