Monday, 22 March 2010


   Formally, as we all know, it is not correct to state that Portugal’s slow growth since the early 1990s is due to the euro. The euro comes into the picture only because it impeded the government to devaluate in order to re-establish losses in factor competitiveness. But slow growth was due to those losses. Recognizing that is not arguing that a non-euro counterfactual would be better. As Rui belw recalls, devaluation in small countries leads only – if at all – to short-term gains.
   Nobody is seriously considering that living the euro is a true political option. It is not, I hope, and I hope that it stays a non-option for a long time to come.

   But we are facing a problem of imbalances within the euro and next steps are to figure out how to deal with it. Paradoxically, as Francesco recalls, Germany is both at the centre of the solution – because of its positive external balances –, and well acquainted with the problem. In fact, the 1990 unification was soon followed by the unification of the Deutschmark which imposed an overvalued currency in the Eastern lander. Wage gaps – and labour productivity gaps – are still wide, despite massive financial transfers from the West to the East, equivalent to 3% of the West’s GDP, each year.
    The bottom line is: macroeconomic adjustments take tame (“Supply is a long run stuff”, as Francesco put it), and present day international financial imbalances have to be taken care of without impacting too much on the needed macro adjustments. How to deal with that? The instruments are out there, and we just need the appropriate political framework.
   Our task in this small peripheral country is to be conscientious about the problem. And some progress has been made. A couple of months ago most economists blamed the lack of “structural reforms”, but now things are a bit different and we are looking at the way the euro zone is working. But the hardest task is to convince the German voter that they have to pay back some of the benefits that they got from the euro. Maybe that is impossible.
   We may also hope that while we discuss these issues, growth will return, and that part of the imbalances will be cured automatically. Hope may not however be the best tool to deal with economic troubles, as Miguel argued a few posts below.


  1. "The euro comes into the picture only because it impeded the government to devaluate in order to re-establish losses in factor competitiveness."

    The euro also impeded the markets of "naturally" devaluating the euro, not only the government.

    And I imagine that the euro could have had another effect - because, with a common currency, nominal interest rates are more or less the same in all Eurozone, countries with higher inflation have lower real interest rates, then probably will have more internal consumption and even more inflation, and a gradual destruction of the sectors that produce tradable goods (like industry and agriculture), because of the non-competitive higher prices.

    Perhaps this could have ocurred in Portugal?

  2. "Perhaps this could have ocurred in Portugal?"

    In fact, that is exactly what Vítor Bento has been saying for a long time. [But things have changed: if you look at the figures of inflation you'll find out that portuguese economy is now with one of the lower inflation rates in euro area].

  3. The argument in my post was incomplete (albeit, I hope, correct) and you were right to point out that the euro meant that interest rates in Portugal have been "too low" (for a correct definition see a paper on that by Vítor Gaspar & Miguel St.Aubyn). Low rates have certainly depressed savings and helped investment in housing, among other effects. But we still need to know how that has affected growth, and up to now we only have theories, not hard evidence.