Monday, 26 September 2011

Portugal's productivity curse and the need for credit/investment

According to Olivier Blanchard (IMF Chief Economist) in a recent interview provided to the "Jornal de Negocios", Portugal needs a productivity boost since the "fiscal devaluation" strategy will be insufficient to get us out of the current crisis.
To put this in perspective, below I plot the growth rates of TFP for the total economy between 1960 and 2012 (estimate) for both Portugal and the EU15 average.

We do observe that since the last economic and financial crisis (in 2008) Portugal has had an average productivity growth rate of -0.18% and this is expected to remain below zero in 2011 and 2012 (in line with the latest GDP growth projections), contrarily to EU15's average which foresees a better performance for the year to come (and which has shown, over time, smaller volatility as well).
To this end, more investment and lower unit labour costs are necessary but not sufficient conditions to increase productivity levels. One also needs such approach to be coupled with banks' recapitalization so that credit flows into the economy at the "right" speed (and amount). Such idea has been reinforced in recent meetings held in Washington DC this past weekend where the European crisis was scrutinized by world leaders and economists. Raghuram Rajan, (former IMF Chief Economist) stressed exactly the financing point in today's article in the Financial Times (here). More specifically, some of the EFSF funds will have to be used to recapitalise banks that are not able to get money from the markets. The problem is the lack of consensus in this matter. For Rajan, "the world has to recognise that the eurozone’s problems are too big to leave to eurozone countries alone to deal with. The world has a stake in their resolution. And it has an institution that can channel help, the IMF." He suggests that the IMF could set up a special vehicle that would offer large lines of credit to illiquid countries like Italy or Spain. This is one additional suggestion that joins a plethora of others being considered for Europe's crisis resolution.

Tuesday, 20 September 2011

For those who need it stated more bluntly

This is why I and the IMF were insisting last week on the need for a fiscal devaluation. It seems the political appetite for this policy is not there. That is fine; it was one option, and there are alternatives. What is not fine is to ignore that the dismal growth forecasts for 2012 can compromise the entire adjustment and rescue package. As I wrote in my essay last week:

"Se o governo não quer cumprir esta parte do acordo, então tem de pensar a sério, e rápido, noutras medidas que evitem uma recessão profunda. Seria uma pena se a desvalorização fiscal tivesse dado o seu último fôlego, mas seria uma tragédia se fosse a economia portuguesa a perder o fôlego."

Monday, 19 September 2011

Intermezzo romantico

Once upon a time in 1969


"If all were well with Europe, we would not be meeting today. If the Community were able to speak with one voice our main topic here would be foreign policy: the question of the peaceful organization of Europe, negotiations with the countries of Eastern Europe and our interests with regard to the conflict in the Middle East.


... The links that have been forged between us [note: us = Europe] must be indissoluble and must grow ever closer. If we want to achieve the necessary harmonization we must give each other support, that is to say, we must apply solidarity in practice. On behalf of the German Government, I declare that we are ready to do this. And German public opinion is behind us in this..."

Willy Brandt, Chancellor of the Federal Republic of Germany, The Hague 1969

reference: (here full transcript)

"Greece must abandon the Euro and Portugal should do the same" (Nouriel Roubini)

Following up on my previous post, where I alluded to a research piece published by Roubini Global Economics, today the FT published its summary in the "Opinion" section - here.
The "Diario Economico" newspaper also comments on this - here (in portuguese).

Friday, 16 September 2011

The quest for a "Polish"-Consensus?: sovereign debt crisis, Greek's problem/contagion and the future of the Euro-zone

Today the 17 ministers of Finance are gathered in Wroclaw, Poland, to dig out solutions for the (general) sovereign debt crisis while simultaneously having to deal with an urgent solution to the “Greek” problem (in terms of the most pressing financing needs). Vitor Constancio (ECB Board Member) told the press this morning that contagion to Portugal is always possible as long as the present (Greek) situation is not clarified (and resolved).(click here)
Such statement comes one day after both Merkel and Sarkozy have reaffirmed Greece’s place in the Monetary Union and reiterated their countries’ support to finding a solution that must prevent the country from abandoning the Euro-area. Timothy Geithner has also urged for a credible, coherent and quick Euro-zone response to the present conjuncture advocating that both the European Commission and the ECB still have several tools at their disposal. Despite these voices, Nouriel Roubini (Dr. “Doom”) published today an economic research piece in Roubini Global Economics entitled “Greece should default and abandon the Euro”. His views are that “Greece is insolvent, uncompetitive and stuck in an ever-deepening recession, exacerbated by harsh and excessive fiscal consolidation.” Some arguments are a bit too pushy, particularly when he compares the Greek with the Argentinean case. Portugal is also briefly mentioned (but not Ireland) with respect to some economic similarities shared with the Greek economy (such as the competitiveness issue) and the possibility of becoming the next “default” victim.
Irrespectively of who says what and where is the reason, the general public can, nevertheless, witness the absence of a unifying (and unique) “voice” in Europe as well as the lack of concrete plan of action to enforce…
Today’s article on the Economist, “Fighting for its life” (click here), suggests/asks for a greater role of the ECB, particularly given the growing financing difficulties of the banking system as a whole. Estimates from Goldman Sachs advert to the fact that Europe’s 38 largest banks may need between 30-92 billion euros in extra capital to cope with haircuts to Greek, Irish and Portuguese government bonds (as well as losses in Italian and Spanish government debt). IMF’s projections are even worse.
In face of increasing pressures from the financial markets, the 17 members may need to take measures to increase the scope and firepower of the European Financial Stability Facility (EFSF), Europe’s bailout fund. At the same time, the ongoing discussions about ECB’s willingness to buy without limit the bonds of solvent Euro-zone countries as well as the question regarding the issuing of Euro-bonds, does not seem to be heading towards generalized consensus. In the end, it is all about credibility and time (in-)consistency of policy-based (political?) actions.

Tuesday, 13 September 2011

First update of the memorandum of understanding

As troubled times hit Greece, it is worth reading the first update of the Portuguese Memorandum of Understanding, to see what has been the view about progress made in Portugal. You find the document here

Saturday, 10 September 2011

Fiscal devaluations

Today's "Dinheiro Vivo" supplemento to Jornal de Noticias e Diario de Noticias had an essay by me on fiscal devaluations. (It is here, but a better version is here.)

There are some pros and cons to this measure, but many of the arguments that have dominated the public debate in the last month are, in my view, not valid. In particular:

1) Fiscal devaluations have nothing to add to our deficit target, positive or negative. They are budget neutral. They are a growth measure.

Friday, 9 September 2011

US payroll taxes and Portuguese TSU

President Obama announced his plan to cut the payroll tax paid by employees from 6.2% to 3.1%, and the part of the tax paid by employers from 6.2% to 3.1%. That is a combined 6.2% reduction in payroll taxes for existing workers. For new hires, all of the 12.4% combined tax will be waived.

This in an economy that is expected to have modest GDP growth around 2 or 3%, and where the unemployment rate is 9.1%.

In Portugal , the unemployment rate is 11.1%. GDP will likely fall, with a growth rate between -0.5% and -2% in 2011-12.

But cutting payroll taxes (via taxa social unica) in Portugal by more than 3%, as part of a fiscal devaluation, was pronounced in the last couple of months as far too much. Not feasible, dangerous, irresponsible, unnecessary were some of the adjectives to describe it.

In the land of small government, it seems that when it wants to, the government can do way more than in the land of "Estado omnipresente". Not so much of a contradiction, when you think about it.

Thursday, 1 September 2011

one more piece of information

The Portuguese Government made available a new document containing the strategy to bring the budget deficit into control (the document is in Portuguese). Although most, if not all, press has given prime time to the increase in taxes for the higher income bracket and to firms with profits above a certain threshold, the document actually contains more information.

An important one, in my view, is a picture showing that past programs have failed dramatically predictions of return to economic growth, and overstated in a systematic way the control of public spending. This puts obvious pressure for the current Government to do differently. And there is a very specific concern in the document to improve the tools for budget control within the Government.