What to think

1) The negotiations between Passos Coelho, the leader of the main opposition party, PSD, and José Sócrates, the Prime Minister, did not really break down. They were simply interrupted. I hope. The two men are clashing in many issues and one of them is certainly their character - I don't need to have lunch with Sócrates to know that I wouldn’t buy a second hand car from him.
2) The Prime Minister wants Coelho to sign a blank cheque before the Budget goes to Parliament, in a fortnight’s time, and of course the latter does not want to do that: we may guess that he wants his MPs (unfortunately he is not one of them because the former PSD leader blocked his election) to discuss the budget, loud and clear, so that he does not loose his electorate.
3) Passos Coelho should not follow the same people in his party that proposed the "revisão constitucional" which was an ideological, badly designed and unnecessary move. He does not need ideology but pragmatism instead.
4) Cavaco Silva, the President, will ultimately help Passos to get out well from this episode.
5) Passos needs to get the Budget passed and to be able to say that he did what was best for the country.
6)It may be necessary to raise taxes in order to fulfil the deficit target for 2011 agreed with Brussels.
7) Contrarily to common sense widely spread in Portugal and abroad, this country has a good record in keeping its international financial obligations and that tradition is well embedded in both the Socialist and the Social Democratic parties.
8) People are not protesting on the streets, contrarily to Greece, France or even Spain, which somehow prouves the point above.
9) Since Cavaco Silva´s reforms, back in the 1990s, Portuguese governments have at their disposal enough tools to cut expenditure and/or raise taxes, as they wish (tools that Mário Soares, for instance, did not have in the early 1980s).
10) Let's see what happens next.

SCUTs or how to make life messy...

   Last week, the major decision from Government was to introduce tolls in highways that were built under the concept of "no cost to the user" - Government would pay private contractors that built and operate the highway according to traffic (with some "demand insurance" though).

   Now, faced with severe budget constraints and having to cut down public spending, the Government introduced payment in highways where people were already used not to pay.

   But given the protest of local populations, that were using arguments put forward some years ago by the same Government, exemptions and discounts were created, based on household distance to the highway.

   From a pure economics viewpoint, price discrimination, as this is the case here, can be welfare increasing - translating from our jargon, it may be good for society that different prices apply to different people.

   The problem is when pure economics meets political economy - by having differential treatment as a rule, everyone will claim and press the Government to have particular exceptions - thus transforming tolls in highways into a bargaining game.

   I wonder what will be the end result, especially if in highways where no price discrimination exists populations start demanding application of the same rules.

The monster fights back

In Greece, until July, public expenditure had fallen by 14%; in Ireland 2.9%; in Spain 2.5%. What about Portugal? It raised by 4%.

-- Ricardo Reis

Nice trend, hum?

Unemployment

Is it so?

"The policies of German Chancellor Angela Merkel in the current economic crisis are comparable with those of Margaret Thatcher, writes economist Pedro Lains in the business paper Jornal de Negócios: 'Although with more pragmatism than ideology Merkel is currently pursuing a similar course to Thatcher's in the 1980s. If Germany got it's way financial discipline would rule in politics, not the money-wasting of the states which in Merkel's eyes is fatal for growth. For Europe she wants less integration and more stipulation of costs as well as regulations on who covers them. What will this stance bring Merkel? Does she represent the majority in Germany? Or is there a more pro-European Germany that is passively waiting for the crisis to end? Merkel's election results of recent months are encouraging for Europe. Perhaps Merkel will suffer the same fate as her predecessor: she'll be toppled once she's solved the main problems. But even if she loses she will win. For Europe will no longer work the way it did when she took office.'"
From Eurotopics.

The euro-crisis: necessary versus sufficient conditions of the eurozone framework

   There are two views on the causes of the current European crisis. The following quote by Wolfgang Schauble well represents the first:

   To the question of what caused the recent turmoil in the euro zone, there is one simple answer: excessive budget deficits in many European countries (FT June 2010).

   The second view (here) is that that the markets finally realized that there is no mechanism to correct external imbalances beyond self-equilibrating forces.

   The fiscal irresponsibility of Greece can partially explain the reasoning behind the first view. I say partially because Greece is such a small fraction of the EMU GDP that it cannot be the sole cause of the current crisis. It is true that during the last decade, the fiscal behavior of most other EMU's members, especially the three largest, has not been irreproachable. Nevertheless pointing to excessive deficits as the simple answer of the euro-crisis appears simplistic and ... insufficient. Consider that two of the countries most affected by the crisis are Spain and Ireland. The same two countries have been the most virtuous fiscal entities of the euro-zone, the champions of the Maastricht Treaty criteria so to speak, as the following graph shows (click to enlarge). I take stock of the Irish and Spaniard experience to conclude that lack of fiscal rectitude is not sufficient to explain the current euro-turmoil.

I'll be back

   Like the famous quote, Telefonica is announcing "I'll be back..." to take VIVO from Portugal Telecom - the fight for the Brazilian joint-venture of the two firms was to be expected, sooner or later.

   Although most of the discussion has been about the recent use (and abuse?) of golden share rights by the Portuguese Government, there is a renewed lesson from all this.

   And that lesson is plain simple, and comes over and over again - the notion of "core national shareholders" in so-called "national champions" is quite elusive and it meltdowns every time

it faces a sufficiently high price. No wonder, and actually I would not expect any company or bank to let go profits just for "national pride". After all, they can always claim they will put the money to good use (and they hope better use) than keeping the current shares.

   Let's take some basic economics (and get corrected if I do something wrong...). First, current shareholders of Portugal Telecom (PT) are not forced to vote in favor of selling Vivo to Telefonica. The single argument to sell is the price.

The importance of Portugal to Portugal Telecom

   In a segment in the night news yesterday, the CEO and chairman of Portugal Telecome (PT) argued that the Brazilian market is crucial for the company. To back it up with numbers, the Brazilian market accounts for 72% of their costumers, 45% of their revenues, and 40% of their profits.
   There's another way to look at these numbers. Even though the Portuguese market only accounts for about 28% of PT's customers, they generate almost 55% of its revenues and 60% of its profits. It looks like what is really crucial for PT is to keep competition out of the Portuguese market. Just imagine if the government (underhandedly) stopped blocking competition from abroad, and Telefonica or others entered the Portuguese market starting a price war?
   PT might not be happy, but the Portuguese customers would be: ultimately, they've been the ones financing PTs Brazilian expansion all along.

Summer, World Cup or both?

   Suddenly, all the discussion about the Portuguese economy faded away, shadowed by the World Cup in South Africa, and by arrival of Summer.

   Still, the worrying fundamentals did not disappear. We will have to come back to them soon.

   Meanwhile, this month taxpayers will be hit by the increase in taxes announced some weeks ago. At the same time, the Ministry of Finance is making available a new instrument of public debt, for long term investments (apparently, for more than 5 years, it pays more than current instruments to the small investor). Good news that Portuguese families can invest at a rate higher than time deposits and Government get funding below rates in international markets.

   I did not went to look into the details of the product, but I would look for clauses that prevent "opportunistic" behavior by future Governments in case rates in international markets fall below that of this new instrument (based on past decisions, future Governments may change conditions, hurting long term small investors).

   However, access to public debt is not yet a couple of clicks away in our computers...

A Review of "Economia Portuguesa, As Últimas Décadas"

   In today's issue of Diário Económico - a Portuguese daily newspaper on economic and financial affairs - I write a short review of "Economia Portuguesa, As Últimas Décadas", Luciano Amaral's latest book, published by the Manuel Francisco dos Santos Foundation. Read it here.

   Foreign readers will have to forgive me but there is no English version available.

Shy Entrepreneurs

   Last night I had dinner with a group of friends from high-school that I hadn't seen for a long time. It is of course a great joy to meet good old friends, however I anticipated some of our conversation would touch on somber topics. After all, the Portuguese soccer team didn't really put up a promising performance in their first World Cup game. Instead, we didn't discuss soccer at all, all we talked about was the Portuguese Economy.
   Like me, my friends are all about turning 40. Which means they lived through the great Portuguese stagnation during a key period of their life-cycle, their 30's. Their view is that one of the reasons we did so badly over the past decade is that Portuguese entrepreneurs are too shy, in the sense of taking on too little business risk. This is a cultural trait, the argument goes.
   I have heard this argument many times over the years, and I'm very skeptical about it. Cultural traits can change very quickly with incentives. My view is that it is more helpful to think of Portuguese entrepreneurs as rational profit maximizers. If they look shy, then it must be because taking risks doesn't pay-off for them. I can think of a few reasons why. First, why take on risks when, if things go well, you get taxed heavily? Second, why take on risks when, if things go badly, you cannot easily fire workers? Third, do financial markets provide entrepreneurs with enough funding and, if so, do financing terms provide entrepreneurs with some degree of risk-sharing (i.e., allow them to pay back a bit more if things go well, and a little bit less if things go badly - in other words, not the terms offered by standard debt/bank loan contracts)? Why take on risk if you have to bear it all by yourself?

world cup and productivity

   Half of the country is stopping today to watch a game on TV; according to newspapers, major companies are allowing workers to see the game (it takes place at 15h00), as long as it does not hurt productivity.

   I wonder what are the effects of this sort of events on productivity, I could not find such an assessment, but likely the main impact is in spirits not on hours worked...

700,000 New Emigrants

   During the research for a forthcoming book, I started to think about the impacts of our prolonged stagnation on the job market. Interestingly, in spite of low job creation, until recently unemployment never rose to really high levels. Therefore, I was left to wonder what could cause such a phenomenon. The answer was relatively obvious: emigration. We all know that Europe exhibits a low degree of job mobility, but we also know that, historically, Portugal has been a country of heavy emigration. Thus, I decided to check the emigration figures to see what was going on. Unfortunately, after the introduction of the European Single Market, many European countries stopped collecting data on immigration for European workers. Similarly, Portugal used to have a "passport for emigrants", which allowed us to collect data on migratory flows, but that too was abolished in the early 1990s. 

   The solution to get the emigration data was to use a combination of labor market surveys, registers of national insurance numbers, the OECD immigration dataset, as well as the immigration figures for the countries that still collect them.

   The results of this research truly surprised me. Between 1998 and 2008, around 700,000 Portuguese decided to leave the country in search of better opportunities elsewhere. The figures are still lower than in the 1960s and early 1970s, but not by much. And the trend is accelerating: in 2007 and 2008, more than 100,000 Portuguese decided to emigrate.

   We don't know how much of this emigration is temporary or permanent, but, obviously, even if it is temporary, migratory flows can easily become permanent. No consolation there, even if we assumed that emigration is mostly temporary (which I doubt).

   One thing is certain. The prolonged economic stagnation is starting to have a major impact on the lives  of tens of thousands of workers, who are increasingly opting to find jobs elsewhere, rather than waiting for an illusive economic recovery. Alas, this trend is likely to persist if the Portuguese economy continues to be stagnated in the next few years.

P(II)GS: too big to fail.

   A recent Report by economists at the Royal Bank of Scotland estimates that the total amount of public and private debt issued by entities resident in Greece, Spain and Portugal that is held by foreign financial institutions -- financial entities outside the P(II)GS -- is about 2000 billion euros. This is about 22 percent of the euro area GDP.
   (by the way, I found no links to the report itself, but a brief description that essentially corroborates the calculations may be found here .
   The message seems clear: P(II)GS are too big to fail.
   Hence the bail-out that European Union leaders (together with the IMF and the US) have designed for Greece.
   And hence the need for fiscal rules, coupled with fiscal federalism, that several of us have been arguing for in this blog -- stressing, as I have done, how they would be positive for our profligate country in need of importing yet this good that it can not produce domestically (discipline).
   I think, moreover, that this Report makes it clear why the solution that Ricardo Cabral devised in a post to EuVox -- rescheduling and reestructuring -- is economically misconceived. The international financial turmoil would be enormous and the Euro would be in real danger. We wouldn't want to have Argentina in Europe.
This said, the essence of the problem remains to be solved: P(II)GS simply cannot live above their means so systematically and deeply. Think about Portugal: 10 percent of GDP of current account deficit, year after year; a country that is lacking structural competitiveness; and politicians that (some, to be fair) remain autistic about this.
   Against this background, has the Portuguese government done everything to its reach in order to contain the indebtedness of Portuguese entities? I do not think so.
   Public expenditure should be significantly reduced, which I haven't seen so far (at least compared with Ireland and Spain's immediate measures). And -- a crucial 'and', for me -- renewed incentives for residents to hold public debt should be created. The Portuguese twin deficits will only be tackled if and when the Government actually stops spending inefficiently and sucking resources from the public to finance that spending; and when it creates virtuous 'forced savings', instead of the vicious ones that have been recently implemented (increased taxes). If the Portuguese save more because they are stimulated to allocate increased savings to public debt, the international financial exposure of the Government would fall, imports would deccelerate and the international financial exposure of the country as a whole would decrease; the immediate signs needed for Brussels -- cutting the deficit -- should have given much more via spending cuts than they have actually been given.