The New Austerity

In the last year or so the Portuguese government has been announcing successive measures to control public expenditure and deficit. This is in line with what is asked for by Berlin, Brussels and Frankfurt. Clearly, austerity measures in Portugal are the reflexion of the new Europe. Germany may be blamed for that but we all know that finding the culprit, be it Germany or Socrates, or the ECB (or Greenspan…), generally means that one has reached the wrong answer. Austerity is not about Merkel or Germany, although domestic pressure there and in the other “northern” countries should be accounted for. But the bottom line has to lie elsewhere, namely, on the gradual redefinition of how the European Union is going to work in the next decade or so. And what will it be? It will be a Union where “fiscal responsibility” will prevail over “cohesion”. I am not worried about that, frankly. Portugal can live with the new Europe on the making, and the changes may even have positive effects on the structure of the economy and on the overall institutional framework. It is a shame, however, that changes had to be imposed on such a short notice and in such a drastic way, mostly because their effects on the less protected parts of the population will be felt more severely. But Portugal will cope with what the new Europe implies: lower wages, lower pensions, higher retirement age, smaller welfare state, lower infrastructure investments, etc. All counterfactual scenarios are most probably worse. And in the end we may have higher savings rates, higher export growth, and lower dependence on foreign capital.