Wednesday 23 May 2012

Portuguese Public Finance Council

Created in february 2012, the Portuguese Public Finance Council has published the first review analysis. It can be found in There is a version of the report in English. The report is overall positive with the budget policies, but still finds room for recommendation about further improvements.

Sunday 20 May 2012

Guest author: U. Schuetz: Unintended Consequences

Unintended Consequences. Challenges for Portugal’s “Arranged Liberalization”
Ulrich Schuetz, University of Lucerne, Political Sciences (

   After Ireland and Greece, Portugal was the third eurozone country to receive financial aid within the European Financial Stabilisation Mechanism (EFSM) framework of the so-called “troika”, composed of the European Union (EU), European Central Bank (ECB), and International Monetary Fund (IMF). In May 2011, the Portuguese socialist government, with support of the conservative opposition (which came to power one month later), accepted a reform plan conditional to the disbursement of financial assistance. The plan aims to improve Portugal’s economic competitiveness and performance through structural reforms towards a more liberal system. At the same time, it requires the state to substantially reduce public debt to regain fiscal solvency. Criticism of the reforms mostly reflects different macro-economic standpoints and comes mainly from economic observers. A frequent evaluation states that instead of fiscal austerity, expansionary monetary policy would lead the way out of the crisis (e.g. Krugman 2012). Because of the pro-cyclical nature of their conditions, past IMF programs were blamed for pushing countries into recession (Soros 2002:120). Missing from the debate on the effectiveness of the troika reform plan is the question if the reforms are embedded in an environment favorable for liberalization. A generalized “one size fits all” liberalization program might not produce the expected results, especially if non-economic factors are considered. Analyzing the separate aspects of the reform plan and trying to predict potential shortcomings in their application is necessary to be able to assess the chances of success. This essay is an attempt to do this by starting from the following assumption: If institutional complementarities and non-market relationships such as corruption and clientelism are ignored, the outcome of liberal reforms will be negatively affected.
   The first part of this paper provides a short overview of the troika reform plan. Subsequently, institutional complementarity and the Varieties of Capitalism approach are discussed regarding the Portuguese case. Finally, the impact of corruption and clientelism on a liberal reform process is addressed before summarizing the findings in a conclusion.

Troika Reform in Portugal
Details of the reform program were agreed on by both the old and new Portuguese government and troika. The agreed measures had broad political support as a result of a basic consensus on European issues between the country’s two biggest political parties, conservative Partido Social Democrata and socialist Partido Socialista (Fischer 2011). The two main pillars of the program relevant to this discourse are (1) increasing competitiveness and growth through liberal reforms and (2) regaining fiscal solvency through a substantial reduction of the public deficit (IMF 2012:4)1. Disbursement of financial assistance is subject to troika’s review of the implementation of the reforms. Portuguese authorities also committed to consult with troika on legislative changes that were not part of the agreement (European Commission 2011:1). As a consequence, the Portuguese government sends a quarterly letter of intent to the IMF and ECB with a review of the progress made so far and documenting the next steps, closing with a request to transfer the next installment. This is standard procedure for IMF-supported programs. The Fund itself argues that “conditionality can serve as a valuable commitment device that complements and enhances ownership of structural reforms” (IMF 2003:12).

Thursday 17 May 2012

1 year of troika

17 May 2011 - one year ago - the Memorandum of Understanding was signed and Portugal entered the financial rescue mode.

A year after we have
- new government, and a relatively large political consensus on the complying with the commitments set in the Memorandum, including the main opposition party
- lower wages - both in civil service, as the Government imposed a wage cut, and private sector (either negotiation of lower wages or through unemployment spells, taking lower paid jobs
- unemployment at historically high levels
- emigration rising again to levels unseen in peaceful
- public budget cuts
- price increases (transports, electricity)
- tax increases (both income and VAT) (tourists can still have back VAT, under certain conditions)
- give away 4 holidays (two historic dates + two religious dates)

but we also have
- sun and 30º C in May
- good roads and highways (though, rather empty ones, but hey, they are there to use)
- summer music festivals - Bruce Springsteen, Bryan Adams and Stevie Wonder will be at Rock in Rio
- good food, even if we take smaller portions
- waves
- exports growing, and to non-traditional markets
- GDP fall was smaller than expected this term (though one number is not yet a change in trend).

And if you want to keep tracking some key numbers in main areas of change under the memorandum of understanding, follow what our students are doing here.

Wednesday 9 May 2012

What adjusts when a country deleverages

Normal blogging should soon come back. For the moment I continue the advertisement campaign on seminars: Friday we have (at Nova 12am) Pierpaolo Benigno presenting "Deleveraging and the real exchange rate"