Portugal under the loop

eu.gifIn a recent survey the OCED puts the Portuguese economy under the loop and their findings apparently give cause for concern.

"Portugal’s economic performance has deteriorated markedly since 2000, with the slowdown turning out to be more severe and prolonged than in most other OECD countries. This lack of resilience reveals structural weaknesses. Meanwhile, with low growth and weak control of public expenditure, the fiscal deficit has remained at unsustainably high levels, reaching close to 6% of GDP in 2005. Despite the existence of a large output gap, the high fiscal deficit leaves no room to stimulate demand. The government has embarked on a strategy that aims at consolidating public finances and enhancing growth and it is important to strengthen these efforts. Without more wage restraint and higher productivity growth, there is a clear risk that Portugal’s competitiveness continues to deteriorate and the income gap vis-à-vis the OECD average widens further." 

Now what is particularly interesting here are of course the instruments at Portuguese policy makers disposal to ameliorate the current state of the economy. Short term interest rates are out of the question since the ECB is calling the shots on this one and as OECD notes there is no room for fiscal stimulance which is either because of the inherent instability of running a fiscal deficit of 6% of GDP or because the growth and stability pact puts down the foot at 3%; remember ... it is all about convergence.

"The only macroeconomic tool left to underpin the recovery (on which the government has, however, only limited influence as it is in the hands of social partners) is reversing the appreciation of the real exchange rate by additional wage restraint, thereby helping to crowd-in net exports, and preventing a further rise in unemployment." 

Moving on OEDC offers four main focal areas ...

Overall, Portugal must address four main challenges:
1. Putting public finances on a sustainable path.
2. Improving the performance of the education system, at the primary and secondary levels and in vocational training.
3. Modernizing the economy to face global competition by enhancing tertiary education, training and innovation, and by continuing to give high priority to science and technology development.
4. Creating a more dynamic business environment, strengthening competition and improving the functioning of thelabour market.

I think that no one essentially can disagree that the points above are all very good and admirable goals to achieve for any country. The question remains whether the cure for Portugal can be alighed with the rest of Europe? However, this can not conceal the fact that Portugal can do a lot of things to improve its situation but like all other countries in the Euro-zone it faces strict demands of covergence but in many cases does not have the appropriate means to achieve them.