Friday, April 8, 2011
FT: Drawing a line in the Iberian sand
(...) The caretaker government in Lisbon did nobody any favours by flipping from denying the need for a rescue loan one day to requesting one the next. Markets may have seen it as a fait accompli that Lisbon would eventually go cap in hand to the European financial stability facility: sovereign bond yields hardly moved on Thursday. But it further complicated a political challenge that was going to be hard enough as it was. Within Portugal, it is doubted whether the caretaker government – which lost a parliamentary vote of confidence last month – has the constitutional authority, let alone the political legitimacy, to commit the country to the kind of conditions a loan from the EFSF would entail. This is especially so since the political class has miserably failed to reach a consensus on the deficit-cutting measures the country can no longer delay. And Portugal’s eurozone partners will not find it politically possible – nor should they – to advance the funds without such conditionality, even if only to jump refinancing hurdles reached before a new government is elected in June. (...) For Portugal, that willingness is a bigger “if” than even for Greece. Lisbon has shown little appetite for the necessary belt-tightening and structural reforms of the economy to restore its long-lost ability to grow. The rest of Europe should be ready to extend rescue loans, but before it does so, it must demand that Portuguese politicians use the election campaign to seek a mandate from the people for a programme of reform. If this is achieved, and a loan is granted, all sides must accept that if the loan conditions are not met, aid will stop and a default triggered. Getting the Portuguese rescue right matters for all of Europe, and most of all for Spain. Madrid has done all that Lisbon has not: it has taken drastic measures to cut the deficit, embarked on reforms to make the economy more efficient, and spared no effort to communicate with bond investors. There is no solid reason why Portugal’s failure should reflect on Spain. Undeserved as this would be, however, it cannot be excluded. Spanish banks are overexposed to Portugal.
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I have to say I find it particularly funny to read "Lisbon has shown little appetite for the necessary belt-tightening and structural reforms". HAHA! Since March 2010 we had 3 "belt-tightening" programs, and I will just mention a few of the measures in these programs that we volutarily accepted (and there is no "if" in that sentence):
ReplyDeletePEC I (March 2010): 1) Salary growth below inflation in the public sector until 2013, 2) new tax bracket at 45%, 3) cut on public investment from 4.2% to 2.9% of GDP, 4) significant reduction on tax benefits, 5) 0.5% reduction on social pensions and subsidies, and 6) privatizations of €6bn.
So OK, this one was not so bad. What about the next one?
PEC II (May 2010): 1) 5% salary reduction for members of the government (YaY!), 2) significant cuts on capital expense, 3) cuts on Regional and Local Admins budgets, 4) increase of 1pp on all VAT rates (standard VAT at 21%, reduced at 13% and 6%), 5) increase of 1pp or 1.5pp on income taxes (depending on the level of income), 6) increase of 2.5pp on colective income tax (for companies) and 7) additional tax on credit to consumption.
OK, now this is starting to tighten a bit. But wait, is there more?
PEC III (October 2010): 1) salary reduction for all public sector employees, up to 10%, 2) freeze hiring and career progressions, 3) significant expense reduction with National Health System and Social Security (0.9% of GDP), 4) increase of 2pp on VAT rates (standard VAT at 23%, the highest in EU), 5) review of all the VAT and income tax clauses, 6) significant reduction on tax benefits for companies, and 7) new tax on banks.
Did you think this could be enough? Not yet. Still not getting there, so then it comes PEC IV.
PEC IV (March 2011): 1) even more limitations to tax benefits and deductions, 2) freeze on minimum wage (485€), 3) some food items charged standard VAT (23%) vs. reduced VAT (6%).
And you wonder... Why did this one fail? Except for the fact that some local producers/retailers could go bankrupt more quickly and that the poor would get poorer, there is really nothing for us to complain there. At least nothing significantly different from the 3 previous programs.
This plan failed because the country needs consistency. We still don't understand why are all the plans failing to meet the goal and we still need one more.. and then another one, and maybe, why not, another one. We need a plan, a direction. There is no point in keeping a government that doesn't seem to know what it's doing. And Socrates clearly didn't have a clue!
We don't mind austerity but bring us solutions that can work on the long run.