Fall 2015 Bro okings Panel on Economic Activity Weblogging: The German Ministry of Finance Says Portugal Is a Major Success…

Fall 2015 BPEA 10:00 AM Fr: Thinking about Ricardo Reis’s paper…

As we all know, in the absence of the Maastricht Treaty a financial crisis like that of Portugal 2010 would have been dealt with by depreciation and an IMF program–both to provide funding to cushion the effect of the sudden stop on capital inflows and to take the blame for the policy changes inevitable to create external balance at whatever capital account conformed to the post-crisis tolerance of both foreigners and Portuguese for Portugal risk.

One powerful benefit of such a resolution is that as long as–and this is a big “as long as”–the external debt was either denominated in Portugal’s national currency or private debt dischargeable via bankruptcy, we would not know be worrying about the legacy of Portugal’s pre-crisis debt. A second powerful benefit is that as long as–once again a big “as long as”–the Gods of the Elasticities cooperate in the medium-run, structural reform to boost export competitiveness and to curb import demand happens automatically, with the drawbacks of coming at the likely cost of a domestic inflation-spiral problem and without imposing pressure for productivity-boosting structural reforms.

Is there a case–as much of “a major success” as the German Ministry of Finance may claim Portugal is–that there is some net economic benefit from euro membership that offsets Portugal’s giving up of these two powerful benefits of adjustment via the exchange-rate channel?

Ricardo Reis: Looking for a Success: The Euro Crisis Adjustment Programs: “Portugal’s adjustment program was extensive, mostly followed… and…

…benefitted from the accumulation of some [previous] experience. Looking back in its 2015 anual report, the IMF describes the adjustment program as a success (IMF, 2015a), and even Wolfgang Schäuble, the influential German finance minister, stated at the conclusion of the program: “This is a major success” (German Federal Ministry of Finance, 2014). This article will argue that the verdict is more mixed…. While the main Portuguese aggregates indicate a success in stabilizing public finances but little gains in getting the economy out of its slump, evaluating the economy’s state… suggests the opposite: promising changes in the structure of the economy, while being far from a path that lowers the public debt….

The trade balance went from -7.1% to 1.1% of GDP…. The ratio of exports to GDP increased from 30% to 41%…. The stock of public debt went from 96% to 130% of GDP…. It is difficult to see how Portugal can get public debt under control without a new reconfiguration of maturities and interest payments on the troika debt that would significantly reduce the market value of the public debt…. In the World Economic Forum competitiveness index, Portugal improved from being ranked 46th to 36th… [as] the result of many legal reforms that were part of the extensive adjustment program… 494 different structural reform actions… half in the public sector, and half in deregulation…. Whether any of it leads to higher economic growth is an open question…