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Portugal offloads debt, but still can’t start economic engine

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Among the new ideas to cut government spending in Portugal is a proposal to give civil servants treasury bonds in lieu of a month's pay. It's a cheeky response to the Portuguese Constitutional Court which late last week ruled that cutting public service pay is unfair and out of order. So, one idea seems to be that Portugal should carry on borrowing its way out of the crisis, but with the clever twist that, instead of getting more in hock to capital markets, the Portuguese government will just borrow from its own staff.

It is a measure of the extent that some euro zone countries have simply run out of ideas in their search for ways to cut fiscal deficits when the entire national economy is shrinking. The idea behind all this cutting is that the nation should become leaner, meaner and more efficient. A more competitive country will attract new business, creating a virtuous circle of investment, growth, profit, taxes and debt repayment. Unfortunately, the job of making nations such as Greece, Spain and Portugal more competitive is complex and stymied by the anchor of a hard currency, which makes the labour of Portuguese, Spanish and Greeks look relatively expensive compared with other emerging nations.

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During the boom years of the last decade, unit labour costs in the Club Med soared. Thanks to the hard euro, money was cheap and the marginal advantage of low-cost borrowing concealed inefficiencies elsewhere – which became glaringly obvious when the money machine stopped working in 2008. Between 2000 and 2009, unit labour costs in Germany did not increase, however, thanks to wage restraint policies and subdued demand, according to OECD statistics. Greek, Spanish and Portuguese unit labour costs rose between 30 per cent and 40 per cent. Since the crash, labour costs per unit of output have fallen in all three countries but the statistical improvement in competitiveness is not translating into more economic activity.

Rising unemployment is making the output per man hour look better, but that does not mean Portugal or Greece are any better at making stuff or doing jobs efficiently and at a competitive rate. More worrying still are the OECD unit labour cost figures for Italy and France, which continue to rise steadily in the face of worsening unemployment and flat or falling output.

This is a toxic brew: weak governments, stubborn fiscal deficits, recession and declining competitiveness. For the troika's hairshirt programs to succeed, they need to be led by strong governments capable of imposing not just spending cuts, but policies that deregulate the domestic economies, withdraw the state and promote investment. Unfortunately, there are currently no governments in the Club Med that have the capacity or the will to make that transition. The likely outcome is that they will eventually seek the easier solution of a currency devaluation.

Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More


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