The Mystery of Why Portugal is So Doomed - Matthew O'Brien - The Atlantic

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  • 7/28/2019 The Mystery of Why Portugal is So Doomed - Matthew O'Brien - The Atlantic


    07/06/13 The Mystery of Why Portugal Is So Doomed - Matthew O'Brien - The Atlantic 1/18

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    MATTHEW O'BRIEN JUN 5 2013, 5:05 PM ET





    Every unhappy family might be unhappy in its own way, but the same isn't quite

    true of every unhappy euro country. The common currency's troubled

    economies all relied on foreign borrowing during the boom, and all went kaput

    when that money disappeared during the bust. But, as Michael Lewis put it, not

    all piles of borrowed money were created equal. Greece got a government

    bubble; Spain and Ireland got housing bubbles; Italy didn't even get a bubble,

    just anemic growth -- and Portugal got one of the quietest catastrophes in

    economic memory.

    And it's not entirely clear why.

    In 2001, Portugal seemed set to embark on a brave new economic future. The

    previous quarter-century had seen it move from dictatorship to democracy,

    from a managed economy to markets -- and the results were positively startling.

    Paul Krugman was among the cadre of MIT grad students advising the newly-

    free government in the late 1970s, and he scarcely recognized Lisbon by the turn

    of the century -- in a good way. The city was no longer an eclectic mix of post-

    revolutionaries and post-Victorian architecture. It was just another part of

    Europe, albeit a poorer part, but a part nonetheless.

    Even this relative poverty looked like it might fade into history with the advent

    of the euro in 1999. Adopting the common currency meant deeper integrationwith Portugal's main trade partners and lower borrowing costs, both of which

    should have augured a boom.

    That's not how things turned out.

    The Mystery of Why Portugal Is Sooomed

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  • 7/28/2019 The Mystery of Why Portugal is So Doomed - Matthew O'Brien - The Atlantic


    07/06/13 The Mystery of Why Portugal Is So Doomed - Matthew O'Brien - The Atlantic 2/18

    Between 2000 and 2012, Portugal's economy grew less on a per capita basis than

    the U.S. during the Great Depression or Japan during its lost decade. This wasn't

    a case of the bust erasing the boom, because there was no boom. As you can see

    in the chart below from Ricardo Reis, a professor at Columbia University,

    Portuguese real GDP per capita flatlined during the "good years" before falling

    during the bad. Incredibly, Portugal was richer 12 years ago then it is now.

    It's an economic whodunit without any clear culprits. Y es, Portugal has real

    structural problems (which we'll get to), but so do Spain and Greece, neither of

    which slumped before the slump. For his part, Reis speculates that Portugal's

    immature financial sector is to blame: it misallocated the foreign capital that

    poured in to low productivity , non-tradable sectors like wholesale and retail

    trade. In other words, it wasted money on things that never had a chance of

    paying off. Now, Portuguese banks certainly did make a lot of bad bets ... but so

    did German ones in Portugal. Something else must have been going on.

    Part of that something else is Portugal's small business culture. As Matt Yglesias

    ofSlate points out, most of southern Europe, Portugal included, suffers from too

    much corruption and regulation. Businesses choose to stay small, because itmakes sense to just deal with people you personally trust when you can't reliably

    appeal to the authorities sans-kickback. Businesses can stay small, because the

    laws make it hard to get big and achieve economies-of-scale. It 's a mom-and-pop

    nightmare of low productivity .

    And it's gotten worse since 2008. Not only do small-and-medium-sized

    enterprises (SMEs) play a, well, outsized role in Portugal's economy, but now

    even they are in retreat. For one, austerity has crushed their customers; for

    another, SMEs are facing a credit crunch. As you can see in the chart below from

    Credit Suisse, the more euro-economies depend on SMEs, the less those SMEs

    can get loans, Portugal no exception.

    It's not a particularly Portuguese problem, but it is particularly bad in Portugal.

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  • 7/28/2019 The Mystery of Why Portugal is So Doomed - Matthew O'Brien - The Atlantic


    07/06/13 The Mystery of Why Portugal Is So Doomed - Matthew O'Brien - The Atlantic 3/18

    The chart below from the European Commission shows that, outside of Cyprus,

    Portugal's SMEs face the highest one-year borrowing costs in the euro zone --

    and that despite falling government borrowing costs.

    But we're back to where we started: with a puzzle. Credit-starved (and

    inefficient) SMEs help explain why things are so bad now, but not why they have

    been so bad for so long. Or why things weren't bad before the bust in Spain and

    Greece. What is clear is that Portugal needs help from the rest of Europe to

    finally get back to growth. That means delaying more austerity -- JP Morgan

    estimates Portugal is only55 percent of the way to structural balance -- and

    ending the delay on more unconventional monetary policy. The European

    Central Bank (ECB) has alreadyruled out a big SME loan program, but it

    shouldn't; yes, Portugal needs to rebalance away from SMEs, but a credit crunch

    isn't the way to do it. More broadly, the ECB should be doing much, much more

    to rev ive a moribund euro-economy. Indeed, it's no accident that Portugal's

    euro-area exports have stagnated while its non-euro ones have surged ever

    since the ECB raised rates back in 2011. As you can see in the chart be...