Finance and Economy

Debt and Financialisation: The Portuguese Example

On the eve of another review and evaluation of the Memorandum of Understanding, signed between Portugal and the Troika (European Commission, European Central Bank and International Monetary Fund) in May 2011, the European commissioner Olli Rehn gave an unexpected statement from Brussels: “Portugal no longer lives beyond its means”.

Those words are doubly unexpected because in their wake, the Troika visitors leave new austerity measures (more wage cuts in the salaries of the private sector and more changes in labour legislation), and because that statement could mean that the Portuguese economy is today better than at the beginning of the “structural adjustment” programme put in place by the Memorandum. That is very far from the truth.

A false view of the causes

Since the first impacts of the international financial crisis on the Portuguese economy in 2009, a hegemonic narrative has emerged: the country had been living, in the last decades, beyond its means. With access to cheap credit for families and the state, powered by financial funds coming from abroad, the country had supposedly lost its mind. People and the state would have begun to spend beyond their ability to generate wealth and repay their debts, causing an unsustainable external debt. Related to this particular narrative on the roots of the crisis was the emergence of a discourse describing the “fat” social state and urgently advocating drastic cuts into the public social welfare system (education, health and social insurance). The political and moral electoral ground, necessary for the implementation of the “impoverishment schedule”, was then created.

Before presenting some of the devastating impacts of the Memorandum of Understanding on Portuguese society and their economy – and also on Portuguese democracy itself – it’s necessary to take a look at the real questions that help us to understand where the crisis of the peripheral countries of European Union came from, through the example of Portugal.

Origins of the crisis in the periphery

When Portugal became a member of the European Union in 1986, several changes took place, placing the country before both enormous challenges and opportunities. Having recently emerged from a dictatorship – one that delayed the development of Portuguese society and the Portuguese economy for more than forty years – Europe was seen as a strategic framework the country’s modernisation. The social and economic changes since then, in fact, are extraordinarily impressive: in the early eighties,  despite all the progress that the revolution of 1974 allowed, Portugal was still largely a rural nation (with more than a third of its workforce engaged in agriculture and the fishery sector), and with an underdeveloped manufacturing sector. Illiteracy was fixed around 20% and only 12% of the population was enrolled in secondary education.

The National Health Service (SNS) then took its first steps (the child mortality rate was about 24 per thousand). The contribution of Portuguese integration into Europe in the process of economic and infrastructural modernisation is unquestionable.

But the Portuguese economy was also affected by some important external shocks in the process of integration, namely after the approval of the Maastricht Treaty and, even more importantly, after the integration into the Eurozone. In fact, it is not possible to understand the present crisis, marked by the growth of external debt since the mid-nineties, without considering the impact of those shocks. Firstly, the Portuguese economy adopted the neoliberal European approach to the functioning of markets, which defends broad programmes of privatisation and deregulation for national financial systems. Secondly, as part of the process of the creation of the European Single Market, Portugal started to be affected by the free movement of financial capital which allowed the country to gain access to cheap money. The large influx of foreign financial funds, especially the ones coming from the countries of the central Europe, then created the conditions for a significant increase in investment and consumption, which helped to stimulate the national economy and attract further capital. The financialisation of the Portuguese economy was then largely reinforced and the banking system acquired unprecedented importance and centrality in the economy.

Undermining the core economy

At the same time, Portugal has begun to be affected by some of its traditional productive sectors being exposed to wider and more aggressive foreign competition. The difficulties and challenges of competing with other nations in some of those sectors increased: the Portuguese agriculture sector, for example, was not able, in many cases, to compete with the modern agriculture systems of other Member States and, later, when Europe opened its borders to countries such as China, in the manufacturing sector for example, the consequences for Portuguese gross national produce were significant. However, despite the gradual modernisation of the production system, the Portuguese economy was not able, under these conditions, to attract significant levels of capital. Investments were more often put into several non-tradable sectors, such as construction, real estate or the large-scale distribution sector.

Nor did Portugal’s entry into the Eurozone improve the competitiveness of the Portuguese economy. Economic growth has basically stagnated since the beginning of the 21st century, reflecting Portugal’s inability to compete at the international level. The negotiations for China to enter the World Trade Organisation (WTO), the enlargement of the EU to include Eastern European countries (which led some large companies to invest in, and relocate to, these countries), and the strong appreciation of the Euro against the dollar, failed to help Portuguese producers to improve their exportations. Economic growth became more and more dependent on the internal market.

There is no doubt that the financialisation of the Portuguese economy, stimulated by the foreign surplus funds that the national banking system operated at low interest rates, helped to develop higher internal consumption levels. This is particularly relevant at the housing sector, both on construction and transaction of real estate. Moreover, it is remarkable that 80% of bank loans made to individuals between 1999 and 2009 relate to loans for home ownership, a fact that explains considerably the level of external debt. But even more remarkable is the fact that it was not some kind of irrational pipe dream for Portuguese families to want to have a home of their own. The levels of amortisation of the mortgages were comparable to the average level in the European Union. Furthermore, when compared with families in countries such as Denmark, the Netherlands, Norway or Sweden, the indebtedness of Portuguese families, in 2010, was lower. The problems came, in fact, with the impacts of the Euro crisis and the levels of unemployment generated by the economic crisis. The decision to own a home is not relevant to Olli Rehn’s statement about Portuguese families “living beyond” their means.

Who is to blame? Pigs or politics?

Let us assume, then, that despite all the difficulties, the process of modernisation of the Portuguese economy and Portuguese society was interrupted and hampered by all the unfavourable circumstances that followed the integration of the country into the European Union. We shall also assume that, since the mid-nineties, Portugal followed overly-closely a model of development largely focused on the financialisation of the economy, like other peripheral countries of the EU. Who is to blame for that? Who is to blame, when this process was widely supported by the European institutions themselves, and its politics oriented to benefit the private banking systems? Who is to blame when the economic crisis, that emerged from a financial system crisis due to the deregulation of markets, demonstrated the weaknesses of a dysfunctional Euro governance system unable to ensure the role and capacity of national central banks to deal with the sovereign debt crisis? Who is to blame, when the austerity imposed on the peripheral countries of the European Union is not solving any of its problems and is constantly failing to accomplish the very objectives that it set out to achieve?

The moralistic judgement narrative about the origins of the crisis among the peripheral countries of Europe (like Portugal, Ireland, Greece and Spain) is clearly expressed by the acronym used a few years ago: PIGS. This moralistic judgement is hindering a substantial part of the European Left from seeing what’s really going on: the erosion of the European ideal of peace, economic development and social cohesion as a whole, and the gradual destruction of national economies and societies in particular, at the hands of an insane politics of austerity.

In the case of Portugal, the “agenda of impoverishment” is advancing quite well: 450,000 jobs have gone since the beginning of the implementation of the Memorandum of Understanding; companies from several different sectors are falling every day; the external debt is higher than it was two years ago; the public sector is under attack; the fragile Portuguese welfare state is being constantly reduced; investment is falling to the standards of the end of the eighties; and it was expected that by the end of 2013 25% of the population would be below the poverty line. Portugal, a country where inequalities were significant even before the crisis (despite notable progress made since 2005), is today a nation where the middle class is disappearing, giving way to a minority of very rich and a majority of poor citizens, as is happening in the other “PIGS” countries, only the system that has generated the crisis – the financial system – seems to reinforce its position in these economies, making breathtaking political and economic gains.

The urgent need for an alternative

Austerity politics, which seem a fair method of achieving “structural adjustments” and “structural reforms” in order to “promote  competitiveness” abroad, are the perfect alibi or ‘secret code’ for the real politics that are being applied in the European periphery: the neoliberal agenda of dismantling the public sector and the public welfare system, promoting a savage new order that expands the rationality of the market to all spheres of life, including access to water or energy. The case of Portugal is, in this sense, particularly clear: the government in charge, since May 2011, has applied twice the amount of austerity measures initially predicted in the Memorandum of Understanding, thereby doubling the resultant devastation during those years.

But it is not only the notion of a decent future for Portugal, or Greece, or Spain or Italy that is at risk. It is also the future of the European Social Model and the possibility of promoting a mode of economic development based on knowledge and environmental respect. To avoid such a regression, all parties of the European Union must unite and recreate a model of European governance that is fairer, more social, more democratic and much less dependent on financial systems that have no constraints on their influence or movements.

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Debt and Financialisation: The Portuguese Example

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