THE STATE OF THE EUROPEAN UNION

THE STATE OF THE EUROPEAN UNION

deficits and the high indebtedness of the finan-

cial and corporate sectors were the main prob-

lems of the Portuguese economy.

The IMF attributed the loss of competitive-

ness and the resulting current account deficits

to the increase in unit labour costs and to the

concentration of resources in the lucrative non-

tradable sector, rather than the tradable sector.

The fiscal deficits were the result of an uncon-

trolled increase in social benefits, healthcare

costs and the “non-transparent” operation of

state-owned enterprises and public-private

partnerships (PPP). In regard to indebtedness,

noting the absence in Portugal of a real estate

bubble, the IMF underlined the high leveraging

of the banks and the extremely high indebted-

ness (especially external) of the private sector.

Implicit in the IMF’s diagnosis was the idea

that joining the Euro was not a cause of the

imbalances in the Portuguese economy but

rather a change of context that exposed “deep-

rooted” deficiencies in the Portuguese econo-

my, namely, barriers to competition and the pro-

tection of the non-tradable sector, labour

market rigidities (wage setting, unemployment

benefits and severance pay), a large stock of un-

skilled labour and the inefficiency of the judicial

system.

From this diagnosis, the rescue programme

was presented as not just a palliative but as part

of a therapy capable of eradicating the struc-

tural deficiencies in the Portuguese economy. Its

objectives were: a) to boost competitiveness

and growth; b) to regain confidence in and en-

sure fiscal stability; and c) to safeguard financial

stability.

The logic of the programme, based on the

ideas of “internal devaluation” (as an alterna-

tive to exchange rate devaluation) and “expan-

sionist austerity”, was presented with great clar-

ity. In the absence of an exchange rate policy,

competitiveness and growth would be obtained

through “internal devaluation” – labour market

flexibility, more competition in the non-tradable

sector and lower social security contributions to

increase profitability in the tradable sector. Fiscal

consolidation should strike a balance between

restoring market confidence and growth

through a credible “front-loading” of measures.

Safeguarding the stability of the financial sector

should be obtained through “market-based”

solutions to boost the banks’ capital positions

and public support to help them regain access

to the capital markets.

The results of the bailout in light of the

IMF’s objectives

Taking into account the Troika institutions’ diag-

nosis summarized above and the objectives of

the programme, an assessment of its results

from the IMF’s viewpoint would probably high-

light three aspects: a) the impact on growth,

employment and competitiveness; b) the impact

on the fiscal deficit and the trajectory of public

debt; and c) bank deleveraging and access to

credit.

The adjustment programme had a recession-

ary impact that far exceeded the expectations of

its authors. According to the IMF’s forecasts, the

Portuguese economy would undergo two years

of recession, in 2011 and 2012, and growth

would start up again in 2013. In 2014, GDP

would be just 0.4% below its 2010 level in real

terms. In fact, the recession lasted three years

and in 2014 GDP was 5.5% below its 2010 level.

In terms of employment, the IMF predicted that

in 2014 employment would be 1.1% lower than

the 2010 rate. In fact, employment fell by 7.1%.

The differences found in the depth of the

recession can be attributed above all to the fact