At the End of Europe Seeking a Path out of the Crisis in Portugal

After living beyond its means for decades, Portugal is now feeling the full brunt of the crisis. The government is responding with a brutal austerity package. But savings alone won't do the trick -- the country needs to find ways to expand industry and make itself more attractive for investment. The good news is that positive models already exist within its own borders.

By Alexander Jung

DPA

The air smells salty at Cabo da Roca, about 30 kilometers (19 miles) from Lisbon. It is the westernmost point of mainland Europe, and a lighthouse is perched on the cliffs, high above the roaring sea. The sign in front of it reads: "The End of Europe." These words sound strangely prophetic at the moment.

On the way there, a two-lane bike path hugs the coastline for several kilometers between Cascais and Guincho. Special streetlights spaced only 50 meters apart illuminate the brownish-red special asphalt at night. But cyclists are rarely to be found along this route, even during the day, because the wind is simply too strong.

The luxury bike path is a reminder of better times, of the years when the Portuguese were still able to draw on unlimited resources. They built the Colombo in Lisbon, Europe's largest shopping center at the time. They also built state-of-the-art football stadiums and many new roads, including 2,700 kilometers of motorways in two decades, many with six lanes -- which are often completely empty.

Many things in Portugal are oversized, and the dramatic consequences of this exorbitant lifestyle are now manifesting themselves. The country had to resort to the euro zone's bailout fund in April, but it only provided Portugal with a brief respite from its financial woes.

The gravity of the situation became abundantly clear when the Moody's rating agency, after questioning whether the country could still service its debts, downgraded Portugal's government bonds to junk status earlier this month. Portugal has overreached financially, and it will have trouble coping with the crisis. Could the euro zone be facing a second Greece?

Brutal Austerity Measures

The new center-right government headed by Prime Minister Pedro Passos Coelho assembled a brutal austerity package, which includes reductions in healthcare benefits and a pay cut for government employees. Two weeks ago, Coelho expanded the list of painful cuts even further, after new holes in the budget had opened up. Before that, the prime minister had announced that the Portuguese people would have to prepare themselves for "two difficult years."

Margarida Sá Pereira, a businesswoman in Lisbon, is getting ready for leaner times. Her family has sold candles on Rua do Loreto since 1789. The shop sells egg-shaped candles at Eastertime and candles shaped like pine trees at Christmas, each handmade with the finest wax. Sá Pereira, a petite woman with conspicuous glasses, stands behind the counter. Wood-paneled display cases reach to the ceiling on both sides of the shop. As the minutes pass by, not a single customer enters the shop.

Customers have been holding on to their money for months, says Sá Pereira, and now the new government wants to tax Christmas bonuses, of all things. Sá Pereira, who makes at least a quarter of annual sales in the days leading up to the holiday, says: "Christmas will be very difficult for us."

Portugal Has Lived Beyond Its Means for Decades

The Portuguese have lived beyond their means for decades, but they were also misled into doing so. At first, the European Union tempted Lisbon with generous aid programs. Since Portugal joined the union in 1986, Brussels has sent about €55 billion ($79 billion) to the country. Then the introduction of the common currency gave the economy another boost.

Suddenly Portugal was enjoying the same access to credit as major countries like Germany and France. As a result, its people became accustomed to fast cars and fancy apartments, all paid for with borrowed funds. But Portugal's apparent affluence was deceptive, because it bore no relationship to the country's real economic strength.

Now the Portuguese have no choice but to save money in every possible way. Even smokers have cut back, as evidenced by a 20-percent decline in tobacco tax revenues in May. Signs in shop windows that read "Liquidição total," or total liquidation, especially in smaller communities, are another indicator of decline.

The country is in a deep state of crisis, but it seems foreseeable that the worst is yet to come. Interest rates are going up, borrowing is getting more expensive, banks are lending less money, companies have stopped investing, some are going under as a result of the credit crunch, and the unemployment rate continues to rise. Surprisingly enough, there is hardly any sign of resistance in the country. Many Portuguese are simply shocked.

Unlike the Greeks, the Portuguese did not become involved in questionable business practices. Their banks did not issue nearly as many high-risk loans as their Irish counterparts. And a real estate bubble did not develop in Portugal, at least not to the same extent as it did in Spain. But now the Portuguese are in the same boat as several other ailing European economies. They are hopelessly in debt and their economic future seems questionable at best. Concerned citizens are asking themselves how this could have happened.

Portuguese Victims of Globalization

One answer can be found in Figueiró dos Vinhos, an attractive town in a hilly and densely forested landscape near Coimbra in central Portugal. Gerry Weber, a German clothing company, built a factory there in 1993, where about 160 workers, all of them women, produced jackets and trousers. The women were paid low wages and Gerry Weber benefited from EU subsidies, with Brussels paying about half of the roughly €3 million ($4.35 million) the company invested in the plant.

The factory suddenly closed its doors 10 years later. Local council member Jorge Domingues, the right-hand man of Figueiró's mayor, remembers how surprised they were by the news of the plant closing. "We were all extremely disappointed," he says.

Domingues is standing in front of the entrance to the factory, a white, two-story building. The blinds are lowered and there is a "For Sale" sign in the window. The German managers used to stay in a top-floor apartment, says Domingues, pointing up at the building. In 2003, they decided to move production to Romania, where costs were 40 percent lower than in Portugal. The women of Figueiró became victims of globalization.

Many Portuguese have suffered similar fates in recent years, as one international company after another shut down its factories in the country. Some 50,000 jobs were lost in the shoe industry alone.

One in four of the jobs lost between 2003 and 2006 was blamed on outsourcing, particularly to Eastern Europe and the Far East. By comparison, outsourcing was responsible for only about seven percent of jobs lost in Germany.

During this time, Portugal failed to climb further up the ladder of economic development, as the Southeast Asian Tiger economies had done previously, transforming themselves from makers of cheap, mass-produced goods to efficient suppliers of high-tech products. Instead, the Portuguese economy has been treading water for years, but without keeping pace with rapidly rising incomes. As a result, unit labor costs have increased by more than one-third compared to German levels since 1996.

In other words, Portugal is too expensive for what it is capable of producing.

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