Debt Quicksand Europe Fights the Growing Currency Crisis

By Carlo Angerer, and

Portugal: 'Two Horrible Years'


Portuguese Prime Minister Pedro Passos Coelho has promised his people "two horrible years" before the crisis ends.
REUTERS

Portuguese Prime Minister Pedro Passos Coelho has promised his people "two horrible years" before the crisis ends.

How did the crisis start?

Portugal has massive structural problems in its economy. As late as the '90s it had a flourishing textile industry, mainly due to low-wage policies. From 2004 on, things went downhill: Portugal lost more and more investors to new EU members in eastern Europe, which also had low wages to offer. Since then the Portuguese economy has hardly grown. The industrial sector is shrinking, and unemployement has risen. The government is highly in debt.

What has been achieved?

In the spring, Portugal slipped under the protection of the EU's rescue mechanism, narrowly skirting bankruptcy. In return for loan guarantees to the tune of €78 billion, Portugal has to quickly make good on what the EU and IMF consider to be missed payments from the last 30 years. The government has imposed austerity on pensions and official salaries; it's reforming the public sector and selling its last state assets, including the public water works and the energy group EDP.

By 2013 the state budget deficit will have to be reduced from 9 to 3 percent. But a new government is still getting started with reforms under Prime Minister Pedro Passos Coelho, who was just elected in June.

What are the obstacles?

Prime Minister Coelho has predicted "two horrible years" for the almost 11 million citizens of Portugal. He knows government reforms are extremely ambitious and will demand a lot from the population. According to forecasts so far, the country will languish in recession through 2012, and unemployment figures may top 13 percent (setting new records). There's considerable fear that new growth will stall. But no one in Portugal wants to consider that. "We simply can't fail," said President Aníbal Cavaco recently.

Portugal

Economic Indicators 2008 2009 2010 2011 2012**
Debt (in percent)* 71.6 83 93 101.7 107.4
Economic Growth (in percent) 0 -2.5 1.3 -2.2 -1.8
Budget Deficit (in percent)* -3.5 -10.1 -9.1 -5.9 -4.5
Unemployment (in percent) 7.7 9.6 11 12.3 13

*Percent of annual economic output, **Forecast
Source: European Commission; As of May, 2011

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