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Portugal has a lesson if the U.S. is watching

by John J. Metzler

United Nations

Portugal is far along the primrose path to economic bankruptcy, following in the steps of Greece and Ireland. While the Portuguese debt crisis is not nearly as acute as that of Greece and Ireland, it nonetheless serves as a warning to other European Union countries, as well as the United States, that profligate government spending has its price.

European Union states, especially Britain France and Germany are due to support an emergency bailout of Portugal to the tune of about $100 billion. While the Socialist government in Lisbon tried to stave off the bitter pill through a series of austerity plans, Prime Minister Jose Socrates’ government finally collapsed.

Now new elections have been called for June. Yet Lisbon’s looming cloud of debt has not disappeared, but become a foggy miasma on the River Tagus. No matter which party wins the elections, (hopefully it will be the market-oriented Social Democrats), the new parliament faces a deepening debt comprising 85 percent of GDP. (By comparison, U.S. debt is now slightly more than 100 percent of GDP!)

The new Lisbon government will confront the albatross of 11 percent unemployment and a falling GDP — an aftershock of the global economic downturn as well as a legacy of the current Socialist government.

Though a small country of 10.7 million people, the Portuguese state itself has historically played a powerful role in creating debt with its bloated bureaucracy and spending. While impressive free-market reforms and an export- oriented economy had been part of Portugal in the 1990s, the state sector remains stifling and burdensome.

To forestall a wider financial crisis in Portugal, the bankers and Eurocrats are looking at a bailout of between 60 and 85 billion euros. Just a year ago, the Greek “rescue package” was 110 billion euros, and Ireland received 85 billion euros.

But European bankers and some politicians are demanding more government cuts and needed austerity in debtor states. “Whoever needs assistance by other European member states and member states in the eurozone has to deliver sustainable measures for reducing deficits, because the deficits are the reason why they need help,” advised German Finance Minister Wolfgang Schaeuble.

Bankers and politicians worry that debt-crisis “contagion” (a nicer word for falling dominos) stops Portugal. Should the contagion reach across to Spain’s far larger and debt-ridden economy, there will be red faces throughout euroland.

One problem is that any EU and International Monetary Fund bailout will impose stiff rules and regulations that, while forcing higher taxes and budget cuts, will not necessarily encourage needed productivity.

Back in 1983, when Portugal’s economy received an IMF package, the result was higher productivity and exports. But imposing penury on Portugal over needed labor reforms and productivity serves only as a stopgap.

The key element needed for reviving Portugal’s moribund economy is not higher taxes or a straightjacket of IMF “policy reforms” but labor market reforms to make the country’s quality products internationally competitive.

In the bigger picture, the looming iceberg remains the fate and future of the euro, which is used by most EU members but not Britain. Countries like Greece, Ireland and Portugal (as well as Spain) are among 17 eurozone members that are largely subsidized by Britain, France, Germany and the Netherlands.

Now that financial realities are setting in, the vaunted European Dream of the euro could turn into a nightmare. While it’s easy to brush off Portugal’s crisis as the symptom of small countries with big debts, what about the U.S. debt?

Profligate government spending and all kinds of bailouts have failed to significantly dent high unemployment or restart a sluggish economy. U.S. debt has soared from $9 trillion in 2008 to $15 trillion in the Obama administration’s current budget. High-profile budget battles in Washington have yet to go past posturing rhetoric.

Whether it is the European Union or the U.S., the bottom line is that governments cannot continue to spend at their usual levels until there is a genuine recovery in productivity. Economic growth may be held hostage to high debt.

John J. Metzler, a U.N. correspondent for diplomatic and defense issues, is the author of “Transatlantic Divide; USA/ Euroland Rift?” (University Press, 2010).