Comparing Greece and Portugal

At the Commission in Brussels and at the Federal Ministry of Finance in Berlin it is common idea that Portugal is a good student, and Greece that bad. Ireland is actually a special case; the country was subjected to the Troika with the two euro-south countries because of the madness of its banks (and the government's permissive). But in 2008, at the outbreak of the financial crisis, the Irish public debt amounted to 43 (all figures are in percent), while the Portuguese one was 72 and the Greek over 100. In addition, the Irish trade balance was in big surplus (8.8!), while those of Portugal (-9.7) and Greece (-12.9) were in a deep red.

You can begin the comparison between these two countries starting from 2009, looking at the 2010-2014 period. In 2009 the GDP of the two countries falls, in the Greek case (-4.4) as in all of Europe (-4.5), while in the Portuguese case a bit 'less (-3). At this point the roads of the two countries divided: Greece begins in 2010 a drop in GDP for four consecutive years, with a slight increase in 2014 (+0.8), with an overall loss of 22 percentage points. Portugal recovered in 2010 two-thirds of the fall (+1.9), but then follow three years of recession and a slight (+0.9) recovery in 2014, losing 4.6 of GDP. As you can see the fall of the Greek economy was more than five times greater than that of the Portuguese.

It is clear that the so called expansiv austerity made in Berlin and in Brussels did not work all that great even in Portugal, but there is no doubt that in Greece things went much, much worse. Perhaps the first thing to look at is the reduction of the deficit from 2009. In this year the deficit in Greece was estimated at 15.4, while that of Portugal 9.8. In 2014 the Greek defict had fallen to 3.5, the Portuguese at 4.5. In Table I you can see the variations between 2009 and 2014 of a series of magnitudes:                                

Table 1    2009-2014 Changes                                              

So the budget package imposed by the Troika was much heavier than in Greece and Portugal, in terms of public spending cuts (note that Greece faced a reduction of almost twenty points of pensions while there is an increase of seven points in Portugal). Also the taxes have increased, as a percentage of GDP, seven points in Greece and four in Portugal. It is hardly surprising that Greece has triggered a dramatic fall in consumption and private investment.

But there is not only the folly of fiscal austerity to be considered. If you look at Table II                                     

Table II    2009 - 2014 Changes                           

Looking at the export performance, undoubtedly Portugal had a better performance than that of Greece, especially if we consider the average growth of exports to Europe (EU + 40, EA 39%). However, labour costs per unit of output fell to a greater extent in Greece than in Portugal (although before 2009 had happened the other way round). The problem lies in the characteristics of exports of the two countries: Greece exports to a greater extent to the EU, while Portugal over Atlantic (Brazil, not only US). Greek half export is due to oil and other row materials, for which demand in Europe has not been high. On the other hand even the Greek trade balance reached a breakeven, due to lower imports.

Portugal thus was able to recover, at least in part, through the export, the fall of the internal demand (which was much less than that in Greek), while this has not happened in Greece. But it was not the mythical structural reforms, namely the de-regulation of the labour market, to count, as the structure of export. The result is that GDP per capita (measured in purchasing power parity) of Portugal, which in 2008 was less than the Greek one by 15%, while in 2014 it exceeds 8.3%.

     The Portuguese student was obedient (labour market), and the Troika has compensated allowing fiscal policy much less harsh than those imposed on Greece. A similar argument can be repeated for Spain. In autumn the two Iberian countries will go to the elections, and it will be interesting to see how the relationship between the new governments and the Eurogroup will develop.