Ireland and Portugal are two Atlantic nations. Both look west, rather than east.
In the fifteenth century, and long thereafter, Portuguese navigators invented, and promoted, globalisation. Portugal had trading posts in Arabia, India, China, and Indonesia as well as a large Empire in Africa and South America.
Since the nineteenth century, Irish people, as emigrants, have been residents of every continent.
During my time in the United States, as EU Ambassador, I became aware of the huge Portuguese influence in that country, in places like Rhode Island, and Newark, New Jersey, both of which also happen to be among the most Irish places in North America.
I am in Portugal this week taking part in discussions on the lessons Portugal might learn from Ireland’s recent exit from reliance on EU/IMF loans.
Both countries have had to use such loans to bridge the gap between Government spending and revenue, because they could not borrow enough elsewhere. Like any bank manager of a client who is spending more than his income, the EU/IMF has imposed conditions which are difficult. In that sense, EU/IMF has taken the blame for decisions that would have had to be taken anyway.
As a proportion of national income, Ireland’s projected budget deficit is slightly larger than Portugal’s (4.9% as against 4.5%).
Ireland’s debt/GDP ratio is about the same as Portugal’s now (around 125%), but the IMF predicts that Ireland’s position will improve a bit sooner, getting down to “only” 100% by 2020, while Portugal’s will still be at 110% then.
Portugal has a big amount of its debt which it must repay, or roll over and refinance, in 2014, whereas Ireland does not have a similar immediate challenge.
The big difference is the relative income of the people. The average per capita income in Portugal is about 10,000 euros, whereas the average in Ireland is almost 25,000 per head…….more than twice as much.
Some adults in Portugal have nothing at all to live on, and have to rely on family networks. Welfare, of some kind, covers almost everyone who needs it in Ireland, and basic welfare rates in Ireland have been preserved from cuts, notwithstanding the big fall in the revenues from which they must be met.
Whereas 10% of Irish adults receive Lone Parents allowance or some other form of social assistance from the state, only 4% of Portuguese do. Incidentally, the figure is only 4% in the UK too, and most UK welfare benefits are paid at much lower rates than in Ireland.
Average wage rates in Portugal only 75% of the level in Greece, 66% of the level in Spain, and considerably below average wage rates Ireland.
One of the reasons Ireland has regained the confidence of lenders is the performance of its exports. Exports are the equivalent of 100% of Ireland’s GDP, whereas Portuguese exports come to only 45%. But Portuguese exports are rising faster than Irish exports. They are catching up.
In the 1999 to 2007 period, Ireland’s exports grew at the third fastest rate in the Euro zone (after Germany and Luxembourg), and Portugal was then seventh in that race.
But in the 2007 to 2013 period, Portugal jumped to second place after Spain, and ahead of Germany! Ireland, notwithstanding its high absolute level of exports, fell back into sixth place in terms of the rate of growth of exports.
Ireland’s slowing rate of export growth may be related to some of the pharmaceuticals it exports going off patent.
Portugal is a leading player in nano technology, but some say its strong exports are partly due to the diversion to exports of goods that would previously been sold in the, now depressed, home market .
Portugal has a well developed infrastructure, it has twice as great an area of motorway per 1000 people as the EU average, and has to spend 1.3% of its GDP on road maintenance, as against 0.9% in Ireland.
Portugal’s economy grew very slowly since the early 1990s, and it continued to spend a little more than it was earning, gradually getting itself into the position it is in today. In contrast, Ireland’s economy grew exceptionally quickly from 1995 to 2002, and then, in the short space of three years, developed a huge credit bubble, which burst in 2008.
Ireland’s problems were dramatic, Portugal’s were chronic.
Both Ireland and Portugal suffer from remoteness from the centre of Europe. Portugal is cut off by its bigger, richer, neighbour, Spain. Ireland has Britain, and the sea, between it and the continent.
Why is Ireland relatively better off at the moment?
Portugal has an older population. As a result, Ireland spends half as much, as a proportion of its GDP, on pensions, as Portugal does. On the plus side, life expectancy ha dramatically improved in Portugal in recent times, by 8and a half years since 1980.
During the 1970,s, when Ireland, already an EU member, was laying the foundation for the Celtic Tiger, by investing in technological education, and promoting foreign investment, Portugal was in the midst of a revolution.
The conservative regime of Antonio Salazar was replaced by a junta of left wing officers, who promoted a constitution, which conferred all sorts of rights on people, without creating commensurate resources, or responsibilities, to meet the cost of these rights. That constitution continues, to this day, to inhibit the elected Government in reducing expenditure to the level of the revenue it feels it can raise without doing damage to the fabric of the economy.
The revolution also meant the abandonment of a costly colonial war, and the return to Portugal of 600,000 descendants of former colonists, equivalent to 6% of the home population, all of whom had to be housed, fed and retrained for a new life. I believe this diversion of resources, delayed Portugal’s modernisation at a crucial moment, and the country has never really caught up since.
The OECD has said that
“human capital is the Achilles heel of the Portuguese economy”
Only 60% of Portuguese 25 to 34 year olds completed higher second level education, whereas 100% have done so in Korea, 90% in Ireland, and 75% in Italy. Too many Portuguese students have to repeat grades, rather than get remedial help in time.
Many of the qualifications of young Portuguese are not “work relevant” according to the OECD. This is why Portugal has been forced to compete for low wage work with countries in Eastern Europe, rather than move up the value chain to higher skill jobs, as Ireland has done. But this is not something that can be remedied quickly. Ireland did not derive the full benefit from the educational changes, made in the 1960s and 1970s, until the 1990s.
Quicker gains can be made through reforms in the labour market.
Wage rates and employment rules are set centrally in Portugal, whereas Ireland allows more freedom to negotiate at the level of the firm.
“Last in, first out” is a legal requirement in Portugal, regardless of the needs of the firm.
The constitutional court has tended to protect the privileges of permanent and public sector workers, and this makes it difficult for Portugal to shift people and resources from the non traded protected sector of its economy to the export sector.
Like Ireland, Portugal has a problem of hard core long term unemployment. One in five children in Ireland grow up in a home where no one is working. This is building up a huge financial and psychological burden for the future. Ireland and Portugal could usefully compare notes on how to solve this problem.
Revenue collection is an area where Portugal could usefully learn from Ireland. Self Assessment (which I promoted as Finance Minister) and intelligent use of computerisation and the internet have enabled Ireland to reduce the cost of tax collection for taxpayer and Government alike.
Getting Government itself to function in a cohesive fashion is a problem everywhere.
Different Ministries tend to develop their own empires, with their own mindsets. Communication, let alone coordination, between them are often difficult. In my own time in Government, I found this to be a huge problem, and I found interdepartmental committees to be ineffective. Direct intervention by the Prime Minister (Taoiseach) was often the only way to move things along. The Cabinet Secretariat of the current Irish Government has been recommended to Portugal as a good example of how to tackle this problem.
Another area in which Portugal may benefit from studying what has been done in Ireland is the reform of the Courts system. Delays and unpredictability in Court decisions can be a major deterrent to foreign investment and a big cost for domestic businesses that are trying to grow. Court reform, initiated during my time as Taoiseach in the 1990s, has introduced computerisation, active case management and a specialised Commercial Court, all of which have been a big help.
As in Ireland, the current Portuguese Government has been implementing a restructuring programme that was drawn up, and agreed with EU/IMF, by its predecessor. This means that, in crude political terms, both Governments could blame both the EU/IMF, and its predecessor, for what it has to do.
Of course, to do so, would actually mislead people to some extent, because the real driver of restructuring is not the EU, the IMF, or the previous Government…..but the lack of money, the gap between spending and revenue, which is there anyway. It would be there no matter who was in power, and no matter who one was borrowing from.
My own sense is that voters understand this. Voters probably understand quite well that restructuring will continue, long after the EU/ IMF troika have gone, in both countries.
This will certainly be the case until the Debt/ GDP ratio is down to 60%, a figure both countries have agreed to in the Fiscal Compact Treaty. Getting the ratio down to 60%, as we have decided to do in Ireland’s case by referendum, will mean running budget surpluses for many years, perhaps in the face of pressure to spend more or tax less.
Continued restructuring is necessary for the simple reason that, if you want to borrow new money, you must repay old debts, and you must get your debts down to a manageable level.
An issue under discussion now is whether Portugal should aim, like Ireland did, to make an exit from the EU/IMF bailout without the support of a precautionary credit line. Such a credit line could be drawn upon if one gets into subsequent funding difficulties.
Bond markets are notoriously fickle, and delays in finalising robust arrangements for the EU, along with worries about excessive credit in China, and about what the stress tests of Europe’s banks may reveal, add to the uncertainty. A precautionary credit line would involve a measure of continuing EU supervision, but such supervision would probably be no greater than will apply anyway under the new EU “six pack” and “two pack” rules.
Obviously, if a country wishes not to have a precautionary credit line, it must, of its own accord, build up bigger cash reserves. These will be in the form of money borrowed ahead of time and kept in reserve. The state would be paying a higher rate of interest on that borrows money than it would be receiving when it parks it on deposit.
Dealing with this issue, before Ireland eventually decided after much thought not to seek a precautionary credit line, Colm Keena of the Irish Times newspaper wrote
“Take, for instance, the much vaunted 25 billion euros in cash that the Government says it has in the bank, as an assurance to bond markets. The money is not ours. It’s borrowed, probably at an average rate of 4%. If it’s earning interest, it’s probably at 0.5%. So it’s costing us 875 million euros a year” he concluded.
That’s real money that could have been used for other things, like reducing the cost of employing people.
But the confidence generating effect of dispensing with a precautionary credit line may, in Ireland’s case, have obviated these costs. Certainly there has been a big boost to political and psychological confidence in the country.
I realise Portugal has built up substantial reserves already, which are costing it money in net interest payments. This is a carefully balanced decision, involving predictions about future movements in global bond markets, and not an easy or simple task.
When it comes to European affairs, I believe German, Dutch and Finnish public opinion needs to understand that an approach of doing as little as possible, and only at the last minute, carries extra costs. For example, a facility to issue Eurobonds, if agreed in principle could give a big boost to confidence. Increasing the size of ESM funds to a market intimidating size would increase the likelihood that they might not ever have to be used in practice.
Turning back to Portugal, what is the best way to build a truly sustainable economy?
I would suggest three themes.
Portugal should aim to make itself the best place in the world to set up a new business. Thanks to the internet, a small business can become a global player much earlier in its life than was possible 10 years ago. Portugal should make it easy to set up a new business, easy to enter a new profession and easy to comply with regulations.
Successful new business is not always about a new technological breakthrough, but about making new connections between existing technologies, or people, that have not been combined before. The global Portuguese community, many of them recent emigrants, can form a network that can bring business ideas and investments home to Portugal. Connect Ireland is a model you could look at.
Finally, it is easier to build on existing strengths, than it is to start something completely new.
Existing Portuguese businesses should aim to become innovation communities, forming new partnerships and synergies in fields where existing expertise can be more widely applied.