Greek Tragedy Plays Out in Portugal

Europe’s austerity battle continues. The latest skirmish took place in Portugal’s Supreme Court, which, according to Reuters

on Friday rejected four out of nine contested austerity measures in this year’s budget in a ruling that deals a blow to government finances but is unlikely to derail reforms two years after the country’s bailout. The measures rejected by the court should deprive the country of at least 900 million euros ($1.17 billion) in net revenues and savings, according to preliminary estimates by economists.

Obviously, “net revenues” means tax increases and “savings” means spending cuts. The curious part of this is how a supreme court of a country can find it within its jurisdiction to pass judgment on individual spending items in a government budget, as well as individual taxes. That, however, is a topic for a separate story. This one from Reuters is primarily concentrated on the policy battle over austerity, and the amazing thing about this story is that it is completely void of context. Greek context, that is:

Debt-ridden Portugal agreed to a 78 billion euro bailout in 2011 from the European Union and International Monetary Fund. The entire package of austerity measures introduced by the 2013 budget is worth about 5 billion euros and includes the largest tax hikes in living memory, which were mostly upheld.

Back in January I explained the draconian nature of those tax hikes. What is unfolding now in Portugal is essentially the sequel to Greece.

However, as Reuters reports, not everyone seems to understand this:

“It’s a lesser evil. … Putting it into perspective, a good manager and leader should not have difficulty finding room in a budget to accommodate this cut,” said Joao Cantiga Esteves, economist at the Lisbon Technical University. “We are talking about an impact of only 1.2 to 1.3 percent of Portugal’s total spending,” he added.

That’s what they said in Greece, too. But 1.3 percent three years in a row accumulates to more than four percent of GDP, with compound interest in the form of negative multiplier effects. Apparently, Mr. Esteves has not kept up to speed with either the events in Greece or the IMF’s new research on the accelerated negative effects of austerity (he might also want to read my paper on austerity to get the rationale behind the IMF’s findings). Government spending cuts cause a faster multiplier reaction than government spending increases. This is a major piece of the puzzle in explaining why austerity has been such a nightmare for Europe’s debt-ridden economies.

It is notable how this perspective is entirely absent in the reporting on Portugal. Reuters is no exception:

The government … has to cut the budget deficit to 5.5 percent of GDP this year from 6.4 percent in 2012, when it missed the goal but was still lauded by its EU and IMF lenders for its austerity efforts. Analysts consider the outcome manageable and say the government should be able to cover the shortfall with additional spending cuts it has been working on at the request of lenders. Analysts say the lenders could also give Portugal more leeway in terms of budget targets. Earlier in the day, Bank of America Merrill Lynch analysts wrote in a research note that even a negative ruling was likely to be “in line with our muddling through outlook,” expecting Lisbon to resume negotiations with its lenders as a result.

The analysts at Merrill Lynch, the university professors interviewed, and the journalists reporting, all take an attitude of business as usual. It is as though the Greek disaster, with one quarter of GDP being wiped out in four short years, has nothing to do with austerity.

Perhaps the parties involved are turning a blind eye to Greece because they don’t want to see the repercussions for the cost of the government debt. Zerohedge notes this:

…the government warning that the court’s decision would put into question the country’s ability to fulfill its €78 billion international bailout program … would send bondholders of Portuguese sovereign debt scrambling for the exits as suddenly the country may find itself in the ECB’s “dunce” corner, with Draghi preparing to pull a “Berlusconi” on a government which can’t even whip its judicial branch in line.

Then comes this comment:

However, of more immediate concern is how will the government now plug a hole of up to €1.3 billion in its €5.3 billion 2013 budget. A solution has, luckily, presented itself: bypass the unconstitutional provisions by paying government workers not in cash, but in government bills!

This is a startling statement, but Zerohedge has a source, namely none other than the Wall Street Journal (subscription required):

The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts, a person familiar with the situation said Sunday. “This is one of the ideas being considered,” the person said. By paying one month of salary in T-bills to public workers and pensioners, the government would save an estimated €1.1 billion in expenses, narrowing the budget gap significantly.

In all honesty, is this really what the defense  of the welfare state has come down to – paying employees in IOUs? Is the Portuguese government so desperate that it is ready to resort to this kind of accounting trickeries??

The California state government has from time to time resorted to “paying” some bills with IOUs, which has caused little more than grumbling among those whom the state owed money. I doubt that the same would be the case in Portugal – especially if they are going to pay their government employees with promises instead of cash. This could contribute to a further destabilization of the country’s economy and, even more so, political landscape.

All, again, caused by austerity in an attempt to defend an indefensible welfare state.