Portuguese Finance Minister Warns: No More Stimulus

Vítor Gaspar says Portugal’s deep economic recession is a “cautionary tale” of the failure of Keynesian stimulus policy.

Portugal’s finance minister said that his country “provides a cautionary tale” of failed economic stimulus policies. Rather it should implement the austerity measures and reforms that are demanded by other eurozone nations and modeled on the German experience. “This is the right approach to eliminate the massive imbalances that have plagued the country for years.”

In an interview with The New York Times, Vítor Gaspar argued that the “Keynesian style expansion” of 2008, when most Western governments ran high budget deficits in an attempt to prop up demand and stave off a deep recession, “can be counterproductive.”

In 2009, Portugal ran a deficit of more than €17 billion, the equivalent of some 10 percent of gross domestic product, while its economy contracted by almost 3 percent. In 2010, the deficit was €16 billion; the economy shrank by 1.4 percent. Last year, the government managed to reduce the shortfall to €7 billion; the economy still shrank by 1.6 percent.

The nation’s debt increased by some €40 billion over the same period. In 2009, it was the equivalent of 70 percent of GDP. Today, at over €180 billion, it is nearly 10 percent larger than the country’s entire annual economic output. Little wonder that some investors fear that Portugal will require a second bailout from other eurozone states if it is to avoid bankruptcy.

Gaspar, who is a member of Prime Minister Pedro Passos Coelho’s right-wing cabinet, insists that the government can slash spending in exchange for the €80 billion in financial aid that was committed by neighboring European countries last year.

The Portuguese economy does not appear to be benefiting from the austerity measures although the government is balancing its books in part by raising taxes.

Portugal’s unemployment rate stands at almost 14 percent. The country’s cheap labor advantage eroded when former communist states in Central and Eastern Europe joined the European Union in 2004 and 2007 but productivity lacks behind workers in the north of the continent.

Growth has been lackluster throughout the last decade. The Portuguese economy is expected to shrink by more than 3 percent this year.

Revitalizing Portugal’s economy will require more than a balanced budget. Government spending accounts for nearly half of gross domestic product. The conservative government in Lisbon must reform the bloated public sector altogether, enhance flexibility in the labor market and reduce red tape which stifles enterprise and foreign investment to boost the nation’s competitiveness relative to other European Union member states.