So – what is Portugal’s alternative? Stop the austerity measures and spending cuts and borrow more on the open market?

That is impossible because the markets have lost confidence in Portugal’s ability to repay and are charging high borrowing rates to reflect the increased likelihood of default. Hence the need for a bail-out.

Let’s assume however that we can go back in time. What if Portugal turned on the spending taps two years ago as you suggest to stimulate growth? Would the resultant “growth” have increased at a quicker rate than the additional borrowing required to sustain it? In other words, would their deficit have been bigger today or smaller?

As the Bloomberg article you reference states – Europe’s growth has slowed – reducing potential export growth. I suspect therefore that Portugal’s deficit today would be bigger. As we have seen the markets don’t believe they can service their debt at the current levels – so on what basis do you think the markets would support the increased spending you propose?

Please try and explain an alternative scenario that makes sense…

I’m guessing Britain should follow what Obama is doing or even more.

Interesting that he cites Greece’s cuts as the reason for it being downgraded. One wonders if he read the very link he posted – look at what it says:
“ATHENS, March 7 (Reuters) – Moody’s slashed Greece’s credit rating on Monday on fears the country’s efforts to cut its debt will not be enough”

The credit rating was cut because the cuts *weren’t enough*, not because they were too much!

I blame Tim Worstall, it has been all downhill for Portugal since the ASI fellow made it his abode.

As much as Mr Osborne is wrong to equate the peripheral states with the UK situation, I can’t see how Portugal and Greece could do anything other than austerity. Just because they had smaller deficits than the UK as a ratio of GDP means absolutely nothing. The capital markets perception in your ability to grow yourself out of your deficit is the key issue. Portugal and Greece simply can’t afford the states that they have built. With or without austerity their sclerotic economies could not grow themselves out of their fiscal problems. I don’t buy the idea that if they had not gone down the austerity route that their interest rates would not have blown out. Their interest rates are only going back to where they should always have been. The eurozone convergence illusion that the south is the same as north is over and their sovereign interest rates are just a reflection of the markets estimation of their ability to repay. Even without austerity the market would not be giving them the money at affordable rates.

So what do Portugal, Ireland and Greece have in common economically that distinguishes them from the UK,,,Yes, the Euro…

PIG are trapped with an exchange rate set (in effect) by Germany, with poor competitiveness, and huge debts and deficits. And yet they cannot devalue to stimulate their economies – with exports, inward investment and tourism – unlike the UK. They are trapped in debt spirals – they can only stimulate their economies by borrowing (which increases their debts, which…), and they will find it very hard to increase competitiveness (ie increase productivity or reduce wages).

The point you miss is that if Osborne’s cuts slow the economy, the pound will devalue, which will in turn stimulate exports, inward investment and tourism…

And the author was employed as an economist at the bank of England?

No wonder things are as they are!!!!

It’s common sense that when you get into debt and the bank is about to foreclose, the solution is not borrow more money and throw a party.

To do so is to wilfully bury your head in the sand

Prof. Mark Blyth on ‘ common sense ‘.

http://vimeo.com/15061570

I don’t endorse everything he is saying but it is an interesting video of the fallacy of composition of ‘ common sense ‘ solutions. However, it does not apply to the periphery because they are in the straitjacket of the eurozone being strangled by the virtuous Germans.

Priceless that no tory trolls are blaming Gordon Brown for Portugal’s problems. But then Brown was not to blame for what happened in Ireland, Iceland, The US, or the UK’s banking crises, Yet the moronic tory trolls still claim that Brown was to blame for the UK’s problems.

Tory trolls are not that good with facts. It is all about their ideological dreams.

The interesting thing about Portugal is that they need a bailout quick because the government is running out of money to pay pensions and public sector workers. That’s the reality of having a huge budget deficit and foreign bankers who don’t think you can repay so they stop lending. Countries don’t go bust as such but the people who depend on the state do.

The problems experienced by the PIIGS (Italy isn’t exactly healthy) are unlikely to land here. The euro is their problem. We can devalue and we are. So a few cuts (and it is just a few), hike taxes (a lot), inflation and devaluation and our problems are solved. The PIIGS are stuffed with the euro. In a way, although the collapse of the euro might have far-reaching and possibly devasting cosequences, it might not be such a bad thing. It’ll rein back the unelected power of the EU – heads will roll – and they’ll be very wary of anymore mad schemes. Sounds like a plan to me except our banks are up to their eyeballs in loans to PIIGS.

Fundamentally the euro was never going to work and staying out is the only thing I thank G Brown for. (Sorry, it’s late and my grammar is going to sh*t!) The reason it will never work is a fixed exchange rate dictated by the succesful economy in Germany. The Germans will always be paying for the PIIGS, which have no hope of matching Germany.

Others have been hanging back and watching the UK before carrying out their own cuts program such as the US and Germany. We appear to have coped well.

BUT we havent, as we’ve only just finally laid off staff and shut service last week ahead of the new financial year that started this week.

We really wont see how we’re in the shit just as Ireland and Portugal until late Summer. The brick wall of reality is in the road waiting us to drive into it.

Sally @9

Interesting, I’ve just congratulated G Brown on keeping us out of the euro. Brown is to blame for a lot of things but the PIIGS problem is not one of them.

It’s perhaps only fair to mention that Portugal and Greece have centre-left governments. Jose Socrates is no Tory – I don’t believe he relishes cuts – but he was persuaded that spending cuts were necessary. The cuts would probably have been tougher still under the centre-right, but, like our Labour Party, the Portuguese Socialists believed some cuts were unavoidable. And if the cuts they proposed were worse than those Labour would propose, it is only because the Portuguese situation is worse than ours. So fundamentally the correct comparison is between the Socialists and Labour. Yet it is impossible to believe that the Portuguese and Greek governments are right, any more than the right-leaning Irish one was, to impose cuts on such a scale. So what should they be doing instead? It seems unrealistic to think that a Keynesian spending programme could have convinced the markets and the doubters and turned things around. Leaving the euro and defaulting on the debt would seem the inevitable alternative to austerity. But this alternative has been too radical for the centre-left to consider.

Brilliant fiction – yes this is fiction.

For the last six months, Portugal’s borrowing costs have been rising mainly because its public finances are fucked – and the austerity measures were needed to restore confidence but it was too little too late.

Greece was already having trouble raising money when it imposed austerity measures – hoping that the austere measures would somehow convince investors to lend them money – and when it did not happen and the costs of borrowing became too high – it went for the bailout which would require much more austere measures – because the money is being guaranteed by European tax payers.

Now some in the loony camp have suggested that Portugal be allowed to default on its loans – okay — so who pays then? Well primarily the ECB and the German Banks because they have been keeping the economy afloat – and its only about a 50 – 60 Billion Euro exposure. Not much.

But if Greece, Ireland and Portugal all default – then German banks suddenly lose more than £100 Billion and in addition so do many other banks including British banks. Then these banks won’t be able to meet the stress tests – and when that happens the taxpayers have to foot the bill – because otherwise depositors are going to lose money.

Some brilliant economist in one of the comments above said – lets just do what Obama is doing – well great but Obama is being underwritten by the Chinese and the Japanese. But and why are they doing so? for geopolitical reasons and because it makes sense – even though US has a $14 Trillion dollar debt it has assets over 65 Trillion – but if you let countries default it would affect Citibank, Barclays, and even high street banks such as Santander – who is going to pay the bill?

Another thing Duncan, the brilliant economist forgets or is not even probably aware of (because if he was he would not write this shit) that UK deficit is higher than that of spain, portugal, ireland and greece – yet our borrowing rates are at 3.7% and Germany is at 3.4%.

But these would all change the moment one of the PIGS default – and that is why Merkel and the ECB are doling out money like candy to ensure it does not – because if it does than Chinese and the Japanese and the Indians and the rest of the world that buys our debt would get worried – because for example Singapore uses pension funds to do bond buying.

Why would they do so – because by letting the PIGS default we would have brought upon ourselves another major banking crisis – and so all these calls for default – sorry guys money does not grow on trees – and you say what happens if they cannot borrow money – eurozone countries cannot even print money. We can but if we do so – inflation would skyrocket – its simple economics folks and with that the inequality you see today would seem like heavens.

But living in a fictitous world with little understanding of policy makes it easier to write crap like this.

Well done – but you just proven that until the Labour party shuns people such as the author of this article it would never ever be credible again economically.

We need the spending cuts – and even Ed Miliband agrees we do. He said he would have cut 2/3rds of what Cameron and Osborne are doing – but he has failed to provide any suggestions on where he would cut.

And on top that the most read left blog in the country is publishing articles like this – well done Duncan – you are doing the job for the Tories to brand us all as loonies.

Thank you so much for your rather idiotic and fictional article. We at eGov monitor have been writing about this day in day out and you want to have a policy debate lets have one – but this is not policy this is fiction and there is no alternative for Portugal but to go for the bailout.

And it has to learn to live within its means and so does the UK.

Keynesian spending programme is the other straw many commentators with dubious economic credibility have been calling for.

Some cited Obama’s campaign when he saiid what happens if everyone stops spending – well the US States are feeling the pinch far more than the federal government and as many of them have balanced budget requirements – a lot of the US is going through austere measures – so that US comparison is wrong.

Second, to go an invest in Keynesian spending you need to have money – last month Portugal government had about 5 Billion Euros in its coffers and had to make loan repayments of 5.4 Billion Euros – so Socrates wanted to pass the fourth austerity measure in less than 11 months to try to get more money in the system – he failed he resigned – and now the country has gone for a bailout.

Where is the money to run keynesian programme? It either has to be printed or borrowed – if printed inflation soars, inequality soars and you would see poverty like you have never seen before.

You can borrow but then you have to have someone willing to lend the money and they would only do so if you repay the money and the interests. Last year, the UK paid £31 Billion to service the debt – how many hospitals, schools can we build with that – by 2015/16 – the debt servicing costs would be almost £67 Billion and that is after the coalition government’s spending cuts. Now imagine where we could have used that £67 Billion?

So what other options did Portugal have?

Shamit – if you’re going to use language like that you’ll be deleted and banned from this website. Don’t make me do that, but I will. Consider this the final warning.

As for your points:
And on top that the most read left blog in the country is publishing articles like this – well done Duncan – you are doing the job for the Tories to brand us all as loonies.

Firstly:
Tories lining up against bail-out
http://uk.news.yahoo.com/14/20110407/tpl-tories-lining-up-against-bail-out-81c5b50.html

Secondly, public opinion is massively against a bailout.

and the austerity measures were needed to restore confidence but it was too little too late.

As Duncan points out – the austerity measures made things worse. As they did in Ireland. It would help if you read the article a bit more instead of making yourself look foolish with wild accusations.

But if Greece, Ireland and Portugal all default –

they’re going to default – its not a matter of if but when. Their economies won’t grow for a while to cover the deficit or repay debts.

And there are several examples in the past of countries defaulting and coming out much stronger, quicker.
http://liberalconspiracy.org/2010/11/24/why-ireland-should-default-on-its-debts-and-start-afresh/

Another bunch of Socialists crash a European economy. This man works at the Bank Of England as an economist!!!

@14 @16 you might not like his language Sunny but Duncan’s article is rather poor and built on a succession of straw men.

I know it is tempting to believe that we can just borrow forever and that’s ok but in the real world, real bond investors get to a point when they stop buying government debt. This issue I don’t think has been covered here or anywhere on labour-leaning blogs. Am just finishing off a piece on that on my own blog.

The euro’s a major part of the problem. Thank God for Gordon.

It should have been rolled out alongside national currencies, not replaced them.

@ Sunny

@ Sunny

As Duncan points out – the austerity measures made things worse. As they did in Ireland.

You just don’t seem to get it.

Without the austerity measures they would have run out of money even more quickly. You know, like, actually RUN OUT of money- no option to print some more, like here.

Government workers would have gone to ATMs and found no money had been paid into their accounts. They would have been unable to buy food to feed their children and then things would have got very unpleasant. Even with Portugal’s mates having a whip round, they still could.

Labour’s current economic policies would only work in a fairy tale land, where the magic money tree actually exists.

They urgently need to get real.

The idea that Portugal, which has effectively gone bust because its cost of borrowing is too high to be sustainable, would be just hunky-dory if only its deficit were higher is a nice one.

Portuguese 10 year bond yield April 2010 = 4.5%, now 8.5%

UK 10 year bond yield April 2010 = 4%, now 3.8%

Osborne’s winning this one so far…

Have just read most of the responses and cannot believe that most do not get it. We need growth – GROWTH – as well as cuts. If the cuts are too severe we do not get growth and the country will end up bankcrupt.No growth,no jobs, no taxes. The misery, unemployment,house repossesions, and yes more suicides.

Sunny -

I am happy to apologise for the language but not the arguments.

Because “wild accusations” they are not. Can you disagree with the inflationary pressures and the cost of welfare if a country defaults on its loans?

You highlight an Lib Com article where you drew the arguments from NY Times about Russia and Argentina.

For lack of time, let me just tackle Russia because I have to get back to my day job.

In August 1998, Russia declared a moratorium which was lifted in November 1998.

What happened in between?

1 – Rouble lost its value by two thirds as the Government was printing money

2 – Russian Inflation reached 84 per cent

3 – Welfare costs (even in a state not really known for its welfare programmes) quadrupled.

4 – Food shortage and basic items shortage in the economy.

5 – State not being able to pay wages

6 – Millions of people lost their life’s savings and millions were pushed into poverty.

There were riots and the military had to be called in, if necessary to shoot at protestors, the Russian Government allowed Regional Governors to forcibly hold down prices

And then the Russian State had to adopt massive austere measures –

a) Spending on welfare was massively cut

b) spending on regions dropped from 14.6 % in 1997 (which was housing and social spending) to 13.8% in 1998 to 10.1% in 2000.

The Recovery:

The recovery was driven by oil and there was a huge surge of oil prices during that period. Secondly, the imports were so expensive which forced people to buy domestic goods and services

Unfortunately, neither Greece, Ireland, Portugal and Spain have oil and they would not benefit from the currency devaluation. More importantly, none of these countries have any control over inflationary pressures – that is determined by the ECB which yesterday was forced to raise interest rates which would hurt workers in the PIGS.

Not only that, the domino effect of bank exposures to these countries are significant – Portugal so far has clocked up 50 Billion Euros – its much more for Ireland and Greece.

And no they would not be allowed to default because then the whole European edifice comes crashing down because German Banks would want bailout money from the Government and the German taxpayers would be quite pissed off. Similarly, British banks and others would be exposed. If we do not tackle that, we would have run on the banks and deja vu – back to 2008 but with severe poverty and social unrest.

The Greek debt has already been restructured and would be restructured again – and so would Ireland’s – and that is why the European Stability Mechanism has been brought into play with about 600 Billion Euros to guarantee loans as well as if necessary buy the bonds and the biggest risk is being taken by Germany.

So no I am not making myself look foolish – I read the article and I re read the article and its not me who is looking foolish.

The Austerty measures that Ireland brought in was because it was running out of money and that happened because they did not understand the scale of the banking crisis. And once you bring in external lenders whoever they may be – they would impose conditions and it would be more severe than the one the country’s politicians would have been able to deliver on.

Interestingly both NY Times and yourself did not mention the mid 1990s Mexico bailout – one of the best things achieved by Clinton and the Republicans in the Congress – they knew if they let Mexico default there would be a domino effect because of US bank and business exposure especially due to NAFTA which could then take on a global economic catastrophe. But with bailout and strict austere measues, the Mexico economy rebounded and got sorted without oil and without riots.

I prefer that option than making millions and millions of Portugeese or Irish suddenly finding they have no money and the impact of their default would be felt in Germany, France and yes the United Kingdom. We already saw a mass exodus from Ireland and that is before a default – imagine what would happen if they default and they all start coming here and France and Germany.

Social welfare costs would soar beyond recognition – public services would not be able to cope with demand and we would have to borrow heavily – and our debt interest payments would reach over £40 Billion or more within a year. If we print money, then inflation would skyrocket and all middle class people will suddenly find themselves to be poor and the poor would have no recourse but to fall back completely on the state.

Now am I looking foolish or is it the other way round?

As I said I am happy to apologise for the language but this article does not reflect any understanding of fiscal and monetary policies as well as the impact of having a single currency and the impact of default and how it could affect us.

So I say again, austerity measues brought by this government are needed – may be its too much – I could buy that but it has restored investor confidence and in a globalised world its important investors have confidence.

In 1993, Bill Clinton had to cut down on his investment on middle classes because he wanted to bring down long term interest rates and tackle the deficit – and when that happened along with some major pro growth strategies – US economy boomed like never before and helped the global economy immensely.

So lets have a debate but don’t call me foolish especially when I know what I am talking about.

It seems odd that while most people diagnose correctly that the PIG problem is largely to do with the structural problems of the Eurozone (well, also the fact that tax avoidance is endemic in Greece and Ireland built their boom laundering money for the multinationals, I can’t comment about Portugal), but then conclude that the “solution” to this problem is a national one – and always austerity.

The real solution – apart from the break-up of the Eurozone – must be to address those structural problems.

In truth the PIGs are suffering in a similar same way that the industrial north of England did under Thatcherism. Trashing the economy of one part of a currency zone – which is what austerity will do to the PIGs – will not benefit the whole.

The Germans will eventually have to realise that they have made a lot of Euros out of selling cars to the Portuguese, and that won’t continue unless the economies of the Eurozone become more balanced. Short term financial transfers to the PIGs is an investment that will end up in German company and worker pockets.

Of course, that’s a hard sell in domestic politics – especially when we are consistently being “educated” by the media in fish-wife economics.

If not, then PIG austerity will lead eventually German austerity, and we know that will affect the German workers (who have seen their wages frozen just like ours even though their economy is relatively booming) and not the neo-liberal elite.

@24 Shamit

I was rather under the impression that Russia was in a bit of a state because their economy had been trashed by the Chicago School and then raped by the oligarchs. You’re describing the consequences of a trashed economy, not of printing money.

@praguetory: What has Sócrates’ government ever done that was rightly called socialist or that a PSD couldn’t just as easily have done?

The P”S” tend strongly to the centre because:

1) it’s less reliant on and rooted in the unions than other centre left parties in Europe;
2) from the start after the revolution the less socially conservative half of the ruling class adopted it as the main tool for advancing their own interests;
3) Marxist parties (PCP and BE) with a sizeable chunk of the vote (~20%) act as a valve releasing any internal pressure that might try to shift the PS leftwards;
4) if they need to keep the left sweet they do it with social-liberal stuff (gay marriage, terribly sensible drug laws) rather than any economic egalitarianism (which there’s never been any of in Portugal – it’s the most unequal country in western Europe).

On top of the PS’s really-not-very-left-ness, Sócrates is from the right-most wing of the party. He was a a student PSD activist.

@26 I think you are missing the point. Sunny said it’s OK for countries to default and, as part of his justification, linked to an article that used Russia as an example of a successful default and recovery.

Shamit listed a number of reasons why the experience of Russia would not be replicated in Ireland, Greece and Portugal. There’s not much to do with oligarchs or the Chicago school in there.

@24 I broadly agree. As I said above, the editorial line here is dismissive of the concept of investor confidence, and so your argument is unlikely to be accepted!

Here’s an article debunking Weldon’s claims
http://libertyinreality.wordpress.com/2011/04/08/what-do-portugal-ireland-and-greece-say-about-austerity/

tax avoidance is endemic in Greece and Ireland built their boom laundering money for the multinationals, I can’t comment about Portugal

It has a fair amount of the former (and as in Greece outright evasion as well as avoidance).
IMO (having lived there the last few year and watching it closely) is that (even more so than in Britain) the people in charge are looking out for each other. The upper classes have more-or-less captured the state, the two big parties, the press and the big companies (both private and state owned).

Hence a state that is big, not because it is doing big work to help the needy but as a source of jobs for the boys, lots of favours swapped between business and government and no real chance of electing a government that actually wants to change it. The PS will say they will shift wealth to the poor and the PSD will say they will slim downthe state, but they won’t because they are doing rather well from the status quo. Beyond that there is the right-wing CDS who can’t see beyond the latest populist squawking point, an ageing, withering, unreformed Communist party and a Left Bloc who prefer to snipe from the sidelines than get their hands dirty in government.

Imagining how things could get fixed is a task for a SF writer.

@28 My bad re Russia. That will teach me to read all of the comments …

Rather than writing a 650 word comment (!), here’s some more thoughts:

http://wp.me/pt0AC-mG

Rather than me writing a lengthy comment, here’s my thoughts on why Duncan’s view is breathtakingly complacent and ignores the main lesson of the credit crunch.

http://www.cashandburn.com/2011/04/puke-point.html

@ 6 Paul ilc
“The point you miss is that if Osborne’s cuts slow the economy, the pound will devalue, which will in turn stimulate exports, inward investment and tourism…”

But the pound practically went into free fall from the ’60s till well into the ’80s – and hasn’t done that well against the Euro since then – but it didn’t help our exports much because we weren’t making stuff other countries wanted to buy. North Sea oil helped, but we remained very import-dependent – and it’s getting worse. Do we make anything much now that foreigners might pay us for? Financial services and visits to Theme Park Britain?