As European heads of state locked themselves into a programme of fiscal austerity at last night’s summit in Brussels, they spared just a few token commendations to those countries already bearing the brunt of brutal adjustment and those now surrendering to it.
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At the start of the week, anyone attending London’s Chatham House would have heard Portuguese finance minister Vitor Gaspar acting as cheer leader in chief for austerity as the necessary response to structural weaknesses and macroeconomic imbalances accumulated over ten years in southern Europe as households, companies and governments borrowed heavily to compensate for weak growth.
Gaspar has a tough message for those advocating a Keynesian response to the looming recession in Europe.
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Since requesting a financial assistance programme totalling €78 billion in April to tide it over until 2014 at below market rates, Portugal has had to submit to austerity strictly overseen by the European Union, ECB and the IMF to keep disbursements flowing. It has done this mainly by cutting spending rather than by increasing revenue. As year-end approaches, the country is on track to deliver a 2011 budget deficit below the imposed limit of 5.9% of GDP. But its new government has just had to impose an even tougher budget for 2012 and there is more pain to come, Gaspar says.
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The Portuguese government hopes that 2012 will prove to be the toughest year of adjustment, that it will then return to a primary surplus and, with the private sector already ahead of the government in reducing indebtedness since 2009, the country could be close to eliminating its imbalances in time to return to the markets in 2014. Portugal will seek to finance the current account deficit increasingly through FDI and equity investment and its structural reform effort will encompass a big privatization programme. Strategic partners already being sought to buy a stake in Energias de Portugal. (EDP) It looks hugely optimistic, although the population of a small country may benefit from the necessary sense of being all in it together. Gaspar says:
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Whether Portugal can manage to stick successfully to this programme while much of the rest of Europe also undergoes a deflationary adjustment is the big unknown. Some holders of its debt may note that aim to reach a primary budget surplus next year and wonder.