An own goal in Portugal

Article Highlights

  • All is not well in Portugal.

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  • The Portuguese economy has been in economic recession for nearly 2 years.

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  • The Portuguese economy is officially projected to contract by more than 3% in 2012.

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The Portuguese economy will be in for the roughest of rides in 2013 if the government goes forward with a proposal to change corporate social security contributions.

All is not well in Portugal. The Portuguese economy is mired in a deep economic recession, and tens of thousands of Portuguese recently took to the streets to protest the additional austerity measures being proposed by the government to bring the country’s IMF-EU program back on track. Of equal concern is the emergence of the clearest of cracks in the bipartisan support that Portugal has enjoyed up to now for its IMF-EU adjustment program.

The Portuguese economy has been in economic recession for nearly two years. In large measure, this has been the result of the major fiscal austerity that Portugal has been forced to undertake on top of a major credit crunch and the euro straitjacket that precludes currency devaluation as a means to promote exports. The Portuguese economy is officially projected to contract by more than 3 percent in 2012 and by a further 1 percent in 2013, while unemployment has risen to more than 15 percent of the Portuguese labor force.

What makes the Portuguese situation all the more lamentable is that the government now appears to be on the road to aggravating the country’s economic and political woes by proposing an ill-considered remedy to the loss of the country’s international competitiveness. In an attempt to effect an “internal devaluation” within Portugal’s euro straitjacket, the government is proposing a reduction in companies’ social security contributions from 24 percent to 18 percent in order to reduce those companies’ effective labor costs. And it is proposing to finance that reduction with an increase in employees’ social security contributions from 11 percent to 18 percent. This initiative is in addition to the fiscal austerity measures that the government is being forced to adopt under its IMF-EU program to make up for the 6-percentage-point loss in tax revenues that resulted from weaker than anticipated economic performance.

The full text of this article is available at The American.

Desmond Lachman is a resident scholar at the American Enterprise Institute.

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About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

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