Sunday 6 June 2010

EU: Stability programme Portugal

The abbreviation PIIGS has become shorthand for the troubled economies which represent five out of 16 members and a considerable proportion of the population of the eurozone: Portugal, Italy, Ireland, Greece and Spain.

Stability programmes for eurozone countries on the one hand, convergence programmes for member states still without the euro.

You can start by reading the background remarks on economic policy coordination in the European Union, in the blog post EU: Useful stability and convergence programmes? (3 June 2010).

You can then move on to the EU Council opinion on the stability programme of eurozone Portugal, published in the Official Journal of the European Union (OJEU):

COUNCIL OPINION on the updated stability programme of Portugal, 2009-2013; OJEU 3.6.2010 C 144/6

Economic background

On 26 April 2010 the EU Council examined the updated stability programme of Portugal, which covers the period 2009 to 2013. The Council began its assessment by a brief presentation of the economic situation:

The global crisis has caught the Portuguese economy in a situation of sluggish economic growth for almost a decade, reflecting structural weaknesses, notably low productivity and potential GDP growth. After stagnation in 2008, real GDP fell in 2009 by 2.7 % driven by shrinking domestic demand, notably investment and to a lesser extent household consumption, whereas net trade was largely neutral to growth. The unemployment rate rose to 10 % in late 2009. The government deficit reached 9.4 % of GDP in 2009 after 2.8 % of GDP in 2008 as a result of sharply falling activity and the implementation of some stimulus measures, but it also reflects prior weaknesses as revealed by high, even if declining, structural deficits in pre-crisis years. On the basis of a planned government deficit in excess of 3 % of GDP in 2009 and an increasing debt in excess of 60 % of GDP, the Council decided in December 2009 that an excessive deficit existed in Portugal and set a deadline of 2013 for its correction. At the same time, large external imbalances persist despite the slump in GDP, with net external borrowing representing 9.5 % of GDP and a negative net international investment position of over 110 % of GDP at the end of 2009. External imbalances relate to eroded competitiveness, reflecting not only low productivity growth but also insufficient labour costs adjustment in a context of, first, increased competition in global markets, notably in labour-intensive sectors where Portugal used to show a comparative advantage and, second, rather benign financing conditions for a number of years. However, financial turbulence during the crisis has been contained. A lasting improvement in economic performance will require considerable adjustments. In the fiscal domain, consolidation is essential to contain an otherwise increasing public debt that undermines long-term sustainability. At the same time, an overarching objective is to raise potential GDP growth, notably by boosting productivity and create jobs in a durable manner. Continued efforts to that end would also help to narrow the large external imbalance, which will remain a major drag on national income in the coming years given the service of the high external debt. Narrowing the external imbalance will require rebalancing the sources of GDP growth towards the external sector by regaining competitiveness through structural reform efforts and lower labour costs growth vis-à-vis trading partners.

Council recommendation

After a detailed discussion, and in the light of the recommendation under Article 126(7) TFEU of 2 December 2009, the Council of the European Union invited Portugal to:

(i) achieve the 2010 deficit target of 8.3 % of GDP, if necessary by reinforcing the consolidation by adopting additional measures; back-up the strategy to bring the deficit below 3 % by 2013 by the timely implementation of concrete measures; stand ready to adopt further consolidation measures in case the macroeconomic scenario proves more favourable than the scenario underpinning the Article 126(7) recommendation and/or any slippages emerge; seize any opportunity beyond fiscal efforts, including from better economic conditions, to accelerate the reduction of the gross debt ratio towards the 60 % of GDP reference value;

(ii) implement an effective multi-annual budgetary framework in order to ensure the adherence to the budgetary targets across the government sector and to firmly contain expenditure over the medium-term;

(iii) enhance the quality of public finances, along the lines envisaged in the programme, notably by improving the efficiency and effectiveness of public spending in the various areas of government action; decisively address the situation of loss-making state-owned enterprises; and factor into the fiscal sustainability position the spending commitments and risks arising from public-private partnerships;

(iv) frame fiscal consolidation measures together with efforts to raise productivity and potential GDP growth in a sustained way, to boost competitiveness and to narrow the large external imbalances, which will also help improving the sustainability of public finances.

Eurozone financial stability

On 31 May the European Central Bank (ECB) published its Financial Stability Review June 2010, which assesses the stability of the euro area financial system both with regard to the role it plays in facilitating economic processes and with respect to its ability to prevent adverse shocks from having inordinately disruptive impacts (page 7).

The Financial Stability Review (225 pages) offers a view of the inter-related financial markets and the consolidation measures of eurozone governments.

The Euro Group plays an important part in the efforts to restore fiscal stability in the euro area. Its president is Jean-Claude Juncker, the prime minister of Luxembourg, where the next meeting is going to take place Monday, 7 June 2010.

Ralf Grahn

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