The euro's problems began when financial rules were relaxed at the behest of France and Germany. The euro itself is hugely important and can survive from hereon. Portugal is on the road to fiscal reconstruction, with the public also backing fiscal austerity.
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While governor of the Bank of Portugal during the 1990s, I strongly supported the introduction of the single currency and was one of the signatories to the euro's creation. I believe the euro can survive from hereon, but there are reasons why the single currency is going through such hard times at the moment.
The viability of the euro depended on member countries strictly adhering to the "Stability and Growth Pact." By obliging all member nations to keep their budget deficits within 3 percent of gross domestic product (GDP), the pact aimed to avoid profligate spending. In 2005, though, the European Union (EU) relaxed the rules and didn't impose any sanctions. This was done at the behest of France and Germany, who were struggling with deficits at the time.
The easiest way out for politicians facing a crisis is to change the rules, but this was a big mistake. This suspension of the pact is incompatible with the survival of the single currency. Though it was a godsend for Portugal and other member nations also struggling with debt and on the verge of noncompliance, it was a completely stupid move. We are paying the price for it now.
It is also unbelievable that Greece managed to keep hidden its public deficit for so long. This shows the complete failure of the EU's auditing functions.
These kinds of mistakes must never happen again. The first thing we need to do is recreate a system for maintaining fiscal discipline. It is important that these rules are obeyed by "core" countries such as Germany, not just by countries like Portugal on the so-called "periphery" of the euro zone.
The euro zone is a balanced economy
I don't believe Europe can work as a single market without a single currency. In the first half of the 1990s, before the introduction of the euro, diplomatic and economic squabbles were commonplace, with one country, for example, complaining that another was devaluing its own currency unfairly to boost export competitiveness.
The euro zone as a whole is well-balanced even compared to other areas with a single currency. We don't have any trade imbalance, while the public debt-to-GDP ratio is much lower than in the United States or Japan. I believe the markets also accept the viability of the euro zone.
We can stop the Greek crisis from spreading over to Portugal and the euro zone as a whole. It is absurd to think that Portugal will also negotiate a Greek-style debt restructuring involving private-sector investors.
Portuguese government bonds were downgraded and the value of these bonds has also declined, but we are currently receiving EU and International Monetary Fund (IMF) support, so this is no problem right now. When Portugal succeeds in returning to the markets, the value of our government debt will have stabilized, and the Portuguese private banks who bought these bonds will probably avoid any losses. Even if there are losses, these can be covered by the 12 billion euros (1.27 trillion yen, or $15.69 billion) allocated to the banking sector as part of the EU and IMF's financial rescue package.
Spending cuts will lead back to a trade surplus
Generally speaking, uncompetitive countries can devalue their own currencies and use this devaluation to boost exports. This option, however, is not possible within the euro zone, which uses a single currency. In Portugal, we have tried to pursue policies that produce the same kinds of effects as currency devaluation, such as reforming the tax system, for example.
We have decreased salaries while increasing the consumer tax burden. The thinking is that this will lower labor costs and boost export competitiveness, while at the same time holding down private-sector consumption and imports, with the trade deficit shrinking as a result.
Consumer spending is already falling sharply. We may almost be able to balance the trade balance this year, while a surplus is forecast for next year.
Of course, Portuguese people don't want to have their spending reined in, but they understand how necessary these measures are. Most members of Parliament support these austerity measures, and there haven't been any major demonstrations either. There is a broad understanding among the Portuguese that they have to reorganize their consumer lifestyles.
Greece was supposed to push through a program of privatization that would earn 50 billion euros through the sale of state property, but up until now they have done almost nothing. Portugal, on the other hand, has already put together a privatization program that has even attracted investment from China.
Portugal and Europe as a whole were also boosted at the end of last year by the European Central Bank (ECB) decision to provide financial institutions with substantial three-year loans. It gave the banks more resilience and more confidence about the future.
The EU and IMF will continue to support Portugal next year. The question is whether Portugal can raise the necessary amount of money on its own when the rescue package comes to an end. In light of the current world market situation, I don't think anyone can make forecasts for two years ahead, but I think the crucial test will come in 2014.
(This article was compiled from an interview by Naoatsu Aoyama from Asahi Shimbun's GLOBE)
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Antonio de Sousa
Antonio de Sousa was born in 1955 and received a Ph.D from the Wharton School of the University of Pennsylvania. He served as governor of the Bank for Portugal from 1994 to 2000. He has worked as the chairman of the Portuguese Banking Association since 2009.
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