May 25, 2015 / 7:09 AM / 2 years ago

Portugal, like Europe, loses hunger for reform

SINTRA, Portugal (Reuters) - Celebrated among Europe’s elite as a model of how to reform an economy after a debt binge, Portugal’s enthusiasm for change has waned as Europe loses its appetite for further belt-tightening.

With Greece’s future in the euro uncertain, after its leftist government all but tore up a reform-for-aid deal, Europe’s policy setters are putting an extra shine on other countries that were bailed out - in part to avoid a spillover.

They have declared Portugal, following on the heels of Ireland, a recovery success story after a debt crisis that started with a financial crash and drove countries from Greece to Ireland to the brink of bankruptcy.

“l compared the case of Portugal to the film ‘Match Point’,” Jose Manuel Barroso, the former president of the European Commission, and one-time prime minister of Portugal, told Reuters, referring to Woody Allen’s film.

“Which side of the tennis court would the ball land on after hitting the net? Ireland or Greece. It was Ireland‘s. Recovery is now under way in Portugal.”

European Central Bank President Mario Draghi chimed in last weekend, praising Portugal for grasping the nettle and making difficult changes to the way its economy works.

“A great deal has been achieved and we have praised progress where it has taken place, including here in Portugal,” Draghi told a group of central bankers and academics gathered at an ECB event near Lisbon.

Yet Draghi’s encouragement was tempered by his broader warning that Europe was letting its guard down on reform, underscoring worries about apathy in a region artificially buoyed by the ECB’s trillion-euro-plus money printing.

UNTAPPED POTENTIAL

Portugal, like Europe, had been ambitious. It made sweeping changes to meet the terms set for emergency loans from the euro zone and International Monetary Fund under its bailout, including reforms to its labor markets and legal system.

It cut civil servants’ wages and pensions and made the biggest tax hikes in generations.

But economists say that drive has waned after the three-year bailout program ended last year and international inspectors stopped visiting the country to check on its progress.

Attempts to cut state salaries have been partially overturned by the country’s highest court, while a general election due in September or October has also sapped enthusiasm among politicians to pursue further changes.

Talk of failure, however, is, off the agenda. The Portuguese economy started to recover in 2014 after three years of recession, expanding 0.9 percent, and growth is expected to accelerate in 2015 to around 1.5 percent.

Those figures, however, mask deep-seated problems. Almost one in seven Portuguese who could be working are not, the third highest level of unemployment in western Europe. The government has warned that this trend will take a long time to reverse.

Charts, which Draghi used in his presentation, hint at the reason for this. One, labeled ‘untapped potential’, ranks Portugal as last on a list of eight euro zone countries for labor productivity, well behind Spain, Italy and France.

In a ranking of countries by ‘ease of doing business’, Portugal comes mid-way down the list, behind Ireland.

Last week, the IMF criticized the government for failing to push ahead with a legal framework to help companies shed heavy loans, a debt burden that will hinder growth.

Some economists blame a scattergun approach to reform.

“Portugal may have carried out reforms, but not ... with coordination between each of them to allow for an increase in competitiveness and output,” said Rui Constantino, chief economist at Santander-Totta in Portugal.

He spelt out three reforms to pursue: “First justice, second bureaucracy and third taxation. Portugal still has a very high tax burden. In the last few years the middle class has lost net income of at least 10 percent.”

But with Portugal no longer answerable to the IMF or ECB - also a member of the troika of inspectors that monitored its bailout program - and as reform momentum loses pace in Europe, there will be little pressure to act.

France has been given two more years to cut its budget deficit to within European norms, extending the deadline for the third time since 2009 as Paris struggles to enact reforms.

Central bankers and academics discussed the need for reform for hours at a remote luxury hotel and golf resort in Portugal last weekend, but reached few conclusions.

For Barroso, there remains little alternative. He defended the prescription of austerity, or tightening spending.

“We didn’t want people in Portugal, in Greece to suffer. But we were close to the abyss,” he said, reflecting on the situation at the height of the euro zone crisis.

“If we, in Europe, want to keep our social welfare model then we must stick with budget consolidation. We don’t want Europe to turn into just a museum for tourists to visit.”

Editing by Susan Fenton

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