We’ve asked Johan Van Overtveldt, author of The End of the Euro, to check in again about the ongoing euro crisis afflicting Europe. Here’s his latest commentary:
Vitor Gaspar, Portugal’s minister of finance, left the conservative government of prime minister Pedro Passos Coelho last week. Gaspar has been widely praised abroad as the leader of Portugal’s efforts to fight the severe economic crisis that hit the country in 2009. In his letter of resignation, Gaspar expressed the opinion that he had to leave because he felt he he had lost public support for his policies.
Gaspar’s resignation comes at a critical point for Portugal. The recession is getting worse, with GDP expected to contract 3 percent again this year. In the years 2011–12, GDP contracted a cumulative 5 percent. Recovery next year is highly uncertain. Unemployment is 18 percent and is still increasing rapidly. Youth unemployment stands at 42 percent.
Under Gaspar’s guidance, Portugal’s budget deficit was reduced from 10 percent of GDP in 2009 to 4.4 percent in 2011. Despite considerable expenditure cuts and tax increases, the deficit is expected to approach 7 percent by the end of this year. Government debt stood at 143 percent of GDP at the end of last year. Renegotiating Portugal’s bailout program may become unavoidable, according to sources at the IMF.
According to people at the European Commission closely involved in the Portuguese situation, Gaspar lost faith in the austerity policies of Coelho’s government. He also voiced the opinion that public resistance to austerity and structural reforms of the economy was very likely to increase in the near future. A lack of international competitiveness makes it impossible for Portugal to offset the unavoidable austerity policies with any expansion of external demand. In most such cases, depreciating the currency would be called for—but as Portugal is a member of the euro area, this is not an option.
The coming months will make clear whether the Coelho government will persevere with austerity and reform attempts, or whether it will try new policies. The rest of Europe is watching closely.