A New Look at Portugal’s Economic Picture

BY Margaret Warner  November 19, 2010 at 5:58 PM EST


Pastry store manager Marco Lume gives his perspective on the economy.

LISBON, Portugal | At first blush, Lisbon doesn’t look like the capital of a country in financial distress. It sports an impressive profile of 18th century elegance and late 20th century skyscrapers, dotted with lots of parks and Mediterranean red tile roofs. Traffic moves smoothly along well manicured streets and parkways.

But this is the city that the euro rebuilt, and now it’s in trouble. Long a sleepy European backwater, Portugal came into cheap credit — and subsidies — after joining the European Union in 1986 and the eurozone in 1999. And its government and citizens spent way beyond their means. Now, with Ireland on the verge of taking a European Union bailout, all eyes are on Portugal, which the financial markets see as the next ailing patient in the EU family.

Portugal’s banks are not in trouble as Ireland’s are, and they didn’t suffer from the heart-stopping housing boom and collapse that Ireland did. But Portugal’s government debt hovers close to 100 percent of its GDP — way higher than Ireland’s. The Portuguese government borrowing costs are rising into danger territory. And the Portuguese government, while raising taxes and vowing austerity, is still borrowing and spending at a brisk clip.

A walk through the historic Plaza Dom Joao in the heart of the city’s downtown Rossio district says it all. Nearly one-quarter of the shops were shuttered behind graffiti-marked metal doors. An upscale men’s clothing store seemed to have been abandoned in haste, linen-clad mannequins still in the window, dried flowers in a vase on a table.

Inside a 180-year-old landmark, the Confeitaria Nacional, manager Marco Lume says he’s lucky. Most of his customers are tourists — Spanish and Italian mostly — and they’re still coming. But the Portuguese aren’t, he said. And even his out-of-town visitors are being careful. “They used to order an entire lunch — fish, vegetables, wine. Now they get a sandwich and some water, or a pastry and coffee. That’s it.”

He blames the government. “We joined the EU, and at first we got a lot for doing that,” he said. “But our politicians didn’t do the reforms they were supposed to, and now we are paying for that.”

The deeper problem is that Portugal doesn’t measure up to the rest of Europe in productivity. It has the lowest per capita GDP in all of Europe, even lower than Greece. Welcoming the Portuguese into the eurozone and letting them borrow money at EU rates was a bit like giving your teenager a credit card before he’s earning enough to pay the bills. And now the family is on the hook.

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