Portugal, And Now?

If Greece is where the West both begins and ends, then Portugal is where the Europe West ends and the gateway towards the Atlantic Ocean opens - the ancient Greeks used to say from the region that is now mostly occupied by Portugal, as the land beyond the Pillars of Hercules, i.e. the strait of Gibraltar, passing the Mediterranean, already in the big unknown Atlantic Ocean.

Portugal is arguably the oldest nation state of Europe, a land devised as the second attempt of a spin-off of the early Christian kingdom of León on the Northwestern Iberian Peninsula to fight the Arabs during the Reconquista, with the Vatican’s blessing. The Portuguese represent no clear ancestral civilization, they are though the result of the multiple settlers since prehistoric times: occupied by Celts like the Gallaeci and the Lusitanians, integrated into the Roman Republic and later settled by Germanic peoples such as the Suebi, Swabians, Vandals and the Visigoths, and later by Arabs and Sephardic Jews - until the 11th century there was no sense of Portuguese nationality when the country was created to give shape to a state with borders closely resembling to what was once the ancient roman province of Lusitania.

After the Reconquista, the Portuguese kings were set to keep an expansionist movement towards South, first against Northern African arabs and then securing the Atlantic routes towards the Southern hemisphere.

What initially moved the Portuguese ideals was a mix of crusaders ideals and the hope to find another distant civilization of Christian people in the Eastern side of Africa, that mix of religious fervor and need for new trading partners eventually led to the financing of the voyages of Vasco de Gama to India, and inspired a generation of great sailors like Magellan, and others that created for the two Iberian kingdoms the very first global commercial village.

On the western extremity of Europe, with few arable land, the sea and the then the richness of the colonies were Portugal’s few sources of revenue providing for sizeable profits from the trade of spices from the Indies and then from the precious metals from its South American colonies.

After the brutality of the Napoleonic invasions that the Portuguese fight against with its Atlantic historic ally, Great Britain – Portugal became a de facto British impoverished province – in David Ricardo’s famous example of comparative advantage, exchanging Port wine for British textiles, and not being able to industrialize, Portugal ended the 19^th century with a very reduced elite that was not able nor wishing to sustain a fragile monarchy and make space for the republican movements to seize the power.

Until the mid-1970’s Portugal was governed by an authoritarian regime (led by conservative dictator Oliveira de Salazar and his "dauphin" for 40 years), which was put to an end by a military coup that effectively stopped a decade long Colonial war namely in Angola, Mozambique and Portuguese Guinea that seemed to have no political solution ahead of it – so during the initial stage of democracy, the fear of left-wing Soviet aligned parties taking control of the country persisted further impeding its economical developments towards a modern pro-market democracy.

About a half of the Portuguese economy is dependent on the central government budget and over-half of private business are family-owned and rely on cheap labor, making meritocratic promotion difficult. Although tax cheating is considered to be under control, the economy’s lack of competitiveness is due to same reasons then of Greece, being mainly a service-based economy, with a strong reliance on tourism, and with little added value exporting capacity with some still small pockets of innovative companies.

Most of the features have to do with deficient macro-economic policies, the result of decades of a lack of a coherent national industrial strategy and an over zeal on non-exporting parts of the economy like the real estate and construction sectors.

Portugal lacks enough productive land to be an agricultural power – but worst, after its entry in the CEE in 1986 the agricultural sector was kept under-developed, not fully exploited, while traditional fishing activities also suffered a big slash.

An almost political dual-party system is the norm after the 1980’s where the two biggest political parties,  the socialist party (PS) divides the power with the social democrats (PSD) sometimes forced to team up with the right-wing Christian democrats (CDS).

However, an over-politicized bureaucracy with the middle- and lower-echelon being controlled by the ruling party made state institutions from top to bottom were often overly politicized, allowing for little meritocracy in those institutions, add that to the constant regime changes that resulted that just in the last 10 years Portugal had five different governments, until 2002 with António Guterres - socialist (currently the UN High Commissioner for the Refugees), then Durão Barroso – social democrat (currently the President of the EU Commission), then Santana Lopes – social democrat (member of the Portuguese Parliament) followed by José Socrates – socialist with no current political activity, and whose expansionist budgetary policies are considered to blame for the country sovereign debt crisis.

The current government, led by Pedro Passos Coelho – social democrat, is managing the country while trying to implement the harsh reforms detailed on the so-called “Memorandum of Understanding” imposed by the troika of the IMF, EU, and ECB in exchange for a $100 billion loan, that allowed the country some financial relief when May last year it was forced to ask for international financial assistance.

Surprisingly, there seems to be no space in the political spectrum for neither left-wing extremists, with the historically important Portuguese Communist Party having had no capacity to strongly mobilize the syndicates into the streets, nor any representative hard-right movements have sprung as a result of the record high unemployment, now above 15%, with last years’ poll indicating a clear shift towards the central parties, allowing for coalition government to be formed between the PSD and the CDS, in fact a referendum of the troika terms, that seem to prove there is a national consensus among the Portuguese people to do the troika proposed reforms on the economy.

It’s exactly this dual nature of the Portuguese, at times exuberant and overly euphoric like the years preceding the International Expo of 1998, and then the European Football Championship of 2004, where 10 stadiums were built to little avail, so that now, half of them are empty year round, and one even being considered for demolishment.

When Portugal joined the European Union in 1986, in the same year of Spain, it’s economy was not ready; with little exporting capacity the Portuguese companies were lured to think the European markets could represent a big exporting market but Portugal did little to change its economic model and relied on low added value exports and on being Europe’s cheapest labor to attract foreign direct investment (that eventually moved East when Soviet Union collapsed); by accepting Portugal, the European Economic Community did a political concession as it had done with Greece in 1981, as a way to show a sign of hope to the newly establish, but weak democracies of the South.

Although Portugal did a serious deficit control work towards acceptance on the Eurozone in 2002, its economy was, as in 1986, not ready for the loss of a national currency, and most notably for access to almost “Germanic” level interest rates – caught with the possibility to access cheap money, in conditions as Portugal had never experienced in its recent economic history, and incentivized by the EU biggest exporters, the Portuguese government went on a shopping spree that seemed to see no end, with the latest shopping list including the construction of a high speed train project that was eventually put on a halt by the later government, already under the auspices of the troika.

Portugal might just stay in the Eurozone, and there is little doubt that it will remain strongly anchored in the European Union and NATO whatever the circumstances, because in Portugal, contrary to Greece, there is overwhelming popular support to remain in both institutions. Irrespective of that, Portugal will face years of economic hardship, although the necessary reforms, now in place are expected to release the hindered potential GDP of the country – that can only really show up when less fiscal pressure is applied, maybe by 2015.

Paradoxically, Portugal’s geographic location has given it few European options, only bordering Spain, the country has historically been forced to look elsewhere, and it was precisely when it was able to diverse its viewpoint that Portugal was able to create a World heritage. Early this year, China, that as recently as 1999 still had a piece of its territory under Portuguese rule, Macao, saw it’s company Three Gorges take a controlling position of Portuguese electrical utility. The Sultanate of Oman, that the Portuguese colonized in the 16^th century, also acquired, through a joint venture with the Chinese State Grid a majority stake of the Portuguese electrical grid company – and further foreign investments are expected in privatizations programs on aerial and naval port infrastructures and in the national airline, that routes a significant part of the air traffic from Europe to Brazil.

Portugal is already showing signs that its reforms package are well under way, with debt markets now asking lower interest rates for 12 month maturity bonds than to its neighboring Spain. However, both countries are so much economic interdependent, with Spanish banks holding most of Portuguese national debt and Spain being the biggest destination of Portuguese exports that none of them can allow the other to fall – Portugal’s fate is now at the handa of Germany’s willingness to save the Eurozone as whole, probably conceding to some mechanism similar to the so-called euro bonds.

Portugal can end up taking the euro crisis as an opportunity to do the structural reforms it needs to do, if so then its geography can help payback its historic ties with the rest of the world, as Portuguese speaking countries like Brazil and Angola now claim a part of their respective regional power house status, they will naturally find opportunities in the ex-colonizer that is now selling most of its assets to manage its national sovereign debt.

Portugal might become the success story that Europe so hardly needs.