The Mystery of Why Portugal Is So Doomed

(Reuters)

Every unhappy family might be unhappy in its own way, but the same isn't quite true of every unhappy euro country. The common currency's troubled economies all relied on foreign borrowing during the boom, and all went kaput when that money disappeared during the bust. But, as Michael Lewis put it, not all piles of borrowed money were created equal. Greece got a government bubble; Spain and Ireland got housing bubbles; Italy didn't even get a bubble, just anemic growth -- and Portugal got one of the quietest catastrophes in economic memory.

And it's not entirely clear why.... [...]

It's an economic whodunit without any clear culprits. Yes, Portugal has real structural problems (which we'll get to), but so do Spain and Greece, neither of which slumped before the slump. For his part, Reis speculates that Portugal's immature financial sector is to blame: it misallocated the foreign capital that poured in to low productivity, non-tradable sectors like wholesale and retail trade. In other words, it wasted money on things that never had a chance of paying off. Now, Portuguese banks certainly did make a lot of bad bets ... but so did German ones in Portugal. Something else must have been going on.
Part of that something else is Portugal's small business culture. As Matt Yglesias...[...]

Of course, Portugal still has to fix its structural problems. This can often feel like a hand-wavey catchall, but, among other things, it means making it easier to fire permanent workers who are very much so; making it easier to start and expanda business; and making it easier to enforce contracts. After all, Portugal's stagnation between 2000 and 2008 shows that adequate demand isn't sufficient in the face of these deep problems -- but it is necessary. That's why Europe needs to stop insisting on punishment as the path to prosperity. 

If they don't, the idea of euro exit might not just be the topic of a popular Portuguese book. It might be the platform of a popular Portuguese party.

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