Global cosmopolitan economics, the euro and the Portuguese economy

Abstract

Despite favourable external circumstances, in the last decade the Portuguese economy developed a model of imbalance and dependence based on the disparity between production and consumption, which was financed from the outside and led to anaemic growth, severe deficits and explosive debt, much similar to the Latin American populist models of the past. The restrictions related to the adoption of the euro and inadequate economic policies are the determinants of this process, and, simultaneously, the barriers that need to be overcome. The internal devaluation/recessionary policy, wrongly presented as a close replacement for external devaluation/expansionary policy, underestimates the recessive effects on demand and the way it gets aggravated amidst strong indebtedness, fostering a deflationary spiral that tends to undermine the policy of austerity that is essential to reduce the imbalances. Doubts about the benefits of the abatement of all obstacles (including those of a monetary nature) to free trade among countries of very unequal development, long expressed by Friedrich List, are intensifying. In the absence of own currency, sovereignty and discretionary budgetary policy will be reduced in favour of prescribed rules, limiting economic policies to microeconomic and mesoeconomic frameworks. Due to the lack of an independent exchange rate mechanism, the exports sector sets the pace for the growth of the economy and of wages in the long term, while the impossibility to devaluate tends to lead to cumulative imbalances that are only offset by the occurrence of crises. Avoiding the latter requires paced wage and social policies, and increasing the rate of growth of the product and wages requires the development of an exports sector with high added value. This is the policy and strategy narrow path that Portuguese economy needs to tread.