The next Greece?

Getting a clear, consistent line on Portugal's economic outlook is hard.

Analysts, creditors, economists, the country's politicians and the Portuguese people themselves all take different views on the situation.

In light of the eurozone crisis, Portugues Finance Minister Vitor Gaspar has been trying to put his country in a good light. Mounting debt, gaping holes in the budget, weak growth rates and poor economic performance are all to blamed for Portugal's dependence on an EU bailout package.

"For more than a decade, the macroeconomic inbalance and structural weaknesses have increased," Gaspar explains in a frank attempt to regain public trust.

On the right track

But Gaspar says his country is on the right track, with the help of a 78 billion euro (US$102 billion) bailout package from the EU and the International Monetary Fund (IMF).

An associated reform package aims to push economic growth, create jobs, balance the budget and raise Portugal's international competitiveness.

For the Portuguese people, the reforms mean tax hikes and lower wages. The cuts are also affecting social services and more and more Portuguese are voicing their criticism of the harsh austerity measures.

Gaspar needs broad support for the reforms. The package, he says, will protect the country and win precious time.

"That's time that Portugal needs to regain the trust we need to be able to reduce the deficit via the markets by 2013."

Promising reforms

The troika of EU observers, the European Central Bank and the IMF believe Portugal is on a positive track with its reform package - it could lead to a slight increase in growth rates.

"In 1984, Portugal implemented a previous IMF reform program. It was no easy time for the country, but it did lead to a surplus," says economist Ulrich Rathfelder, analyst at the German Helaba bank. Rathfelder is confident that with strict austerity, Portugal can get out of the current crisis as well - even if it takes longer than Finance Minister Gaspar hopes.

But other economists have a bleaker outlook.

David Bencek and Henning Klodt of the Kiel Institute for the World Economy (IfW) have compared the situation in Portugal to that of other EU countries. While its debt situation may not be as devastating as it is in Greece, the two economists say Portugal will need a haircut to deal with its debt.

Some experts argue that if Greece defaults on its debt, other countries like Portugal will go the same way because the underlying problems - in all the eurozone's troubled states - are thought to be the same. A recent IfW study, however, suggest there are some differences between Greece, Portugal and Spain.

It could stop the domino effect.

"The structure of the crises, as well as what led up to the current problems, are different - and solutions in these three countries will have to be different too," the report says.

In Portugal's case, the study says low economic output, and private and public tax burdens, created its problems and the country now needs quick action to turn things around.

Helaba expert, Rathfelder, also believes speedy consolidation is the way to go.

"There are competitive companies in Portugal - in the car industry, in the supply sector, and there are small, efficient firms in the IT sector. So the basis for a turn-around is there," says Rathfelder.

But things still need to change - and fast - if Portugal is to create the trust its finance minister so badly wants.

Author: Beatrix Beuthner /ai
Editor: Zulfikar Abbany