As Portugal bites the dust – following Ireland and Greece in asking for an EU bail-out – the most important
question is still not being asked by EU policy-makers, or by the British government for that matter: will a bail-out actually solve any of Portugal’s problems?
The simple answer is, it won’t. Asking the European Central Bank to take on more junk bonds, or piling more taxpayer-backed loans on Portugal’s already heavily indebted economy is not a long term solution. Ireland and Greece have already sought to renegotiate their bail-out terms as they are struggling to grow fast enough to repay their EU/IMF loans (ECB rate increases like the one we saw yesterday are unlikely to help). Similarly, a bail-out will do little to solve Portugal’s underlying problems. The country is insolvent and has little prospect of being able to repay its existing debt burden, let alone even more loans from an EU bail-out. Portugal is uncompetitive within the eurozone; its cost competitiveness has decreased by a huge amount, especially compared to Germany. This is all basic economics.
A restructuring won’t magically make Portugal more competitive – any more than a bail-out would – but it would cut Portugal’s debt rather than increase it. It would also reduce the burden on taxpayers, instead transferring more of it to investors. The bigger question of whether Portugal will ever become productive enough to sustain the pace required of it in the eurozone is certainly open to doubt. But bail-outs, unless they are outstripped by growth, only add to the stock-pile of debt that these countries couldn’t service in the first place. UK liabilities under the bail-outs could then turn into real losses if it comes to a default.
Neither are bail-outs the solution to the problems of the eurozone as a whole. It is finally starting to dawn on people that a large amount of the debt circulating the system will never realistically be repaid. The fact that the post-2013 permanent eurozone bailout fund provides for investor ‘haircuts’ is an admission of the fact that, in the end, someone will have to take losses.
All this means that the government is putting British taxpayers’ money on the line, but the UK remains exposed to meltdowns in the eurozone in future. This is the worst of all worlds. Rather than propping up this failing bail-out orthodoxy, the UK needs to push – strongly – for a restructuring of Portuguese debt, in combination with a recapitalisation of exposed banks and a limited cash injection.
The eurozone has become like an alcoholic in need of a strong dose of reality, its addiction to bail-outs (via the ECB or governments) has to be dealt with. While no one would appreciate a lecture from the UK Government, which has its own economic challenges to deal with, it’s time for Britain to engage with what’s happening across the Channel. The UK has already provided loan guarantees to Ireland and looks set to do the same for Portugal. For this price, it has every right to make the rational arguments for a debt restructuring that would start to unwind the debt in the system. The way Swedish Finance Minister Anders Borg has acted as a voice for economic common sense in the eurozone crisis, despite being outside the Single Currency, provides an example for George Osborne to follow.
Ironically, the UK’s relative distance from the eye of the political storm allows it propose the radical solutions that others wouldn’t dare.
Mats Persson is director of Open Europe.
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