Nightmare in Portugal
The Financial Times has a long, deeply depressing portrait of conditions in Portugal, focusing on the plight of family-owned businesses — once the core of the nation’s economy and society, now going under in droves.
This is what it’s really about. And anyone playing any role in our current economic debate, whether as an actual policy maker or as an analyst giving advice from the sidelines, should be focused, above all, on how and why we’re allowing this nightmare to happen all over again three generations after the Great Depression.
Don’t tell me that Portugal has had bad policies in the past and has deep structural problems. Of course it has; so does everyone, and while arguably Portugal’s are worse than those of some other countries, how can it possibly make sense to “deal” with these problems by condemning vast numbers of willing workers to unemployment?
The answer to the kind of problems Portugal now faces, as we’ve known for many decades, is expansionary monetary and fiscal policy. But Portugal can’t do those things on its own, because it no longer has its own currency. OK, then: either the euro must go or something must be done to make it work, because what we’re seeing (and the Portuguese are experiencing) is unacceptable.
What could help? A much stronger expansion in the euro area as a whole; higher inflation in the European core. Looser monetary policy could help achieve these things, but bear in mind that the ECB, like the Fed, is basically up against the zero lower bound. It can and should try to push unconventional policies, but it needs as much help as possible from fiscal policy too — not a situation in which austerity in the periphery is reinforced by austerity in the core, too.
What has happened instead, however, is three years in which European policy has been focused almost entirely on the supposed dangers of public debt. I don’t think it’s a waste of time to discuss how that misplaced focus happened, including the unfortunate role played by some economists who have done fine work in the past and will presumably do fine work in the future. But the important thing now is to change the policies that are creating this nightmare.
Portuguese Memories (Trivial and Personal)
A few readers might be interested in some maudlin memories from my youth.
You see, back in 1975, shortly after the overthrow of the dictatorship that had ruled the country for half a century, the governor of Portugal’s central bank, Jose da Silva Lopes, called on his old friend Dick Eckaus, a professor at MIT, to see if he could get some MIT people to come and offer expert advice. Sure enough, a team consisting (I think) of Eckaus, Rudi Dornbusch, and Lance Taylor showed up (I’m pretty sure Bob Solow also visited). They apparently did fine work putting together the national accounts, among other things, and Silva Lopes wanted more. Unfortunately, senior MIT faculty were not available.
So, in the summer of 1976 they got five MIT grad students: Miguel Beleza (a Portuguese national who would later serve both as governor of the central bank and finance minister), Andy Abel, Jeff Frankel, Ray Hill (who went off into the private sector), and me. Judging by later academic reputations, they got quite a group! The next year, by the way, they got David Germany, Jeremy Bulow, and, guess who, Ken Rogoff.
Portugal in the summer of 1976 was a bizarrely interesting place — still somewhat chaotic in the aftermath of both the coup and the withdrawal from its African empire (the hotels were filled with “returnees” from Africa placed there on a temporary basis). Lisbon often seemed like a fossil, with much of its appearance and infrastructure little changed since the Edwardian era. Democracy seemed shaky, although the truth was that the Maoist posters everywhere were deceptive; the democratic left had won pretty decisively by the time we arrived (although the TV was still showing East German programs about tractors, even as the film theaters caught up on a decade of Western porn).
The country, in short, was fascinating, lovable, and still very poor.
We had a reunion conference 25 years later, and Lisbon was, to be frank, a bit disappointing: it had become a normal, if charming, European city. But this normality was, as we all recognized, a wonderful thing: Portugal had emerged from a long, troubled history to become part of the basic decency of the European social model.
And now all of that is under siege.
I sometimes encounter Europeans who think my harsh criticism of the troika and its policies means that I’m anti-European. On the contrary: the European project, the construction of peace, democracy, and prosperity through union, is one of the best things that ever happened to humanity. And that’s why the misguided policies that are tearing Europe apart are such a tragedy.
Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed Page and continues as professor of Economics and International Affairs at Princeton University. He has taught at Yale, MIT and Stanford. He is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes. In 2008 Mr. Krugman received the Nobel Prize in Economics.
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