Austerity + Industrialization = Hawaii (or rather Madeira?)

Industrialization again! The European Union should not sustain the illusion that the European economies should be based on services. Alvaro Santos Pereira, who is the current Minister of Economy and Labor of Portugal, says in his interview to that Europe is taking the wrong way by shifting to service-oriented economies. According to him, the economic growth can only be restored by reviving industrial, agricultural, and mining activities that take into account the different strengths of countries. This must become part of the austerity program that reduces public debt but preserves unemployment.

The European Union needs to be restructured in a way that it will be able to stimulate this process, say the Minister, who is also an internationally recognized economist. His government aims to reduce the role of government, strengthen market forces, and provide better conditions for foreign investors. One of his most important messages is that Europe makes a historic mistake when resisting to the shale gas revolution. If the countries further oppose the shale gas exploration, unemployment will increase, we will become even less competitive (compared to the United States), and we will not be able to get out of the financial crisis.

Zentai Péter: As I read the conflicting news and reports from Lisbon, it is impossible to tell whether good or bad things happen in Portugal. Is there an exemplary, positive turn in the economy or the continuation of the recession lasting for thousand days?

The truth is that Portugal has been stagnating for 10 years. We have barely had any growth, so the country is indeed in a crisis. However, in the last few months, we exported a lot and became the second fastest growing economy in terms of exports after Germany – at least within the Eurozone. It is the first time since 1943 that Portugal has a positive trade balance, in other words, we are exporting more than we are importing. Tourism is also flourishing: the number of holiday-makers increases by 7 to 8 percent a year. Outwardly, we appear as being able to respond to external changes quite well.

This must be due to internal adjustment and restructuring. How else?

The overall growth is still very small. In fact, the data of the last few months show a little positive trend: the shrinkage of the economy stopped, and now, we seem to get out of the technical recession.  But it is only because of the export growth. We export 77 percent of our products to Europe, thus, it highly depends on how Europe performs. At the same time, thousands of small and medium enterprises strengthen ties with other Portuguese speaking countries, especially, in Africa. Trade and investment flows have been intensifying in Angola and in Mozambique in the last years – even more than I expected. However, these economic links do not counterbalance the fact the

Portugal belongs to Europe: is its primary market. Thus, now, we have to deal with the crisis, which hit us harder than the Northern European countries. One of the biggest problems is that the Portugal has cumulated a lot of external public and private debt. In addition, we lost our competitiveness when we entered the Eurozone. The situation even worsened when China joined the WTO (World Trade Organization) and loaded the Western world with products which our traditional economy was based on. We simply cannot stand against them. (The irony is that in Angola and Mozambique, again the Chinese are the biggest competitors of Portugal.) The third reason for the weakening of Portugal is that it faces competition from the Eastern European countries that have become members of the European Union recently. On the top of it all, the financial crisis hit the country. For ten years, the imports exceeded the exports by almost 10 percent of the GDP (Gross Domestic Product). It is hard to picture all that the GDP.

The current government (which has been on power for two years) is focusing on restoring competitiveness and compounding debt. For that, we implement a large labor reform, cut the bureaucracy, privatize companies, and get rid of the golden shares, a tool for government intervention (the holder of the golden share has veto power in the decision making of a privately owned company – ed.).

Apparently, this led to street protests. I can see it in the news, on the Internet…

In order to reduce public debt, we had to impose severe austerity and people had to make big sacrifices. The more we focus on the debt consolidation and the more important structural adjust get, the less likely it is that we can restart growth. Although we are on the right way and our external adjustment is successful for far, its positive effect cannot be felt in everyday life and unemployment is increasing.

I assume that – just as in Greece – the radical sentiments have strengthened. Extreme right or extreme left parties might have become popular and more and more people might be led to the conclusion that Portugal should leave the Eurozone or even the European Union…

First of all, Portugal is in a completely different situation than Greece. Greece is an exception in the EU; its issues are far more complex and serious than those of any other Southern European countries. I do not see any extremist movements in the Portuguese politics.

Not even the extreme parties, such as the Communist Party promote the idea of leaving the EU. It is out of question for everybody. If we withdrew from the Eurozone, banks would collapse, unemployment would increase dramatically, the standard of living would plummet, and there would be unforeseeable consequences. Maybe, it was a mistake or too early for us to join the euro but leaving it would be an even bigger mistake.

So none of the parties regard the European Union and the way it operates as a failure? All of the causes of the Portuguese crisis you mentioned are related to the EU membership and globalization…

Clearly, the European Union needs to be reformed. Our country, however, still profits more from being a member as if it was not one. The problem of Portugal is the same as of the EU: it is not competitive enough. Not market friendly enough. This is why it drops behind the United States and Asia in term of competitiveness. We need to break down the market barriers that restrict free market competition.

Furthermore, we should admit that we were wrong when we insisted that services should become the basis for the Europe economies. Europe though that is could become a strong economic power if it improves services and technology related to them. Abandoning industries, agriculture, and mining was a tremendous mistake! My government strongly promotes reindustrialization. It backs the idea of bringing back small and medium industries and industrial production. Without this, we will not be able to create jobs.

This is what the Hungarian government says, as well. But the United States is already doing it…

The U.S. does it well. There are two movements going on simultaneously: the “third industrial revolution”, which is a technology-based industrialization creating jobs, and the energy revolution. The energy revolution is based on shale gas providing lowering the prices of all of the energy resources, especially, the price of the gas. Due to the cheap energy, American companies become increasingly competitive.

In Europe, they always pass over the importance of shale gas; moreover, they rigidly oppose the exploration process.

Again, I think it is a terrible mistake. Europe is letting a historic chance pass by and hindering itself from catching up economically, thus, further increasing unemployment. Without reindustrialization, the unemployment issue will exacerbate social tensions. There is nothing we can do but investing in a new industry policy and gaining competitiveness.

If all of the European countries start industrializing, harsh competition will evolve between them. Also, protectionism can resurge, which is already threatening us.

Every country has to adjust the reforms and specialize in different things. Of course, it would not make any sense to open mines everywhere or emphasize agriculture too much… European states have capital and highly qualified labor force to specialize and invest in industrial, technological sectors that make them the most competitive. The EU is not preventing that. However, its institutions must be reformed in a way that they will be able to provide proper incentives to countries. In order to increase competitiveness and attract foreign investors, they have to lower taxes for companies, reduce red tapes, and provide capital for small and medium enterprises and venture capitalists. If the right incentives are given to people, they will respond in the right way – provided that they have the necessary knowledge and skills.

Undoubtedly, the economic, financial, and social environment of the Member States is so fragile that the future of the European Union is questionable. The potential collapse of the EU would be extremely dangerous for a lot of counties. However, in my opinion, it is a remote possibility. We need to create an economic growth that absorbs unemployment, thus, prevents exasperation of social conflicts. That is why I am stressing the most important task for Europe: reduction of public debt, financial consolidation, and creating jobs. The latter simply cannot be achieved without reindustrialization.