Portugal Should Quit the Euro to Restore Competitiveness

The following letter was posted in the May 9 edition of Financial Times:

Sir, Daniel Gros correctly emphasises that Portugal has more of an acute balance of payments problem, as exemplified by a gross external debt to gross domestic product ratio of around 230 per cent, rather than a public finance problem ("Portugal is delaying the pain it knows is inevitable", May 5). However, he does Portugal a great disservice by offering it the counsel of despair that it should follow Latvia's example to correct its large external imbalance.

It is true that over the past two years Latvia did turn around a very large external current account deficit, while maintaining its currency peg to the euro, through large public sector wage cuts and austere demand management policy. However, it did so at a staggering economic and social cost.

Latvia's real GDP fell by around 20 per cent while its unemployment rate increased to close to 25 per cent. At the same time, the weakening in Latvia's economy has thwarted the desired reduction in its budget deficit, which at 7½ per cent of GDP remains a far cry from the 3 per cent of GDP deficit needed to secure Latvia's entry into the eurozone.

In weighing its policy options, Portugal would do well to ask whether it is prepared to pay the social and economic costs that Latvia has paid to restore competitiveness and to correct its external imbalance within the straitjacket of euro membership. It might also consider that a collapse of its economy would highly complicate the attainment of its budget deficit targets and almost certainly raise its public debt to GDP ratio to well above 100 per cent.

These considerations might induce Portugal to conclude that the cost of continued eurozone membership is a price that is not worth paying and that exiting the eurozone might be a very much less costly way to restore international competitiveness.

Desmond Lachman,
American Enterprise Institute,
Washington

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman
  • Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's (IMF) Policy Development and Review Department and was active in staff formulation of IMF policies. Mr. Lachman has written extensively on the global economic crisis, the U.S. housing market bust, the U.S. dollar, and the strains in the euro area. At AEI, Mr. Lachman is focused on the global macroeconomy, global currency issues, and the multilateral lending agencies.
  • Phone: 202-862-5844
    Email: dlachman@aei.org
  • Assistant Info

    Name: Emma Bennett
    Phone: 202.862.5862
    Email: emma.bennett@aei.org

What's new on AEI

image The Census Bureau and Obamacare: Dumb decision? Yes. Conspiracy? No.
image A 'three-state solution' for Middle East peace
image Give the CBO long-range tools
image The coming collapse of India's communists
AEI on Facebook
Events Calendar
  • 21
    MON
  • 22
    TUE
  • 23
    WED
  • 24
    THU
  • 25
    FRI
Wednesday, April 23, 2014 | 12:00 p.m. – 1:30 p.m.
Graduation day: How dads’ involvement impacts higher education success

Join a diverse group of panelists — including sociologists, education experts, and students — for a discussion of how public policy and culture can help families lay a firmer foundation for their children’s educational success, and of how the effects of paternal involvement vary by socioeconomic background.

Thursday, April 24, 2014 | 12:00 p.m. – 1:30 p.m.
Getting it right: A better strategy to defeat al Qaeda

This event will coincide with the release of a new report by AEI’s Mary Habeck, which analyzes why current national security policy is failing to stop the advancement of al Qaeda and its affiliates and what the US can do to develop a successful strategy to defeat this enemy.

Friday, April 25, 2014 | 9:15 a.m. – 1:15 p.m.
Obamacare’s rocky start and uncertain future

During this event, experts with many different views on the ACA will offer their predictions for the future.   

No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.