ETV - Portugal’s austerity measures and the impact on business innovation

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Post published in the Innovation Models Blog following the interview of Hugo Mendes Domingos in ETV's (Portuguese Economic TV) Closing Bell in September 19 2012 about the austerity measures announced by the portuguese government.

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ETV - Portugal’s austerity measures and the impact on business innovation

  1. 1. Portugal’s austerity measures and the impact on business innovationMeasures announcedOn 7 September 2012, the Portuguese Government announced new austerity measures thatinclude an increase (of 7 percentage points) in the contribution of workers towards socialsecurity together with a decrease (of 5,25 percentage points) in the contribution of companies.This would place Portugal broadly in line with Germany. The first measure was aimed at fightingthe increased cost with social security and generally to help achieve the new deficit goal, agreedwith the ECB, EU Commission and IMF. The second measure taken was aimed at providingcompanies with sufficient funds (savings from the tax break) to keep jobs and fosteremployment.Impact on the economyThis measure should help support the social security accounts that are suffering badly from therise in unemployment. Moreover, the Government expects that this measure will supportemployment and increase competitiveness for firms (according to finance minister Vitor Gaspar,this measure will create 1 to 2% employment by 2015), as a result of lower costs for employers.However, these effects are unlikely to have a significant impact in the short run. A recent studyby four economists from the University of Minho revealed that the net effect of measures willactually increase the unemployed by 68 thousand. The economic outlook remains sharplyrecessionary for Portugal, and cloudy for most of Portugal’s trading partners. This scenario isnot favorable for the predictions made by the government.ReactionsReactions to the announcement of these austerity measures were widespread andpredominately negative. In Portugal, business leaders rose against the measures saying theywere unnecessary and will not benefit their companies. Paulo de Azevedo from Sonae, one ofthe largest business groups in Portugal, claimed that these measures would be harmful for non-exporting companies. The announcement also shook the political sphere with the oppositionand even some members of the Government party (PPD/PSD) opposing and criticising themeasures. The coalition that enabled the government to have majority in the Portugueseparliament was weakened with the head of CDS/PP publicly admitting to be against themeasures.
  2. 2. Source: BloombergInvestors’ reaction was ambiguous or indifferent as we can see that from the chart above. Itshows the yield to maturity of Portuguese 10 year government bonds and its evolution lastmonth. The first drop which occurred on 5 of September was an obvious positive reaction to theECB’s announcement of its intention to purchase sovereign debt from struggling countries.However, the reaction after the announcement of these measures (on 7 September) wasnegative, at first glance. However, it is hard to isolate the effect, due to a high number ofrelevant events that might have also affected the yield. It is unclear whether the markets arefactoring in one of the largest demonstrations in the history of the country having taken placeduring the weekend.The European Commission admitted that the government could drop the measures if it couldcome up with an alternative to fulfill the adjustment programme’s goals as agreed with the IMF.A year ago, IMF representatives alerted to the risks of these measures and their intendedpurpose. The delegates believed that “it is not obvious that promoting employment is a goodsubstitute for increased efficiency”. Moreover, the head of the IMF delegation, Adebe Salassi,recently stated that these measures were not enforced by the delegation and were solely aninitiative of the Portuguese government.As these measures are likely to affect the contributions to social security in Portugal, we find itrelevant to compare these with other European countries. Looking at the overall map ofaggregate contributions of employees and employers for the European Union countries as apercentage of GDP until 2010, we find that Portugal is below other countries in terms ofcontributions and is closer to the UK than to other southern European countries such as Spainor Italy, for example.
  3. 3. 20.00   18.00   16.00   14.00   EU  (12,9%)   12.00   Portugal  (9%)   10.00   Spain  (12,3%)   8.00   UK  (7,8%)   6.00   Italy  (13,4%)   4.00   France  (16,7%)   2.00   Greece  (10,9%)   .00   1995   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010  Source: EurostatInnovation Models insightHere at innovation models, our opinion/reaction about this measure is also mixed. HadGovernment announced that the proceeds from the reduction in employer contributions weredirected at developing innovative projects that might foster employment in the long run, wewould consider these measures as positive. This would have been difficult to implementanyway. We believe that the source of the economic difficulties in Portugal has not beenaddressed yet.This matter was discussed in ETV’s “Closing Bell” programme on 18 September (inPortuguese): Youtube link - http://www.youtube.com/watch?v=S6UN9k8lUtI&feature=plcp  

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