05 July 2013

BoP/da Silva Costa: Portugal's situation in the post-Troika period

Speaking at the "Portugal post-Troika" economists meeting in Lisbon, da Silva Costa said that for a successful adjustment of the Portuguese economy and to ensure its prosperity within the monetary union, certain domestic and external conditions must beestablished.

Conditions for a successful exit of the Programme

Looking ahead, a new institutional framework must be established, on the basis of a broad consensus, fostering behaviours consistent with the maintenance of fundamental macroeconomic balances and the economy’s competitive capacity. In this context, the first point to have in mind is social cohesion. The ongoing sectoral shift in the Portuguese economy suggests that unemployment rates should remain high over a protracted period of time. Safeguarding social cohesion is key so we can manage unemployment in line with its structural nature. We must be able to free up and generate entrepreneurial skills, attract foreign direct investment and boost our productive sector. At the same time, we must create support schemes to re-train long-term unemployed with a view to increase their employability.

At the same time as a political consensus and consensus among social partners is needed, external conditions supportive of our adjustment must be put in place. These external conditions depend on the solidarity of our European partners, which can only be accomplished if we prove to have a sense of responsibility and the ability to comply with our commitments. The keyword in this whole process is "trust".

As regards short-term external conditions for a successful exit of the adjustment programme, I consider it crucial that European mechanisms be in place so as to address incidental factors. To deal with any excess volatility in financial markets and, consequently, prevent investors from moving away from Portuguese debt, European intervention mechanisms in the primary and secondary Portuguese debt markets must be in place, which, in turn, entails the adoption of a precautionary programme. The precautionary programme will help enhance the credibility of the macroeconomic adjustment process in the period immediately after the conclusion of the Programme. The associated conditionality is, on the one hand, the counterpart to our European partners’ solidarity and, on the other hand, a key element to consolidate market confidence in the country’s economic policies.

Turning to medium-term conditions, it is crucial that the European Union implements mechanisms of economy policy coordination and establishes a process of cooperative European growth. In this context, European countries with a favourable economic situation should make use of the leverage available to them to expand their domestic demand, contributing to a more balanced and sustainable adjustment of the whole economy. The establishment of a Banking Union is a central pillar for fixing financial fragmentation in the euro area and breaking the link between sovereign risk and bank risk.

In sum:

• For a successful adjustment of the Portuguese economy and to ensure its prosperity within the monetary union, certain domestic and external conditions must be established. By proving that domestic conditions are in place, external conditions will ensue and be strengthened.
• In terms of domestic conditions, social cohesion must be ensured and consensus among social partners, as well as a broad consensus between political players, must be reached.
• The necessary political consensus does not concern policies to be implemented but only the limits and constraints to their definition and implementation.

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