The British economist David Ricardo told the Portuguese in the nineteenth century to sell their wine to England in exchange for cloth. Whatever the virtues of comparative advantage, the Portuguese sold their wine, but also their textiles, until they joined the EU in 1986. At that point, the textile industry was destroyed by cheap Chinese imports.
Adopting the euro in 1999 did not restore the old industry or create new ones. Low interest rates set off a housing and real estate boom. More than half of the nation?s housing is less than twenty years old. I recently drove from Portugal?s second largest city, Oporto, to a conference in Braga, one of the oldest Christian cities in Europe. Along the thirty-two mile route, I saw no factories but many attractive new houses. Portugal has a nouveau riche elite based in real estate that flipped houses and land as often as Floridians did in the United States.
Portuguese weather still ensures flourishing wine and tourism industries. But this is not enough to support a European standard of living. The euro encouraged imports and consumption, but did nothing to develop industries to employ Portuguese workers. The rector of Braga?s University of Minho, Antonio M. Cunha, talks about partnerships with business, biotech, and nanotech–the panaceas of twenty-first century development. On the other hand, Socialist Prime Minister Jose Socrates has levied a ?crisis tax? on state workers in deference to the European banks and IMF.
Fernando Teixeira dos Santo, the Portuguese Minister of State and Finance, worries about the sovereign debt crisis. When I asked him how Portugal would rebalance its economy and end its trade deficit, Teixeira dos Santo ignored the question, telling me that he hopes for a European fiscal union, the necessary complement to the monetary union. But there is no evidence that German taxpayers will provide the budgetary support that Washington provides for the poorer U.S. states. All this adds up to deflation, even though that will lead to still slower growth and make it more difficult to reduce budget deficits. No one in Portugal talks openly of this fate, but the sober and disheartened outlook of every Portuguese I spoke with testified to the grim acceptance of this future.
Photo: Portugese Prime Minister Jose Socrates (José Goulão/ Wikimedia Commons)