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Portugal: When there's no light at the end of the tunnel

By Laura Smith-Spark, CNN
updated 6:14 AM EST, Tue December 20, 2011
Workers protest austerity measures during a 24-hour general strike last month in Lisbon, Portugal
Workers protest austerity measures during a 24-hour general strike last month in Lisbon, Portugal
STORY HIGHLIGHTS
  • Portugal is facing the toughest austerity measures in a generation
  • Workers are coping with cuts to pay and conditions, amid rising unemployment
  • "Hope is the last thing we can give up," says a business owner
  • Portugal agreed to a 78 billion euro ($104 billion) international bailout in May

Porto, Portugal (CNN) -- In Portugal's second city, Porto, crowds throng the main shopping streets, accompanied by the smell of roasting chestnuts and the twinkle of festive lights. Bacalhau, the dried, salted codfish traditionally eaten on Christmas Day, hangs in store windows framed by hand-painted wall tiles. Tourists wander past clutching maps and cameras.

But in Matosinhos, the fishing community that adjoins Porto, residents say the impression that all is well is far from the truth. Portugal's working families are feeling the impact of austerity measures imposed following a 78 billion euro ($104 billion) international bailout in May.

The country's austerity experience may signal what lies ahead for other European neighbors if the debt crisis that has shaken global markets is not resolved.

The government says the measures are needed to restore economic stability and will pave the way for Portugal's recovery. Meanwhile, among the Portuguese people, it is still unclear if the measures will put the country back on track and if the nation will continue to accept them.

Butcher Joaquim Barbosa, whose business has been in the family for more than half a century, says his trade today is a third less than it was a decade ago -- and as the latest cuts bite, his business is going downhill even faster.

"This is the worst year we've had -- and I expect next year will be even worse," he said.

IMF approves bailout loans to Portugal

Portugal's workers face wage cuts and longer hours at work in 2012, while many pensioners will see their retirement benefits slashed.

Unlike the angry scenes in Greece, where protesters clashed with riot police in Athens as austerity measures were debated by lawmakers, the response in Portugal has so far been almost entirely peaceful, even during a 24-hour general strike last month.

However, people are changing their habits in order to cope, some business owners say.

Many windows along the main shopping street in Matosinhos are advertising discounts of up to 30%, a sight normally seen only after Christmas. Barbosa said some of his clients are buying less and others have disappeared altogether, probably opting to buy cheaper meat at supermarkets that can afford to drop prices.

Fernanda Lopes, 60, who runs a stall selling colorful fruits and vegetables in the municipal market, picks up two tomatoes, one large, one small, to illustrate the change in her business. Before, customers would have selected the larger tomato, she said, but now they choose the smaller, less expensive one.

"I'm hoping to find the light at the end of the tunnel because hope is the last thing we can give up," she said. "But it feels like a big tunnel and we haven't seen the light yet."

Lopes does not intend to abandon the business her mother started 55 years ago, in part because it belongs to a tradition of small-scale commerce she fears may die out, but there's no denying times are tough.

Shared pain

In the lower market hall, fishmonger Deolinda de Sousa Rato, 70, can no longer find customers willing to pay for expensive monkfish, she says, gesturing toward a glistening specimen on a bed of ice. During the week, the stall her daughter now runs makes 10 or 15 euros ($13-20) on a good day, she said. In a coastal community where people habitually consume more fish and seafood than meat, the fall-off in her family business is a sure sign that households are feeling the pinch.

"The whole year has been a disgrace," said Rato, who retired five years ago, but helps out on busier Saturdays. After 48 years working in the market, she collects a 300-euro ($400) monthly pension and fears that may drop in the future if more cuts come.

Lopes said the only small comfort is that the financial pain is being shared by everyone, but she worries the country's young people do not have the experience to cope.

"We are from a generation that has been through a lot before," she said. "We've been through a dictatorship, when the country was very poor. The younger people haven't been through so much, they are not used to this type of impoverishment."

Lopes' nephew has moved to northern France for a job raising livestock, she said. Meanwhile, relatives in Brazil, a Portuguese-speaking former colony whose economy is booming, are urging other family members to move there in search of opportunity.

Asked what could improve trade, Barbosa, the butcher, has an immediate answer: more jobs.

"Everyone is very nervous because they don't know what they are going to do with their lives"
Sofia Carvalho, university worker

"If everybody had a job, it would be one of the solutions," he said.

Countrywide, unemployment stood at 12.4% in the third quarter of 2011, up from 10.9% a year earlier, according to the national body Statistics Portugal. The rate is expected to rise next year among the nation's 10.6 million people.

Among those with a job, public sector workers are being paid about 15% less than they were a year ago, with further austerity measures looming in the New Year, says Manuel Caldeira Cabral, a professor of economics at the University of Minho in north-western Portugal.

Portugal has a system in which workers receive 14 paychecks a year, with an extra check in the summer and in the Christmas holiday period. This year, for those earning above a certain amount, a 50% tax has been levied on their extra Christmas check and next year they won't get one at all. They will also lose the summer check. The two extra checks help many families pay for big-ticket items like car insurance, home improvements or vacations.

In the private sector, employees face greater job insecurity and all are being asked to work an extra half hour a day for no more pay, Cabral said.

The changes come against a backdrop of relatively low pay in Portugal. The average was just over 1,000 euros ($1,340) a month in 2008, according to Statistics Portugal, while the country's minimum monthly wage is only 485 euros -- a little more than a third of the minimum wage in France, according to the Federation of European Employers.

Another squeeze on living standards will come soon in the form of an increase in sales tax to 23% on many goods. Transport and energy costs are also going up.

Meanwhile, cuts to pensions above a certain threshold will mean more hardship for retirees. And for young people finishing their education, the prospects of finding a job look ever more remote.

No jobs for students

Filomena Carvalho, 53, has worked in the public education system for the past 25 years and currently teaches at a high school in the Porto area.

Her students are largely taking professional courses to qualify for work in the tourism industry, but of the 22 who graduated this summer, only one has found a job so far, she said, working in a hotel reception.

"We've been through a dictatorship, when the country was very poor. The younger people haven't been through so much, they are not used to this type of impoverishment"
Fernanda Lopes, market stallholder

"The students worry about finding jobs and it's hard to motivate them," she said. "They end up being motivated more by (getting) social security than by work."

Teachers, meanwhile, are struggling to remain motivated in the face of wage cuts, diminishing promotion opportunities, the threat of future job losses and an unpopular new evaluation system, she said.

College graduates are faring little better.

Pedro Calado, 25, graduated as an electronics engineer from the well-regarded University of Porto this year. Unable to find a job in the commercial sector, he is working for considerably lower pay in a university research lab and is considered lucky to be employed at all.

Morale around the university is low, he says, citing a recent outbreak of stickers plastered around campus with the words "Portugal is crap." While he strongly disagrees with that sentiment, he said, it reflects the hopelessness felt by young people who have a good degree but no prospects.

Cabral, the economist, says that although the austerity measures are painful for many people, they see the alternatives, such as mass layoffs, as worse.

The politicians have also, for the moment at least, forged a consensus, he said.

The measures passed last month by Prime Minister Pedro Passos Coelho's center-right coalition government, elected in June, go further than those proposed by the previous Socialist government, which collapsed after failing to push through its own reforms. But the Socialist Party chose to abstain in the austerity budget vote rather than oppose the plan, signaling a broad support for the measures, Cabral said.

Presenting the budget, Passos Coelho told parliament it was needed to stabilize Portugal's finances and "prepares the country's economic recovery," according to state news agency Lusa.

Mariana Abrantes de Sousa, a U.S.-trained economist and former investment banker who now works as a financial consultant, agrees that the political consensus is smoothing the path for reform.

Portugal is "very much on the right track" in cutting spending and reforming pensions, she said, and must also reduce imports of goods, including food.

But while austerity is important, she said, creditors should also be forced to share the pain through debt relief for Portugal, including agreements on debt refinancing, with longer repayment terms and perhaps lower interest rates.

Crucially, people will find it easier to accept the cuts because they are being quite widely shared, she said.

'Everyone is nervous'

There are other reasons to remain positive about Portugal's ability to weather this crisis, said Abrantes de Sousa, pointing to the country's track record of recovering from past crises, for example in the early 1980s.

However, political analyst Pedro Adao e Silva sees rising unemployment and lack of youth opportunity as potential catalysts for social unrest.

Having cast off a decades-long military dictatorship only 37 years ago, Portugal was already among the poorest countries in Europe before the global financial crisis took its toll.

"This is the worst year we've had -- and I expect next year will be even worse"
Joaquim Barbosa, butcher

It has historically had high employment rates and people are accustomed to strong social protection for the unemployed, which will now weaken, Adao e Silva said. This will create huge political pressure in a country where people have over the past 25 years developed expectations of a better standard of living but where the gulf between rich and poor remains wide.

He predicts that the current political consensus will break down as the austerity measures bite next year, affecting public sector workers and retirees in particular.

Portugal's government is meanwhile powerless to take other remedial action, he said. Tied to the euro, it can't devalue its currency as it did during a recession in the 1980s to become more competitive. And it can't risk leaving the euro because its debts are in the currency -- and would become even more crippling if it was not part of the bloc.

So how did Portugal find itself in this dire situation?

Abrantes de Sousa, who worked for the country's Finance Ministry from 2006-2010, said that as money came flooding in from international lenders in the last decade, Portugal was able to build up unaffordable levels of debt.

"Anyone who said we were borrowing too much was quashed," she said, herself among them.

Nonetheless, Cabral draws a contrast with heavily indebted Greece, saying Portugal was taking measures to balance its books and that its deficit was below 3% in 2007-2008, similar to that of Britain and France.

He says many Portuguese blame their country's current situation on the mishandling of Europe's debt crisis by the French and German leaders, Nicolas Sarkozy and Angela Merkel, and are very nervous about the new threat to big economies like Spain and Italy, who have seen government borrowing costs soar in recent months.

"They feel that Europe is being mismanaged and there's a feeling that even if Portugal does everything right, it doesn't mean it's not going to be caught up in the turmoil of Europe," Cabral said.

He sees a glimmer of hope in Portugal's export market, which grew by 17% in the first half of 2011, compared with the same period last year, and has prevented the country's GDP slumping as much as predicted.

But even as the government takes steps to cut public debt and boost growth, private debt remains an obstacle to recovery in a country where years of easy credit have led many to over-extend themselves.

Sofia Carvalho, 38, who works on a student exchange program at the University of Porto, took on a second job, in sales, in order to pay for a new car and keep up with costs after losing a fifth of her pay in this year's cuts. But she still has to watch what she spends, she says.

And even those who have enough money to pay the bills, for now at least, are suffering the psychological effects of the crisis, she adds.

"Everyone is very nervous because they don't know what they are going to do with their lives," she said.

"For years and years the government spent and spent, but now they just cut everything -- and the workers are the ones who take the burden."

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