Wednesday, January 12, 2011


It’s looking as if Portugal is the next eurodomino. I was hoping not — mainly, of course, for the sake of the Portuguese (I did my first ever policy work there back in 1976, and have always had fond memories), but also selfishly, because it’s by far the blurriest of the troubled peripheral countries.

What I mean by that is that the Portuguese macro story is harder to tell than those of Greece, Spain, and Ireland. Greece was excessive government borrowing; Ireland and Spain, housing bubbles. Portugal, by contrast, wasn’t all that bad fiscally — debt/GDP on the eve of the crisis roughly comparable to Germany. But it also didn’t have surging house prices. There was a lot of private-sector borrowing, but it’s not that easy to explain exactly why.

What’s clear, however, is that at this point Portugal faces adjustment problems similar to those of Spain, and possibly worse. Prices and labor costs are out of line with the rest of the eurozone; getting them back in line will require painful internal devaluation, aka deflation; and given the high levels of private debt, deflation will have nasty side effects. Tolstoy was wrong: many unhappy countries, at least in Europe right now, are pretty much alike.

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