Can we already say that Portugal is no longer one of the European Union's bad pupils? Which countries are the new weak links in the eurozone from a financial point of view?
Rémi Bourgeot: Portugal has come a long way. It has not really been one of the Troika's "bad pupils" for several years, since it had applied the austerity cure without flinching too much in exchange for a 75 billion euro aid program. Portugal has even had the "luxury" of an anti-austerity coalition government since 2015, which has, at least on some expenditures, deviated from the fiscal policy that was imposed. The country has benefited from a chain of events that has allowed it to limit the damage.
The austerity package was significant but less unreasonable than in the case of greece, and the country was able to exit the program, safe from the ECB's ultra-expansionary policy, when many thought a second one would be necessary. The collapse in borrowing rates allowed Portugal to refinance its debt directly on the markets, with rates falling much faster than would have been possible simply because of economic improvement. Despite the acceleration of growth and the massive decline in unemployment from over 16% during the crisis to less than 9% today, Portuguese debt remains at very high levels, around 130% of GDP. S&P's decision to upgrade Portugal's rating to investment grade reflects this overall positive momentum, particularly in terms of growth.
Economic conditions have generally improved in Europe, particularly due to the ECB's massive purchase program and the depreciation of the euro since 2014. This recovery and liquidity has supported just about every country in the South, but the situation remains bad. The banking crisis has not been resolved, especially in the Italian case. As we have seen during the year, the rules of the banking union, which consist in making the creditors of the banks contribute, remain unenforceable and the States are still in the front line. Italy, but also Spain and even Portugal, remain major sources of concern in this respect. In Greece, the situation has improved with a return to growth after a real depression that saw the country lose a quarter of its economic activity, but the situation remains very dilapidated, despite this somewhat mechanical rebound after such a serious crisis.
The rating agency considers the country's outlook to be stable and is optimistic about its growth over the period 2017-2020. What about the other members of the PIIGGS? Do other troubled countries have similar dynamics?
The improvement in the economic situation is fairly widespread among the so-called peripheral countries. This is not a situation unique to Portugal. Most countries have benefited in recent years from a combination of considerable monetary support, a gradual exit from the most severe austerity measures, and falling commodity prices that have benefited importers. This improvement should not, however, cause us to lose sight of the structural problems affecting the eurozone. The banking crisis mentioned earlier is a key point, and more generally the monetary union is still not really equipped for times of crisis. We will see, as soon as the next crisis hits, a resurgence of concerns that were thought to be definitively over. The ECB has somehow changed its nature by becoming a real central bank ready to support public debts to ensure the survival of the currency it is responsible for. A change of leadership at the head of the institution may somewhat call this achievement into question. But above all, the banking union has not really been implemented, particularly with regard to the absence of a common guarantee for bank deposits. And it is clear that the proposals for a substantial common budget put forward by Emmanuel Macron have come up against a wall. Everything is getting better and better, on the basis of a very deteriorated situation... and until the next crisis.
S&P downgraded the EU on June 30. Can Portugal's recovery reverse this trend?
S&P had lowered the EU's rating on June 30, 2016 in the wake of the Brexit vote from AA+ to AA. On the one hand, the agency underlined the challenge to the cohesion of the Union that the British vote illustrated. On the other hand, it noted the budgetary difficulties that the departure of the United Kingdom represents for the EU. Moreover, the rating, even if lowered, was accompanied by a stable outlook and was still based on the idea that the British budgetary contribution would be honoured. A chaotic exit due to a failure of negotiations in particular could change the situation, but we are not there yet.
Beyond the Brexit issue, the economic recovery that Europe is currently experiencing generally supports the creditworthiness of the EU, which is estimated to be close to that of its most creditworthy members. The improvement in Portugal's rating does not have a significant impact on the EU's rating, but it illustrates this more general trend, the limit of which still lies in the structural fragility of the European construction, particularly from a monetary point of view.