"THE PORTUGUESE MIRACLE

Far from Brussels dogma and French fiscal policy, Portugal's success is based on boosting investment and cutting taxes, explains economist Sébastien Laye

We need to move away from slavish reverence for economic policy in order to better understand the lineaments of each country's success. "Let's take the case of Singapore. It looks like an economic miracle. But the miracle is less one of inspiration than one of perspiration."These words of the economist Paul Krugman in 1996 should lead us to put into perspective the different economic models: the Japanese model, the Anglo-Saxon model, the Scandinavian model.

But there is one country in Europe that has not only emerged from the abyss of the financial crisis, but is now in an insolent state: it is Portugal. In many respects, analyzing the reasons for Portugal's current economic success provides intellectual weapons that the current majority is sorely lacking in order to finally overcome unemployment and emerge from sluggish growth.

First of all, the facts: while in 2013 unemployment culminated at nearly 17.5 %it is now 7,9 %, while in France unemployment seems to stagnate at around 9 %. It is hard to remember a time when the differential between the two countries was to Portugal's advantage... As regards public finances, the deficit is 2 % of GDP on average, compared with just under 3 % in France, even though Lisbon's stock of public debt, inherited from the crisis and previous mismanagement, still peaks at 122 % of GDP.

Public finance overhauled

After negative growth rates between 2011 and 2013, the Portugal recorded a growth of 1.6 % in 2016 and 2.7 % in 2017 : unlike France, this pace is not weakening, since in the first half of 2018, the growth gain was 0.9 % (0.4 % in France) with thus the certainty of having a final growth still well above 2 % in 2018 ; and this even though the Portuguese economy does not need the same level of growth as France to create jobs.

This is no doubt due to a labor market structure dominated by services, which is much more intrinsically flexible, even beyond labor law: this phenomenon is evident in seasonal employment in the hotel and restaurant industry.

Sustained domestic demand

But most of Portugal's current success can be explained by two phenomena: the revival of investment on the one hand, and tax competition on the other.

Portugal's current left-wing majority has consciously ignored Brussels' dogmas. Brussels has warned Lisbon repeatedly, criticizing the lack of labour law reforms and budgetary frameworks, before having to tone down its criticisms in the face of Portugal's insolent success. there has been no structural reform of the labour market to make employees' rights more flexible, no lowering of social protection, and even less freezing of the minimum wage or retirement pensions.

Portugal has chosen to support domestic demand by boosting investment, which at 17 % of GDP is close to the German level but with lower inflation. The government has massively lowered taxes for the middle classes and the burden on small businesses, while promoting the upmarket nature of its industry, moving away from a low costto boost its export market share.

In a way, the Portuguese success and the French stagnation are only the obverse and the reverse of the same reality, in a curious game of communicating vessels on a European scale.

In Lisbon, growth can be seen in the enthusiasm of entrepreneurs and especially the youth, in the internationalization and optimism of investors: the whole world comes to do business in Portugal. The contrast with France and its false calm in the summer of 2018 is all the more striking, against a backdrop of breathless growth and shattered hopes...

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