Portugal's chips are in the European Recovery Fund

The way in which Portugal sees the restoration of a certain normality faster will depend to a great extent on the European response, especially with regard to the final format, a key aspect in order to contain the severity of the short-term economic impact.

Portugal's current framework regarding the post-pandemic future has been raising natural concerns, not only because of the economic and social severity it can bring, but also because of the prolonged time in which mobility restrictions can be maintained - especially if there is a second wave of the virus that leads to a setback in the process of opening European economies in the last third of the year - making the situation potentially disastrous in terms of the Portuguese State's ability to continue to provide support to companies and families, maintaining the balance of the sustainability of accounts feasible public policies.

With the weight of the opening of the national economy to reach a significant value (exports were responsible for about 44% of GDP last year), and with Tourism weighing around 19,1% of the product, the country is in a situation of complex balancing exercise. Much of the ability to quickly recover activity and employment at national level will depend on the incentive that comes from the European Union, especially from the European Recovery Fund that is being discussed this weekend.

European response starts to gain dimension and credibility

As a general rule, responses from the European Union have traditionally been considered too slow, supported by budgetary readjustments (that is, aid that was already set aside for a given purpose, which is then reallocated to the same country, albeit for a different purpose) and , finally, very based on the creation of new indebtedness.

This time, and although late, the answer seems to live up to the demands. First of all, because it is “new money”, raised in the market in an almost mutualized way and specifically addressed to the pandemic crisis, and which, afterwards, in the distribution to countries, does not constitute a mechanism that relates only to the debt format. Finally, it is also based on a mechanism that is more coordinated with the other monetary responses, whether from the European Central Bank, or even from all the other solutions that are already on the ground.

With the new fund already implemented on the ground, eurozone countries will potentially have a high financial capacity for the recovery phase. In total, the European response to Covid-19, in immediate terms and with a view to recovery from 2021, would add 1,3 billion euros in global instruments, including the three short-term mechanisms - European Mechanism credit line of Stability, lines of the European Investment Bank and SURE for the labor market - with an amount of 540 billion, and the now proposed Recovery Fund of 750 billion euros.

A solution allows not only to act in a short-term logic, but also in terms of reforming the European economy in order to allow long-term growth, through greater commitments to the circular economy, sustainable growth, and betting on clean energy and technology . But, above all, it ensures that countries with worse fiscal balance conditions, such as Portugal, can have support to revitalize their economy, which they would hardly achieve through traditional debt solutions, minimizing the risk of a new sovereign debt crisis.

The delicate anatomy of a Portuguese miracle

Portugal was one of the European countries that most quickly announced a response to the Covid-19 outbreak, with the Government implementing the first containment measures on March 12, and then, on March 18, announcing the state of emergency with more restrictions, including the duty of self-isolation, temporary restoration of border controls and closure of commercial activities. However, the deflation strategy has not been going well, and after the reopening (namely of the borders with Spain in early July) Portugal had several problems with the control of the sanitary front that meant that some municipalities in the metropolitan area of ​​Lisbon had to retreat by imposing restrictions, such as the ban on gatherings with more than 10 people and the closure of commercial establishments at 20:00 pm (except restaurants).

Externally, the end of the perception of an exemplary Portuguese miracle was evidenced by the exclusion of Portuguese nationals from the first safe and quarantined nationality lists of several European countries, with emphasis on the United Kingdom, which published them more recently. This affects how Portugal can be perceived in the reopening of the Schengen area and, consequently, the relaunch of the economy and one of its main sectors, ie, tourism.

This combination of factors creates a difficult scenario for Portugal on a number of fronts. If we are considering a 50% drop in tourist arrivals in 2020 that several observers speak of (and that may even be an optimistic scenario), the negative impact will be around 4% to 5% of the value created in terms of product. The shock could further affect the economy in general. The confidence indexes for industrial companies and services reached historical minimum levels, as well as that of consumers, readings that condition consumption expectations and generate a complex cycle of contradiction, in which even those with the power to buy retract given the uncertainty of expectations for the future.

At the same time that the more traditional sectors are suffering due to the deterioration of national consumption, as well as less impetuous activity in exporting sectors with some relevance, the recent State interventions in companies such as TAP and Efacec are creating financial responsibilities in budgetary terms that, in the long run, will remain uncovered. Last but not least, the Portuguese financial sector, which is still healing the wounds of the last great crisis, as the fragility of the pandemic impacts are making itself felt, it may again see its balance sheet deteriorate due to potential increase in bad debts - and eventually lead to new capital needs.

The opportunity lies in Europe's strategy

All the fronts that have to be faced to avoid a disruption of the system at the national level point in the same direction, which is the need to put greater means to restore confidence in the post-pandemic period and promote a structural overhaul of the economy for the medium term .

Only with the means at the disposal of national decision-makers, the risk of Portugal being in a situation of enormous fragility is extremely high, since the levels of public indebtedness necessary to contain the recession and revitalize the business fabric - strategic and huge companies - and still requalifying to combat structural unemployment would also be extremely high.

This is based on the assumption that a second wave would have a low impact on the national economy, and it would not be necessary to increase the measures currently in place to contain the impacts of a new health crisis on the economy and social cohesion. It would be very complicated to maintain the financial discipline of recent years, an exercise that has allowed the country to recover the confidence of international investors in Portuguese sovereign debt, should it be necessary to declare a state of emergency by the end of the year.

The opportunity for Portugal to recover more quickly therefore lies in the European strategy and, above all, in the Recovery Fund. Portugal may receive an amount equivalent to 13% of the Gross Domestic Product, that is, up to 26 billion euros in financing over the next five years, of which, around 15 billion euros would be 'grants' and would not be eligible for Portugal's debt (or, at least, not initially) which can significantly boost economic recovery and help debt sustainability.

The opportunity lies in the possibility that the country will be able to carry out a transition from the national economy to a more sustainable and innovative cycle, given the huge component of incentives that the “Next Generation EU” program closes.

'Bottoms up': decisive moments. Time for Europe and Portugal

In a situation of complex balances, the way in which Portugal faces the quickest restoration of a certain normality will depend to a great extent on the European response, especially with regard to the final format - a key aspect to be able to contain the severity of the short-term economic impact, as well as creating a path for sustainable growth in the medium term, both in terms of new sectors and the sustainability of public finances and, consequently, public and household indebtedness.

Above all, a solution that will be a sign of cohesion at various levels. Right from the cohesion between European nations (in an increasingly protectionist world), which is an opportunity for the European Union to re-position itself geopolitically as a bloc commercial power. And also in the sense of opening the door to a new social cohesion, with the citizens of their countries, which allows Europeans to feel less Eurosceptic and more confident in an inclusive future, stripped of nationalisms and all kinds of extremisms.

This is the time for Europe, but it is also the time for Portugal, which should take the opportunity to carry out an important economic and social transformation.

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