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 From Lisbon's poorer neighboring city of Almada across the River
Tagus, 42-year-old mother of two Capelo is one of the nearly 800,000
people, or 15 percent of the workforce, still unemployed as the
country takes back control of its finances.
"Things have gotten worse since last year, business and job-wise,"
said Capelo, who has relied on a home-based sweets business to
supplement her jobless benefits since being laid off as a graphic
designer in January.
On Saturday, Portugal becomes the second euro zone state after
Ireland to exit a bailout, having stuck to the European Union's
recipe of belt-tightening to beat the euro zone crisis.
The 78-billion-euro rescue program the EU and the International
Monetary Fund assembled in 2011 for the nearly bankrupt country will
formally conclude with Portugal's budget in much better shape and
borrowing costs at eight-year lows.
But a shock 0.7 percent drop in its GDP in the first quarter points
to the risks inherent in an economic recovery plan which, by
focusing on fuelling export growth by cutting labor costs, has
become dependent on volatile foreign demand.
That data, released on Thursday, also illustrated how far the
country is from a lasting economic recovery.
Portugal's central bank highlighted the challenges, saying progress
under the bailout was insufficient, and ensuring sustained growth
and getting banks lending again would require further reforms.
But as a government no longer dependent on aid looks anxiously ahead
to an election in 2015, these may fail to materialize.
INTERNAL DEVALUATION
For those who have lost their jobs or seen their pensions or their
salaries cut, life in a post-bailout world raises painful questions:
Were the reforms worth it and will they ever deliver enough growth
for jobs and better living standards?
Further south in the industrial city of Setubal - one of Portugal's
poorest and plagued by high unemployment - there is little evidence
of the growth that, before stalling, had returned to the country in
the second quarter of last year.
"Levels of poverty keeps getting worse, especially among people aged
25-40 who lost their jobs," said Constantino Alves, a priest who
runs a "Social Restaurant" charity for the poor.
"We get young couples, parents with children seeking meals and aid.
There are various small entrepreneurs who had shops here and are now
in utter poverty, eating here. Many have lost all faith to find
jobs. It's a crisis of confidence," he said.
The problem, say economists, is that reforms already implemented
during three years of wrenching recession and austerity will only
have a delayed impact.
"These are political economies that are very difficult to reform.
The only way to change is incrementally," said Antonio Barroso,
senior vice president at the Teneo Intelligence consultancy in
London.
The government has made it cheaper for firms to hire and fire. That
has lowered the cost of doing business and helped bring unemployment
down from its 2013 peak of 17.5 percent.
But many observers say that because austerity during the bailout
focused overwhelmingly on cost-cutting - like public sector wages
and pensions - and tax hikes, deeper reforms that would have reduced
the size of the state or made the economy even more export-oriented
have not taken place.
"The (bailout) adjustment program was basically based on internal
devaluation," said Antonio Costa Pinto, political analyst at the
University of Lisbon.
That has pleased the creditors. Labor costs in Portugal fell eight
percent since 2011 to 11.6 euros per hour in 2013, according to EU
statistics agency Eurostat. That brought competitiveness gains, with
the value of exports rising to 41 percent of GDP last year.
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But the European Commission has said that after wages fell around 5
percent between 2010 and 2013, Portugal is still only half-way to
getting pay down to levels that could tangibly reduce unemployment.
"Portugal's challenges remain the same," said Costa Pinto, pointing
to the need for further competitiveness gains.
'DESPERATE FOR GROWTH'
That creates a dilemma for a government that will want to give
voters some hope before next year's national election.
"This government is looking like it is desperate to go for growth,"
said Nicholas Spiro, managing director at Spiro Sovereign Strategy
in London.
"...It is still a job half done. The danger is that the reforms
grind to a screeching halt, there is a very high risk that that
happens."
With government bond yields at record lows, market pressure to
persist with tough economic reforms has evaporated.
And now that its lenders from the Commission, European Central Bank
and IMF have stopped reviewing the economy, the country can change
policies more freely, even if still needs to gradually reduce the
budget deficit under EU rules.
The government has already said it will partly reverse salary cuts
in the public sector in the next few years and it is considering
cutting taxes next year.
"I don't think there is an incentive to continue pushing reforms,"
said Teneo Intelligence's Barroso. "I think the pressure to cut
taxes before the election is huge."
Perhaps that will give a push to growth in the short term, but will
it help generate the high growth necessary to sharply reduce
Portugal's high debts at around 125 percent of GDP? Or to create
jobs for those outside the few fast-growing sectors?
Back in Almada, Capelo still hopes thing can improve.
"At least we still have hope that the data will one day transform
into real improvements," she said. "I want to try and get a bank
credit this year for the business."
But bank loans to firms and individuals are continuing to decline,
dropping to 240 billion euros in February, their lowest since 2007,
according to the Bank of Portugal.
"Getting loans from banks is the big problem even for companies that
have managed to survive. There are no loans, so it's difficult to
buy new merchandise, not to mention expand," said Anabela Sharamia,
vendor in a furniture shop in Setubal.
(Editing by John Stonestreet)
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