Recently the Portuguese government stated that a plan to build a network of high-speed rail lines had been cancelled, and that some of the European Union subsidies for this project were to be redirected into freight transport.
This plan has led to the government managing to secure funding for a high-speed link between Lisbon and Madrid. Initially the European Union had withdrawn funding for the high-speed link between the two capitals due to Portugal’s decision to cease work on the project.
Apparently the Finance Ministry in Portugal has now received funding for the project through the European Commission’s Connecting Europe Facility funding, and the government has managed to hold onto the European Union funding for the link while reducing the percentage of EU funding.
The previous agreement has now been nullified, and new funding for the project has increased from 25% to 40%. However the plan for a high-speed passenger link doesn’t look as if it will be revived, as the emphasis is now on rail freight. The government is looking to link Lisbon with the rest of Europe, and expects a rail line could reduce costs to exporters by 40%, and could increase the capacity by up to 80%. Whereas a passenger rail link would have cost €4.276 billion, the freight line is anticipated to cost just €700 million, and the government only needs to find €175 million due to European Union subsidies.
This is obviously good news for exporters, and Portugal’s trade deficit narrowed during the last quarter to €.58 billion compared to €3.12 billion a year earlier. Exports increased by 1%, while imports decreased by 3%.
The Portuguese prime minister, Pedro Passos Coelho recently announced a fresh round of austerity measures, as he feels they are necessary to ensure the country is able to meet its targets in return for receiving a €78 billion bailout from the IMF and European Union.
Next year’s budget will include an increase in social security contributions from 11% to 18% for all workers, and this equates to roughly one month salary. Even though the Prime Minister feels the country has made a good start in attacking the problems, he has been at pains to point out they haven’t yet been conquered.
This move is hardly likely to be popular amongst the Portuguese who have already seen across-the-board tax increases combined with spending cuts since the country was forced to seek a bailout last year.
In addition the Prime Minister is cutting the Social Security contribution of companies from 23.75% to 18% in the hope this will boost employment. Portugal will miss its budget deficit goals for this year, and economists think this is due to the government underestimating the depth of the recession that has led to lower tax revenues.
In July a court ruling prohibited a cut in salary benefits for public sector workers, making next year’s budget goals more difficult to meet. The increase in social security contributions is partly to make up for the shortfall due to that decision.
The opposition has urged the government not to adopt any further austerity measures, especially as the economy is expected to contract by more than 3% in 2012. However Portuguese banks’ borrowing from the European Central bank fell by 3.5% in August, and now stands at €54.9 billion.
The Portuguese Prime Minister Pedro Passos Coelho recently said that the government is managing to shrink its budget gap, and has successfully cut its spending in line with demands by global lenders. In spite of the country looking set to miss tough fiscal goals, it looks likely that EU and IMF inspectors will grant some relief as the country has been successful in sticking to a tough posterity program. However the prime minister hasn’t ruled out fine tuning the program.
Some economists think that lenders to Portugal could come up with a slightly easier target to meet this year combined with more spending cuts. As part of its austerity programme Portugal raised taxes, introduced deep structural reforms and reduced spending. While the budget deficit may have shrunk, this program has had the effect of driving up unemployment levels and depressing tax revenues.
Unemployment is currently at 15% of the country is still going through the deepest recession since the 70s. The current figures show the deficit was 6.9% of GDP for the first half of the year, while the year-end target is just 4.5%. Although Portugal has so far satisfied the EU troika these gains haven’t been without pain, as recent figures showed the economy shrank by 1.2%.
Portugal’s crisis is slightly different from other beleaguered European countries as it has come about as the result of stagnation during the last 10 years. The boom and bust cycle that brought down other countries bypassed Portugal. The current crisis means already reasonable house prices have declined steadily and are now attracting foreign buyers looking for a bargain.
Property prices are expected to contract for another year or so, and owners desperate to sell or accepting offers way below the asking price. Up until recently high-quality apartments in the Algarve and Lisbon had proved to be more resistant, but now even their prices are declining.
Next month sees the introduction of new Portuguese laws aimed at attracting citizens outside the EU who wish to invest in the country. It amends an earlier law passed in 2007. The legislation was passed on August 9, and comes into force on October 9 and will allow non-EU citizens to receive a Portuguese visa enabling them to enter and stay in the country for a minimum of five years provided certain types of investments are undertaken.
These investments should either be the purchase of the property with a minimum value of €500,000, or transferring more than €1 million in capital, or creating a minimum of 30 jobs. At the moment the full details of the law haven’t yet been published.
Portugal wishes to raise its profile as being an attractive destination for highly qualified, wealthy individuals who want to invest and work in the country, and it faces tough competition as many other European countries are trying to do the same thing.
A lot of European countries are short of money, and are being forced to look outside the EU towards other world economies in order to attract foreign investment. This means EU policies regarding citizens from outside the euro zone are becoming more flexible in order to give member states an opportunity to attract investment in the most straightforward way possible. Key markets are seen as being Brazil, Russia and possibly China. Certainly Portugal has a lot to offer investors as it enjoys a temperate climate, low cost of living, and high quality medical care combined with a rich history and culture.