1. Economics and “structural adjustment” within the Eurozone: the case of Portugal
José Castro Caldas
Centro de Estudos Sociais
Coimbra University, Portugal
Ana Costa
Dinâmia-CET
ISCTE-IUL, Portugal
Paulo Coimbra
Économie Politique et Démocratie, Congrés AFEP 2014, Paris, 2 -4 July 2014

2. The broad research question
The crisis has triggered a public debate on the state of “economic science”
Seven years have gone by and (seemingly) there are no signs of a “paradigm shift”
To what extent is economics immune to “real world” events (reality tests)?

3. The broad research question
The crisis has triggered a public debate on the state of “economic science”
The Battle of the Letters: Keynes v Hayek 1932, Skidelsky v Besley 2010 » The Cobden Centre,
Economists and astronomers: Why are the former lost in space?, Dean Bakerhttp://rwer.wordpress.com/2014/01/04/economists-and-astronomers-why-are-the-former-lost-in-space/
Economics: Change of course, By Claire Jones,

4. The broad research question
Seven years have gone by and (seemingly) there are no signs of a “paradigm shift”
Growth theory after Keynes, part II: 75 years of obstruction by the mainstream economics culture - Hendrik Van den Berg
Professional ties that bind: how normative orientations shape IMF conditionality,
The Tyranny of Political Economy, Rodrik,
How the Rich Rule, Rodrik,
Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens, by Martin Gilens, Princeton Universityhttps://
Facts, Values and Objectivity in Economics,
Objetividade e Controvérsia; Dos Estudos Sociais da Ciência ao Pragmatismo Institucionalistahttps://

5. The broad research question
Seven years have gone by and (seemingly) there are no signs of a “paradigm shift”
Agnotoly, Social Theories of Ignorance, pág. 209 e sgts; pág 219
Social Costs Today, Planned obsolescence and manufacture of doubt, pág 73
All in: Market expectations of eurozone integrity in the sovereign debt crisis, Michele Changa & Patrick Leblondb
Moreover, our analysis suggests that all of the emphasis placed on austerity and fiscal policy coordination may have been a diversion,

6. The broad research question
To what extent is economics immune to “real world” events (reality tests)?
Facing Reality in the Eurozone, Adair Turnerhttp://
Objections to providing fiscal support for deleveraging, Martin Wolfhttp://blogs.ft.com/martin-wolf-exchange/2012/07/30/accelerating-private-sector-deleveraging/ Yet let us also look at alternative ways of accelerating deleveraging. Broadly there are two: capital transactions and default. The latter, in turn, comes in two varieties: plain vanilla default and inflationary default => fiscal conservatives sound just like the revolutionaries who were prepared to sacrifice present generations for what turned outto be imaginary future benefits.
Stimulus and Fiscal Consolidation: The Evidence and Implications - Dean Baker and David Rosnickhttps://
Poland calls for €700bn EU spending round, Poland’s finance minister,
Post-Crash Economics, Robert Skidelsky,

7. The broad research question
To what extent is economics immune to “real world” events (reality tests)?
An Economics Lesson For Professor Sinn - Frances Coppolahttps://

8. The narrow research question (The case of Portuguese bailout)
The Portuguese bailout was a “field experiment” on how to “adjust” within a currency union?
The program: grounded on “scientific” (economic) “consensus views” (“common or widespread views of economists and policy makers”, (IMF, 2013a))
Was the program object of “reality tests”? What was observed? Did those tests modify the “consensus views”?

9. The narrow research question (The case of Portuguese bailout)
The Portuguese bailout was a “field experiment” on how to “adjust” within a currency union?
Blanchard, Olivier and Francesco Giavazzi, 2002, “Current Account Deficits in the Euro Area: The End of the Feldstein-Horioka Puzzle?” Brookings Papers on Economic Activity, vol. 2002, No. 2, pp. 147–186.
Pág 149:

10. The narrow research question (The case of Portuguese bailout)
The Portuguese bailout was a “field experiment” on how to “adjust” within a currency union?
Portugal, Italy, Spain, and Germany. The implications of a suboptimal currency area, 2006, BLANCHARD página 9

11. The narrow research question (The case of Portuguese bailout)
The Portuguese bailout was a “field experiment” on how to “adjust” within a currency union?
International Monetary Fund, 2008, ‘‘Competitiveness in the Southern Euro Area’’, IMF Country Report No. 08/ (Ver pág 109)

12. The narrow research question (The case of Portuguese bailout)
The Portuguese bailout was a “field experiment” on how to “adjust” within a currency union?
Jaumotte, Florence, and Piyaporn Sodsriwiboon, 2010, “Current Account Imbalances in the Southern Euro Area,” IMF Working Paper, WP/10/139 (Washington: International Monetary Fund).

13. The narrow research question (The case of Portuguese bailout)
The Portuguese bailout was a “field experiment” on how to “adjust” within a currency union?
Jaumotte, Florence, and Piyaporn Sodsriwiboon, 2010, “Current Account Imbalances in the Southern Euro Area,” IMF Working Paper, WP/10/139 (Washington: International Monetary Fund).
“internal devaluation”, mimics a real devaluation by reducing labor costs at home relative to trading partners. One instrument … lowering social security contributions financed by increasing VAT rates … Other instruments: reducing indexation of wages to inflation…. Minimum wage and public wage growth could be moderated and unemployment benefits reassessed.

14. The narrow research question (The case of Portuguese bailout)
The Portuguese bailout was a “field experiment” on how to “adjust” within a currency union?
Historical Precedents, Contemporary Manifestations: Crisis and the Socialization of Financial Risk in Neoliberal Mexico, Thomas Marois
Revisiting Latin America’s debt crisis: some lessons for the periphery of the eurozone, Santiago Capraro and Ignacio Perrotini
Public debt crises in Latin American and Europe - a comparative analysis - Oscar Ugarteche

15. The narrow research question (The case of Portuguese bailout)
The program: grounded on “scientific” (economic) “consensus views” (“common or widespread views of economists and policy makers”, (IMF, 2013a))
The Battle of the Letters: Keynes v Hayek 1932, Skidelsky v Besley 2010 » The Cobden Centre,

16. The narrow research question (The case of Portuguese bailout)
Was the program object of “reality tests”? What was observed? Did those tests modify the “consensus views”?
"Recomendações do Conselho relativas ao Programa Nacional de Reformas e ao Programa de Estabilidade de Portugal para 2014", publicado no Jornal Oficial da União Europeia, a 29 de julho – MAIS AUSTERIDADE -

17. The Portuguese bailout: the problem to be addressed
The Portuguese economy faces considerable challenges. Competitiveness indicators have suffered, economic growth has been anemic, and the current account deficit is at 10 percent of GDP. The global crisis exposed Portugal’s weak fiscal and financial position with public debt at around 90 percent of GDP at end-2010 and private sector debt about 260 percent of GDP. Banks that financed this build-up in debt now have the highest loan-to-deposit ratio in Europe.

18. The Portuguese bailout: the goals
Our strategy envisions bold and upfront structural reforms to improve competitiveness, an ambitious but credible pace of fiscal adjustment, and measures to ensure a stable and dynamic financial system.

19. “Scientific” underpinnings
Internal devaluation (Jaumotte F. and P. Sodsriwiboon, 2010)
“internal devaluation”, mimics a real devaluation by reducing labor costs at home relative to trading partners. One instrument … lowering social security contributions financed by increasing VAT rates … Other instruments: reducing indexation of wages to inflation…. Minimum wage and public wage growth could be moderated and unemployment benefits reassessed.

20. “Scientific” underpinnings
Expansionary fiscal consolidation (Alesina, 2010):
a fiscal adjustment may be expansionary if agents believe that the fiscal tightening generates a change in regime that “eliminates the need for larger, maybe much more disruptive adjustments in the future” [the wealth effect of expectations of lower taxes and lower interest rates in the future spurs present spending and investment].
The (possibly) recessive effect of internal devaluation might be offset by the expansionary effect of fiscal consolidation

21. “Scientific” underpinnings
a_Fundamentos Teóricos do MoU: The political economics of austerity, Suzanne J. Konzelmann Expansionary Fiscal Consolidations: Theoretical Underpinnings and their Implications for the Eurozone, Pasquale Foresti and Ugo Marani, All in: Market expectations of eurozone integrity in the sovereign debt crisis, Michele Changa & Patrick Leblondb Economic relations between Germany and southern Europe, Annamaria Simonazzi, Andrea Ginzburg and Gianluigi Nocella, The transfer problem and the need for sustainable external accounts, Lapavitsas - (Dada a relação entre salários e inflação) a Alemanha não cumpriu o objectivo inflação) (ver também De Grauwe,

22. The program Reducing Public Debt and Deficit
Streamlining the Public Sector (Public Financial Management, Public-Private Partnerships, State-Owned Enterprises, Privatization Health Sector, Revenue Administration, Public Administration and its Perimeter)
Protecting the Financial System amidst Deleveraging
Enhancing Competitiveness through Structural Reforms (Labor market flexibility, fiscal devaluation, foster competition in the non-tradable sector, judicial reforms)

23. Outcomes Memorandum Actual GDP (2010 - 2013) % var -2.8 -5.7
Unemployment rate, 2013
13.3
16.5
Government deficit, 2013 (billion €)
5.2
8.1
Gross government debt, 2013 (%GDP)
112.2
128.9
Current Account, 2013 (% GDP)
-4.1
0.6
International Net Invest. Pos. 2013
(% GDP)
-123.4
-118,7

24. Outcomes 2011Q2 2014Q1 Employment 4 902,9 4 559,3 2010 2012
Emigration (perm.) (n.of people)
23760
51958
Income Distribution (S90/S10)
9,2
10,7
Risk of Poverty after soc. transf.
17,9
18,7
Risk of Poverty (anc. 2009)
16,9
24,7
Population in risk of poverty (%)
25,3
27,4

25. The outcomes: IMF reviews
First till fourth reviews (so far so good):
“macroeconomic indicators are evolving broadly in line with expectations” although “funding conditions (especially for banks) remain difficult, and markets volatile”
Fifth review , October 2012 (there is something wrong):
“fiscal deficits targets … are beyond reach due to a large (and persistent) shortfall in tax revenue collections” and of a recessionary effect; the falling of real disposable incomes and the increase of unemployment are causing social and political resistance to adjustment...

26. The outcomes: IMF reviews
Seventh review , June 2013 (there is something wrong) :
the “economic outlook is markedly worse than previously expected”: strong export growth has started to decelerate; the recession is deeper to previously anticipated, with negative consequences for unemployment; “high risk that adjustment will continue to take place through further economic contraction rather than an improved supply response”.
Need to recalibrate the program: allow automatic stabilizers to accommodate the impact of lower growth and higher unemployment; alternative measures to close the fiscal gap (constitutional court); restructuring the corporate sector, alleviate the tight credit conditions facing smaller firms; reduce nominal rigidities in order to boost competitiveness and growth.

27. The outcomes: IMF reviews
Eighth and ninth reviews , October 2013 (back to normal):
signs of economic recovery; unemployment rate is expected to remain below 18% in 2014; gains export market share.
Eleventh review, April 2014 (success, but not over):
The near-term outlook continues to improve, but: fiscal consolidation and financing needs remain sizable; unemployment remains high; excessive rents in the non-tradable sector; remaining labor market inefficiencies; high corporate debt; net international investment position remains sizably negative, highlighting the need for a durable rebalancing.

28. Reality test: What should count as evidence?
Public deficit and debt?
External debt?
Rate of unemployment or employment?
Inequality and poverty?
External Account?
Market access?
What should count as evidence is an ex post rationalization, disputed in the public space.

29. IMF’s Staff reassessment (IMF 2013a)
Pre-crises "consensus view“
Reassessment
Advanced Economies are not at risk of a fiscal crises
The crisis exposed shortcomings in the euro area institutional architecture
Financial markets discipline government finances
Multiple equilibria can emerge even at low levels of debt.., a smaller move in interest rates can shift the sovereign from solvency to insolvency
Central bank financing of the budget could undermine its independence and its control of inflation.
Central bank purchases of government debt have turned out to be useful to allow for a more gradual fiscal adjustment.
Discretionary fiscal policy has a limited role to play in fighting recessions
Fiscal policy can ... have powerful effects on the economy in the short run

30. IMF’s Staff reassessment (IMF 2013a)
Pre-crises "consensus view“
Reassessment
Positive confidence effects can dominate the adverse mechanical effects of cuts in spending or increases in revenues, and lead to “expansionary fiscal consolidations"
Most famous episodes of expansionary contractions observed in Europe in the 1980s and 1990s were typically driven by external demand more than by a surge in internal private demand on the back of confidence effects
Frontloaded fiscal consolidation is the most effective approach to restoring the health of public finances
Excessive frontloading can hurt growth to the point that it undermines social and political cohesion, and weakens rather than strengthens market confidence… frontloaded efforts may even be “self defeating,” and fail to achieve the consolidation targets in the short run due to negative growth...

31. IMF’s Staff reassessment (IMF 2013a)
Pre-crises "consensus view“
Reassessment
Expenditure-based consolidations are more durable than revenue-based ones
The crisis has not offered conclusive lessons regarding the relative size of revenue and government spending multipliers
A large and protracted fiscal consolidation is likely to exacerbate income inequality
Adjustment packages should be carefully designed to limit their negative social effects and improve their sustainability
Keeping rules simple and transparent helps enforcement via market discipline and public pressure
Fiscal rules should be made more binding in good economic times, while allowing room to maneuver when the economy is weak

32. Responding to “anomalies”…
Firewalling (division of labor) within the IMF:
Research (scope for exploration, and some expression of dissent)
Policy (sticking to old habits)
In-between:
IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations.

33. Responding to “anomalies”…
Accommodation:
Materialization of risks (disturbing causes): lack of political consensus, austerity fatigue, external shocks, constitutional risks…
Problems of implementation (not enough): excessive rents in non-tradable sector; remaining inefficiencies in the labor market…

34. Responding to “anomalies”…
Partial belief revision (qualifications giving scope to conservation in policy):
“The crisis has provided evidence that fiscal policy is an appropriate countercyclical policy tool… Nevertheless, a number of reservations regarding the use of discretionary fiscal policy tools remain valid…” (IMF, 2013a)
The design of fiscal adjustment programs, and particularly the merit of frontloading, has returned to the forefront of the policy debate. [But] frontloading is more justifiable in countries under market pressure… (IMF, 2013a)

35. References
Alesina, A. (2010), “Fiscal adjustments: lessons from recent history”, Prepared for the Ecofin meeting in Madrid April
IMF (2013a), “Reassessing the role and modalities of fiscal policy in advanced economies”, IMF policy paper, September 2013
Jaumotte F. and P. Sodsriwiboon (2010), “Current Account Imbalances in the Southern Euro Area”, IMF WP/10/139