Post published in the Innovation Models Blog following the interview of Hugo Mendes Domingos in ETV's (Portuguese Economic TV) Closing Bell in September 19 2012 about the austerity measures announced by the portuguese government.

1. Portugal’s austerity measures and the impact on business innovation
Measures announced
On 7 September 2012, the Portuguese Government announced new austerity measures that
include an increase (of 7 percentage points) in the contribution of workers towards social
security together with a decrease (of 5,25 percentage points) in the contribution of companies.
This would place Portugal broadly in line with Germany. The first measure was aimed at fighting
the increased cost with social security and generally to help achieve the new deficit goal, agreed
with the ECB, EU Commission and IMF. The second measure taken was aimed at providing
companies with sufficient funds (savings from the tax break) to keep jobs and foster
employment.
Impact on the economy
This measure should help support the social security accounts that are suffering badly from the
rise in unemployment. Moreover, the Government expects that this measure will support
employment and increase competitiveness for firms (according to finance minister Vitor Gaspar,
this measure will create 1 to 2% employment by 2015), as a result of lower costs for employers.
However, these effects are unlikely to have a significant impact in the short run. A recent study
by four economists from the University of Minho revealed that the net effect of measures will
actually increase the unemployed by 68 thousand. The economic outlook remains sharply
recessionary for Portugal, and cloudy for most of Portugal’s trading partners. This scenario is
not favorable for the predictions made by the government.
Reactions
Reactions to the announcement of these austerity measures were widespread and
predominately negative. In Portugal, business leaders rose against the measures saying they
were unnecessary and will not benefit their companies. Paulo de Azevedo from Sonae, one of
the largest business groups in Portugal, claimed that these measures would be harmful for non-
exporting companies. The announcement also shook the political sphere with the opposition
and even some members of the Government party (PPD/PSD) opposing and criticising the
measures. The coalition that enabled the government to have majority in the Portuguese
parliament was weakened with the head of CDS/PP publicly admitting to be against the
measures.

2. Source: Bloomberg
Investors’ reaction was ambiguous or indifferent as we can see that from the chart above. It
shows the yield to maturity of Portuguese 10 year government bonds and its evolution last
month. The first drop which occurred on 5 of September was an obvious positive reaction to the
ECB’s announcement of its intention to purchase sovereign debt from struggling countries.
However, the reaction after the announcement of these measures (on 7 September) was
negative, at first glance. However, it is hard to isolate the effect, due to a high number of
relevant events that might have also affected the yield. It is unclear whether the markets are
factoring in one of the largest demonstrations in the history of the country having taken place
during the weekend.
The European Commission admitted that the government could drop the measures if it could
come up with an alternative to fulfill the adjustment programme’s goals as agreed with the IMF.
A year ago, IMF representatives alerted to the risks of these measures and their intended
purpose. The delegates believed that “it is not obvious that promoting employment is a good
substitute for increased efficiency”. Moreover, the head of the IMF delegation, Adebe Salassi,
recently stated that these measures were not enforced by the delegation and were solely an
initiative of the Portuguese government.
As these measures are likely to affect the contributions to social security in Portugal, we find it
relevant to compare these with other European countries. Looking at the overall map of
aggregate contributions of employees and employers for the European Union countries as a
percentage of GDP until 2010, we find that Portugal is below other countries in terms of
contributions and is closer to the UK than to other southern European countries such as Spain
or Italy, for example.

3. 20.00
18.00
16.00
14.00
EU
(12,9%)
12.00
Portugal
(9%)
10.00
Spain
(12,3%)
8.00
UK
(7,8%)
6.00
Italy
(13,4%)
4.00
France
(16,7%)
2.00
Greece
(10,9%)
.00
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
Source: Eurostat
Innovation Models insight
Here at innovation models, our opinion/reaction about this measure is also mixed. Had
Government announced that the proceeds from the reduction in employer contributions were
directed at developing innovative projects that might foster employment in the long run, we
would consider these measures as positive. This would have been difficult to implement
anyway. We believe that the source of the economic difficulties in Portugal has not been
addressed yet.
This matter was discussed in ETV’s “Closing Bell” programme on 18 September (in
Portuguese): Youtube link - http://www.youtube.com/watch?v=S6UN9k8lUtI&feature=plcp