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2013 Europe: Portugal

We are beginning to see a complete break-down of certain economies within the euro-zone. I gave a very comprehensive account of my views on things in the three part scenario I painted for 2013.
Part 1 -- Part 2 -- Part 3
However, I was pointing out general principles, and how they would likely play out. It's perhaps time I put real things that are happening right now into that framework.

I live in the Algarve which means I have first hand experience of what is happening here in Portugal, which is, according to the so-called banking triumvirate that oversees the way the economy is run, a great success. Naturally, it is anything but.

Let me first try and give a picture of life in Portugal. This is almost impossible in a few lines, but let's try.

The country does not have a very good record of achievement over the years. It managed to stay afloat despite various outside threats, and eventually entered the twentieth century still as a largely medieval place. When I first visited Lisbon in the mid sixties it was a small, very dirty, collapsing place that was largely closed. There were just over 60 escudos to the £. Forty years later when Portugal converted to the euro there were 315 escudos to the £. That gives you some idea of the disaster that was the Portuguese economy throughout that time.

When I returned in 2001 I found a largely messy country which was part medieval, part modern, with a somewhat confused populace. Many of the main roads were still dirt tracks; the electricity failed on average twice a day, sometimes more often; large parts of the country still had no piped water, and the stuff we did get out of the tap often came out as a thick brown gunge. The bank tills only operated half the week (tuesdays wednesdays and thursdays), and if you wanted to take out money on other days you had to go to Spain. Timber, tiles, and a whole host of things simply weren't available. They all came from Spain. That's where we bought our microwave ovens, and many other things. Even now if I want a bottle of sherry I have to drive over the frontier. You just dont see many basics we take for granted in Northern Europe on sale here. The Portuguese are an insular lot.

They are also an uncomplaining lot. They also accept, and seem to like, the widespread abuse of power and invasive corruption. They expect politicians and bigwigs to bully them, and extort money. They repeatedly vote into office known crooks.

A very recent example of corruption is the way a government minister gave a tourist project the go ahead as crucial to Portugal's economy, thus taking it out of the normal planning process. As everybody knows, the last thing Portugal needs is more tourist housing as there are already tens of thousands of abandoned building projects marring the countryside. The over-riding issue here was simply a payment to the politician to gain his support. Nothing will be done about that blatant corruption. It's a way of life here, and is apparently seen as perfectly okay.

An architect friend of mine came to Lisbon last year with a Brazilian friend. The Brazilians find the Portuguese a bit of a joke, but let's leave that to one side. He rang me up and said: "John, I dont get it, how does Portugal function?"

I laughed. It doesn't. Let me explain. He was referring to the fact that people get paid on average €900 a month. Housing costs about half that. A family therefore has the equivalent of about €100 a week to live on. That supposedly provides for a family's food, clothes, gas, electricity, mobile phones, car, and so on.

Let's go back a bit. In 1985 most of the population were peasants in the fields getting about by donkey, or low-paid workers in towns who walked to work. There were hardly any cars, there were no electrical appliances as most folks either had no electricity or had a single circuit on a 6 amp fuse. That explains why you couldn't buy an electric kettle. There was nowhere to plug it in.

Fast forward twenty-five years and you have families with all sorts of gadgets, probably two new cars, mobile phones, and a wallet full of credit cards.

Problem number one: whoever heard of a middle class that exists on credit cards? Folks who cant afford a car go out and buy a new one, apparently paying extortionate amounts of purchase tax, and locking into an introductory payment scheme, which after two years reverts to a higher payment scheme. All is well for that two year period, then the rate goes up, so the family stops paying and the car is repossessed. They then go out and buy another new one on another reduced payment scheme.

Excuse me but you cant run a middle class on that basis. You still have a peasant class, on peasant wages, but you now also have a totally skewed economy which is ultimately running at a loss.

The money to buy the car was lent at below market rates: a loss. The car is returned after two years and is now worth half what it originally sold for: big loss. The economy is not based on credit so much as on defaulted credit. The country cant grow on a base of defaults.

The way round this has in the past been repeated devaluation of the currency. That, of course, does not solve the above problem, but means that there is no way for a local economy to thrive, and it makes imports more and more expensive. The modern method of coping is to cadge money from the EU, which has now turned into bailout loans. These can never be paid back because everyone is running on negative. The way out of that scenario is to kick the can down the road (borrow more money to pay back the money you previously couldn't pay back).

There is another side to this. Because the government and hangers-on are filching funds from the system, and have been for years, and because the government consists of people who dont give a damn for the country, only for their own welfare, and because they are utterly incompetent, they cant manage the economy and it is going from bad to worse.

This means the government cant pay the bills despite the fact that they are borrowing heavily from the EU and the IMF, so they are wrecking the businesses of Portugal. They have increased the tax rates across the board which will do three things.

First, it will mean the revenue from taxes will go down. There is a simple mathematical model for tax collection. It consists of a bell curve. The government finds the sweet band within that curve and sets the tax rate within that band; at the top of the band in good times, and at the bottom of the band in hard times. If you move lower than that band you take in less tax. If you move higher you also take in less tax. It's obvious. At high rates people dont work, it doesn't pay. They go on the dole instead. At lower rates, more people work but there is less tax collected.

The corollary to this is that to get people back to work, and to get businesses to grow, you lower taxes. The Portuguese government is raising taxes. That is what you do to cool down an over-heating economy, not one that is already on its knees.

Second, as mentioned above, it discourages people from working and so more people join the dole queues, and there are less jobs because employers are also discouraged by the high tax rates, and taking on more workers becomes uneconomic, thus the economy will nose-dive.

Third, money is removed from the work place, both by government, and by the withdrawal of investment in the market place, which in turn leads to a smaller economy.

In short, the Portuguese government is quite deliberately destroying the Portuguese economy with the connivance of the international banking system.

Let me quote you from a recent letter from yet another businessmen who has thrown in the towel. This will show you how some of this works.

"On January 1 new laws are being implemented for all small businesses." First, please note that small businesses are the lifeblood of an economy and usually a government will do all in its power to encourage them. The Portuguese government wants them all out of business. The letter explains: "The first thing we have to do is purchase a cash register at the staggering cost of €2,000 which will have a USB port fitted so that it can be checked monthly by the tax authorities. We are already being taxed 80% on our income."

"The next ludicrous rule is that we have to purchase a [receipt book] at a cost of €50 with only 50 receipts in it."

Just think about that. You run a shop, and someone comes in to buy a mars bar. It sells for 90 cents. You had to buy the mars bar in the first place, probably for about 70 cents. You have to pay for the running of the shop, and earn a living, yet it costs you a further one euro just to give a receipt. How long before you stop selling pretty well anything? Even if you are mathematically challenged, by day two you are probably in shock and need therapy.

How about this one. "It was declared that all farmers would have to count how many potatoes they would plant in the field so that the government could assess how many kilos of potatoes they could charge tax on."

Portugal is run by a bunch of complete lunatics who are hell bent on destruction. This is economic suicide.

Let's continue with the letter. "Tens of thousands of small shops, cafes, music shops, etc, are closing down because of this madness."

Let me ask you two things. First, do you want to live in a country like that? The rate of emigration is naturally rather high, and includes a steady flow of Portuguese, together with a good proportion of foreigners who came here for the good life. Second, how long do you think this madness can last? And that leaves one wondering what the end-game will be. Is Portugal headed back to the dark ages?

If you decide to invest here you really do need to see a psychiatrist. By all means come to retire here, but make sure you have plenty of money, and plenty to insulate you from the economy here, and maybe it would be best to move to somewhere close to the border. And dont buy a place, it is easier and cheaper to rent, and if you decide you cant take any more, then you can easily up sticks and move somewhere else, without waiting for years and years to sell your home.

I have to face facts; I made a very big mistake buying a home here. I'd love to tell you all is sweetness and light, and that buying my home would be the best move you ever made, but unfortunately I was brought up to tell the truth. What a bummer!

Is that it? Not really. It's the same in Greece. And how long before somewhere else goes the same way? Almost every country in the eurozone is running on negative. Europe, economically speaking, is currently not a pretty sight.


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