Could Portugal leave the Euro?

I have been banging on for years that I do not see how over the medium to long term Portugal (and other Southern European countries) can realistically stay in the Euro. The problem has always been for me that if productivity growth in Northern Europe increases at a faster rate than in the South, then it will make increasingly less sense to make stuff in the South. Without the option of devaluing the currency, the only way Portugal and its Mediterranean brethren can remain competitive is to keep salaries down; this is of course not very popular and combined with a profligate public sector which needs high taxes to fund it, means that the man on the Lisbon omnibus will generally be broke.

The truth is that one of the key reasons for joining the Euro was because it was seen as a way of forcing the Portuguese to behave more Germanically, in terms of running a balanced budget, building a competitive industrial sector and growing productivity. What has actually happened since Portugal joined the Euro is that the country has just blundered on as before, spending public money like it was going out of fashion and generally failing to modernise the economy at anything like the rate required.

There are some exceptional companies in Portugal that are successful on a European and even world level (our custom cycling & triathlon clothing brand, Carvalho Custom has been able to ride the wave of development in the high-tech textiles niche for example), but frankly it would make life a hell of a lot easier for our brand and for others like it, if we had a Portuguese currency that was devalued 25% from the Euro as it currently stands. And that is what would happen if Portugal were to leave the Euro, so it baffles me why more Portuguese exporters are not in favour of leaving the currency union.

I still maintain that after a few more years of continuing austerity measures and high unemployment, social rest will reach the point that a mainstream Party will suggest leaving the Euro and out of desperation, the Portuguese people will vote for them, if only because they will have nothing left to lose. The terms of the debate are now clearly shifting across Europe as more heavyweight and credible commentators talk about a possible break-up. Perhaps most notably Oscar Lafontaine, the German finance minster who originally launched the Euro in 1999: “The economic situation is worsening from month to month, and unemployment has reached a level that puts democratic structures ever more in doubt. […] Hopes that the creation of the euro would force rational economic behaviour on all sides were in vain,” he said, adding that the policy of forcing southern European countries to carry out internal devaluations by cutting wages to make their economy more competitive was a “catastrophe”.