I recently returned from a visit to Portugal, that small, attractive state on the southwest extreme of the European landmass that looks out to the Atlantic and beyond, the birthplace of Prince Henry the Navigator, whose maritime ventures in the early 15th century heralded Europe's domination of the world. Like many Englishmen, I have a fondness for Portugal, its gentle people, its sunny vistas, its history and superb architecture, its lovely food and drink. This visit last month, the reader will gather, was not my first.

But I flew out of the capital city of Lisbon feeling more disquiet about Portugal's future -- that is, about its future prosperity and social fabric -- than ever before. Two days after I flew off to London, Portugal was paralyzed by national strikes, including the closure of airports, as workers and students protested against the new austerity measures.

The reason for these convulsions lies in the current crisis within the euro zone, and the fissures that are opening up in the credit ratings of the stronger national economies, and the less competitive or "weaker" economies, generally along the fringes, such as Greece, Ireland, Portugal, Spain, perhaps even Italy. At the heart of this particular crisis is the unpleasant fact that the common European currency project is, in its present form, simply not working. It was and is a bold idea to advance from a European Union common tariff policy towards a monetary union, and most member-nations signed on to that agreement, with a few exceptions like a doubtful U.K. But it is economically impossible for the latter object to work if the actual fiscal policies of the 17 participating states are so far apart: that is, if central government deficits differ widely, if the percentage of national debt to GDP is far apart, and if government spending policies are awry. All this has been observable over the past decade, and yet countries with the laxer fiscal policies still managed to attract large sums of foreign capital, which invested in everything from government bonds to real-estate developments, at a time of very low interest rates.

The 2008 international banking crisis, and the growing worries by investors about the U.S. government's own very lax fiscal policies, its colossal indebtedness and its mountain of bad housing loans, changed all that. It was therefore probably inevitable that the spotlight would swing across the Atlantic, to highlight those nations which had similar budgetary problems but which could not, like the profligate U.S. Treasury, simply print more and more dollar bills.

And why cannot Greece and the other weaker euro zone economies print their way out of their immediate troubles, as many of their politicians and publics assuredly would now very much like to? It is, of course, because they lost their capacity to do so when they entered the European currency union. They can no more print banknotes than can the states of Vermont or Arizona. They have surrendered their fiscal sovereignty.

None of this escaped the notice of international investors, and especially those foreign banks and hedge funds who slowly began to realize that they may have put their funds into dubious goods, like buying an attractively decorated nag in a Somerset horse market. Since it is impossible to punish these lax European nations by trading against their currencies -- the drachma and escudo and lira are now officially dead -- the punishment of the market is applied by demanding ever-higher rates of interest for refinancing government bonds, and perhaps more for buying new ones. Proposals by the European Central Bank, by the Germans, and by monetarist economists that foreign banks should "take a haircut" of 50 percent or even 25 percent on their imprudent earlier loans has intensified unwillingness to lend, and explains much of the flight into the U.S. dollar and the U.K. pound in recent weeks, however miserable their own economic landscapes appear. Risk and misery are, after all, relative measures.

What does this mean for the weaker economies and their peoples? It means that, in simply having to repay foreign obligations and ensure that bonds are refinanced, they not only have to pay the higher interest rates demanded by the market, but also demonstrate the greatest determination in cutting the government's large deficits: Taxes must be raised and official spending heavily cut, say the pundits.

Which brings us back to Portugal. The national strike I barely escaped from was predictable; they have already happened in Greece (many times), Italy, France. They are protests against the grim reaper of modernization, globalization and, more specifically, being yoked into a currency union with much more productive economies such as Germany and the Netherlands. But while they are understandable, they also seem, to me at least, destined to fail. The mere news of protest strikes, or of governments tottering, alarms investors and sends their capital elsewhere. After a while, the attractiveness of 8 percent interest rates, which happened in Spain just recently, is actually not attractive: It suggests a government default.

Thus, the governments of Portugal, Greece and perhaps Spain face this double dilemma. There are some businessmen nowadays who suggest that they would be better off returning to their old currency. A return to the escudo would, of course, mean much hardship -- a plummeting exchange rate, much higher inflation, sort of Argentine-style. But the prices of Portuguese exports (wine, dried fish, textiles, fruit) would become much more attractive, the Portuguese tourist industry would boom, and even real estate might recover.

So, why not? The answers are equally clear. It would be a massive blow to national prestige to pull out of the euro. It would leave the escudo, or drachma, completely exposed to international currency turbulences, without any ECB protection. And it would set back the European venture enormously. No one can predict if the outcome would be (painfully) good, or disastrous. This was, after all, why Hamlet in his famous "To Be, or Not to Be" soliloquy decided that he would "Be." The unknown was too risky.

This leaves the stronger European economies, especially Germany, with their own double dilemma. They could push Greece and Portugal out of the euro zone, perhaps, but at what cost to themselves? The Germans would avoid bankrolling any more profligacy in Europe's south, but at the hazard of stopping the European unification project, which has been their lodestar since 1949.

"Gouverner, c'est choisir," the old French saying had it: "To govern is to choose." Sometimes governments may ardently wish they didn't have to choose. But of course they must. Some day. Some time.

 

 

 

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