Surging Portugal Exports Led by Volkswagen Signaling a Recovery – Bloomberg.

This is my first Portuguese recovery meme article, and the writer follows the form to a tee. Basically, a few anecdotes and economic statistics are presented without context to show that the country is recovering from the Eurocrisis.

The central theme of the piece is that rising exports are leading Portugal to an economic revival. Examples of export success are given, and the writer evokes the old trade routes plied by Vasco de Gama, which is a nice touch. A source even claims that Portugal was the first global economy. This is not true, though it could claim the second spot. Venice with its network of outposts and established trading routes with the Ottomans and Far East was the first global economic power. The Portuguese overtook the Venetians by establishing a trading route around the Cape of Good Hope to the Indian Ocean.

Unfortunately, none of this changes the hard, biting reality of economic statistics. Exports contribute about 40% to Portugal’s GDP. This means that exports have to grow 1.5 times the decrease in consumer and government spending just to keep the economic in place. That is asking too much of the new Atlantic Tiger:

Not only does GDP continue to decrease amidst the rise in exports, the decline is accelerating. Additionally, the export boom is unsustainable anyway, because 71% exports go to other Eurozone nations most of which are in recession including Spain, Portugal’s largest trading partner.

When exports level off, the country has little means to revive domestic demand. Government spending cuts are causing a vicious multiplier effect throughout the economy resulting in falling consumption as evidenced in the chart above.

Moreover, Portuguese labor costs have declined a mere 6% since the start of the crisis but would have to fall another 25% to equal Germany’s productivity. The decrease so far has caused a recession and record high unemployment, so it is unlikely that Portugal will be able to endure a further adjustment of the necessary magnitude.

For some reason, journalists writing these articles never consider a Eurozone exit, and ironically that is the only way to solve the Euro Crisis. Remove the euro, remove the crisis.

The choices facing Portugal are grim. It can either choose to remain in the euro and experience a lost decade or more in economic growth, or it can exit the euro, endure a one or two year depression that will wipe out citizens’ savings but at least resume growth with a devalued escudo. As the Euro Crisis has shown, countries that remain within the Eurozone do not resume sustained growth, and this is what they ultimately need to put their fiscal houses in order.