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Deep in crisis, Portugal tries to transform

By Anthony Faiola,

Melides, Portugal — A former physical education teacher, Manuel Araujo puts his energy to use now as mayor of this sleepy village in the Portuguese south, springing into action to aid a resident panicked by a snake in her house in the thick of night and marshalling town workers to help another local fend off a home invasion by stinging bees.

But that kind of localism — a way of life here for centuries — may be a luxury Portugal can no longer afford.

Mired in a worsening debt crisis that has claimed Greece and Ireland, Portugal is embarking on the region’s most sweeping societal transformation in a quest to modernize, with success seen as vital to visions of Europe as a united economic powerhouse. In exchange for a $111 billion bailout from the European Union and International Monetary Fund, the national government has vowed to cut waste and improve competitiveness by doing everything from rolling back a cherished culture of job security to reforming archaic laws that force landlords to rent out apartments for as little as $5 a month.

Underscoring the breadth of the changes ahead, Portugal is literally preparing to redraw its map. This country the size of Indiana has more than 4,500 local governments, a constellation of towns and counties that E.U. and IMF officials see as emblematic of the inefficiencies that have plunged Portugal into a debt crisis. A move is underway to significantly reduce the number of local jurisdictions, which could force together some towns divided by centuries of petty rivalries while robbing others of a kind of local access to government that is seen in this whitewashed village of tiled courtyards as being as much a part of Portuguese rural life as a plate of salted cod.

“This is a horrible idea,” proclaimed Araujo, 62, whose town is one of five jurisdictions in the southern county of Grandula, all of which are fearing potential mergers. “This kind of link between the people and their local government in Portugal goes back to ancient times. We understand we are in a crisis. But in this town, we are now afraid of losing an identity that goes back to 1419.”

Economists worldwide are closely watching the attempt to transform Portugal, a seafaring nation of 10.6 million that once commanded a vast empire from Brazil to Macau but is now an example of the single-biggest problem confronting the 17 countries that share the euro: economic divergence.

Adoption of the euro more than a decade ago stabilized hectic interest and inflation rates, giving the Portuguese government — and its people — access to vast sums of cheap cash. Although it gave them the same currency and only slightly higher borrowing rates as Germany — Europe’s hyper-modernized economic engine — the economy here has stayed frozen in time, moribund with one of the region’s lowest productivity rates, and outdated laws and state inefficiencies.

To gain an edge, nations such as Portugal could devalue their currencies. But as a member of the euro, this nation does not have that choice. Instead, if Portugal wants to keep the euro, it must change just about everything else to become more like the successful nations of northern Europe, in the process altering society in profound ways.

“There are no guarantees they’ll succeed, but the only way they can is to fundamentally change the way the country works,” said Diego Iscaro, senior economist with IHS Global Insight. “Politically and socially, this is going to be very challenging.”

Housing obstacles

Down a cobblestone street in old Lisbon, in a neighborhood dotted with blooming jacarandas, Miguel Lesta, 72, lives with his elderly wife and 39-year-old son in a charming three-bedroom house. Together, the family earns roughly $2,000 a month. Their monthly rent: $28.

They have lived there for 40 years, their rent controlled by tenant-friendly laws established after the fall of King Manuel II and the birth of the republic in 1910.

Such laws have made the Portuguese housing market one of the most broken in the Western world, with longtime tenants facing only minuscule annual increases. Revised laws mean that new tenants must pay sharply higher market rates — other similar houses in the Lestas’ neighborhood are renting for $800 a month. But even current laws are so protective of tenants that it can take a decade to evict someone for failing to pay.

So many landlords here have simply decided to keep their properties vacant, peppering hilly Lisbon with abandoned eyesores and crippling the government’s property tax base. The housing market is so out of balance that it has become a major obstacle to labor mobility, with employers finding it incredibly hard to relocate workers or hire job candidates from outside the area.

As part of its pledge to the E.U. and IMF, Portugal is set to change all that, with proposals being considered that would make it easier for landlords to raise rents and evict bad tenants with as little as three months’ notice. That has struck fear in people such as Lesta, a retired car washer who picks up extra cash working in a parking lot. The chance of higher rent has come just as the government is also moving to increase heath-care and prescription fees as part of its contract for change with the E.U. and IMF, costs that are hitting the family hard given that Lesta’s wife — 73 and nearly blind — has multiple ailments.

“You don’t understand, this is our way of life,” Lesta said. “This was a right for the average people, so we could live with dignity. I pay for all the repairs in my home. I installed the electrical wiring in that house, not the landlord. And if they raise the rent, we will be out on the street. What do they want us to do? Rob to survive?”

Losing local governments

Even more controversial here are moves to liberalize labor laws that made Portugal a worker’s paradise but hobbled companies and stifled growth, with reforms set to make it easier to open new businesses and for existing ones to hire and fire.

At the same time, the country is being forced to chip away at the public sector. Government workers lost 5 percent of their salaries this year and face a pay freeze through 2013. Pensions above $2,000 a month will be cut, and overall, the public workforce will be slashed by at least 8 percent by 2014.

That will happen in part, officials here say, by eliminating some local governments altogether. Although some — such as the city of Lisbon — are almost self-sustaining through local taxes, others depend on transfers from the national government for the bulk of their budgets, a bill that cost $3.5 billion last year alone. As a study in the costly web of bureaucracy that makes up local governments, many here cite the northern county of Barcelos — with 124,000 residents and 89 local governments, or one for every 1,390 residents.

The national government has yet to say which towns will go, but hundreds of mayors are feeling a sword of Damocles over their heads. That is particularly true in small towns such as Melides, nestled in a region of picturesque cork orchards where a graying population of 2,000 — 1,000 less than 15 years ago — has saddled the town hall with an eroding tax base. Nearly all of the city’s $322,000-a-year budget comes from the national government or the county seat. “We cannot make it alone,” Araujo said.

The funds employ 11 local staffers whose tasks include maintaining the village cemetery and aiding elderly with sending faxes and e-mail. But it is the prospect of losing their independence and identity through any merger with nearby villages that riles the locals most.

“I know, I know, this crisis was our fault, and I accept that. Portugal has made mistakes and now we have to pay the bill,” said Antonio Candeias, 62, who runs a construction supply shop. “But what are people in rural areas going to do if we lose our independence? If we start having to travel to see our local officials? This is going to be hard on us.”