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Portuguese Fear Losing the Euro

On the bank of the Tagus River that flows through Lisbon is an imposing stone monument to the Portuguese navigators who crossed the oceans from the end of the 15th century. They were the first Europeans to reach Africa, India and China.

These sailors created an empire that made Lisbon one of the richest cities in the world, bringing rare and expensive goods from colonies that were sold for huge profits to the kings, nobles and rich of Europe.

Visitors to the city center walk past the churches, piazzas and large public monuments built with this wealth from the coffee and cocoa of Angola, the gold and silver of Brazil and the silk and porcelain of China.

But today the mood could not be more different from that of the glorious past. “We are the past, we are like a museum,” said Teresa da Silva, manager of a handicraft shop. “This century belongs to the Indians and the Chinese. We are paying higher taxes and our pensions are being cut.”

On July 1, the parliament passed an austerity program proposed by a new government elected in June, as a condition for loans of 78 billion euros (US$113 billion) from the European Union and International Monetary Fund. After Greece and Ireland, it was the third EU country to seek a bail-out.

The program calls for a cut in income tax benefits, a levy on year-end salary bonuses, widespread privatizations and cuts in social security. The level of value-added tax will rise from 6 percent to 23 percent.

"This VAT increase will hit the poor very badly,” said Celia Pedroso, a journalist and travel writer. “Many young people want to emigrate to other EU countries, Angola and Brazil. For years, we lived above our means. We have a bloated public sector, with 700,000 workers, for a population of 10 million.

“Now they are even talking about removing us from the euro zone. This would be a disaster. Nobody wants that,” she said.

The possibility of expelling Greece and Portugal is being discussed as a last resort, if the public and politicians of rich EU countries become unwilling to go on funding their budget deficits.

Portugal earned great wealth from its empire, which it lost after the revolution of 1974. In 1986, it joined the European Economic Community, later the EU, which provided the financial support to maintain its status as a developed country. It adopted the euro on Jan. 1, 1999. EU membership and the euro have been critical in attracting foreign investment and integrating Portugal into the larger economy of Europe.

The Chinese state and private investors have become players in Portugal’s economy. The People’s Bank of China has become a buyer of its public debt. “We look favorably on investing in Portuguese government bonds,” said Vice Foreign Minister Fu Ying in October 2010, ahead of a visit by President Hu Jintao.

In January this year, China bought one billion euros of Portuguese debt in a private placement, with an interest rate of 4.74 percent and repayment after 18 months. This enables China to diversify its enormous foreign exchange holdings,  obtain a higher rate of interest than from bonds of stronger economies and earn political goodwill from countries who badly need support.

While Portugal has not attracted the level of Chinese corporate investment that has gone to Britain, France and Germany, dozens of Chinese private firms, mainly from Zhejiang, have opened retail outlets, selling Chinese clothes and other cheap consumer goods. They are open seven days a week, from morning to evening, operating with giant warehouses and an efficient distribution system.

"They are everywhere, even in small cities in the interior,” said Pedroso. “All the staff are Chinese and they speak Portuguese poorly, but it is enough. They are good for the economy but have forced some local shops to close.” There has been controversy over claims that these shops enjoy favourable tax treatment, perhaps in exchange for help with the debt crisis. Most Chinese-owned firms are small family enterprises in service, retail and import-export.

About 10,000 Chinese live in Portugal, including migrants from Mozambique and other former colonies. Their fluency in Portuguese and familiarity with local business practices enable them to enter the mainstream economy and work as doctors, engineers and bankers.

The country attracts limited numbers of Chinese students, mainly to learn Portuguese and work with the booming economies of Brazil and Angola, and of Chinese tourists.

"The Chinese work hard, a pre-condition of economic growth,” said Manuel Oliviera, a taxi driver. “Many Portuguese are lazy, especially those who work in the government. There are too many public holidays. Democracy has not been good to us, giving us corrupt politicians who line their own pockets and provide jobs for their friends. Most people do not vote now. Perhaps, in the future, China will buy Portugal.”

 

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