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When Krugman says
the Portuguese macro story is harder to tell than those of Greece, Spain, and Ireland. Greece was excessive government borrowing; Ireland and Spain, housing bubbles. Portugal, by contrast, wasn't all that bad fiscally -- debt/GDP on the eve of the crisis roughly comparable to Germany. But it also didn't have surging house prices. There was a lot of private-sector borrowing, but it's not that easy to explain exactly why.
he's confusing why with how.

The why is, in all cases, the Euro Convergence Criteria, Growth and Stability Pact, and Illegal State Aid rules.

The how is excessive government borrowing, housing bubbles, incompetent banking, or nothing much obvious.

The how reflects the core flaws of each country's political economy. In Greece's case it appears to be tax corruption since the leading industries (shipping and tourism) don't pay much by way of taxes (with Government assent) and the underground economy is large. Is Spain's case it was corruption of a different kind, where the government and construction companies are joined by the hip and all Spain knows to do to generate economic activity is lay bricks, asphalt or concrete, with lots of kickbacks between local governments and construction firms. In Ireland's case it was corruption between the government and the banking sector, comparable to Iceland's. In the case of Portugal... Well, Portugal may have been the healthiest political economy of all since there's no obvious culprit and hence no dominant corruption mode.

Of all the ways of organizing banking, the worst is the one we have today — Mervyn King, 25 October 2010

by Migeru (migeru at eurotrib dot com) on Wed Jan 12th, 2011 at 06:44:53 AM EST
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