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In Portugal, as in America, a 'Third Way' Is Reemerging

By Steven Pearlstein
Wednesday, May 6, 2009

LISBON

You can easily imagine the popular story line that plays out daily in the politics of much
of Western Europe. It's the one about bankers and money managers in New York and
London who got rich by playing fast and loose with other people's money, under the
eyes of regulators so blinded by their faith in markets that they couldn't spot a con game
going on right under their noses.

And what makes it all the more galling to Western Europeans is how easily this plague
of greed and deregulation so easily crossed the Atlantic, sending their own economies
into a recession that is expected to be deeper and longer than it will be where it all
began.

Sitting in his office last week, Jos Scrates, the prime minister of Portugal, joked as he
recalled the day last September when he first learned about "this thing they call a
subprime loan." As head of this country's nominally socialist party, Scrates spent the
previous four years reducing the size of Portugal's government, taming its runaway
budget deficit, challenging labor unions and deregulating its markets. And what is his
reward? An economic crisis that has once again put the country in a fiscal bind and
boosted the polling numbers of Portugal's Communist Party.

There are similar tales to be told across the continent. In France, top executives have
been taken hostage by workers demanding that layoff notices be rescinded. In Sweden
and Switzerland, companies have revoked pay packages for top executives in response
to public outcry. And just last week, the European Union unveiled new regulations that
have the hedge funds howling. Everywhere, there are calls for higher taxes on the rich,
with the British government proposing to raise the top marginal rate to 50 percent from
40 percent.

"In terms of further market liberalization, I would say the window of opportunity is now
closed," Christine Lagarde, France's reform-minded finance minister, told reporters
recently in Washington.

Given the circumstances -- unemployment as high as 17 percent in Spain, exports off 20


percent in Germany, house prices off 40 percent in Ireland -- none of this is surprising.
But the real story in Europe may be how firmly market liberalization seems to have
taken hold. Not only have there been few, if any, calls for re-nationalizations, but some
countries are still moving toward privatization and deregulation. Instances of
protectionism are outweighed by the examples of cross-border mergers and acquisitions
that have been accepted as a matter of course -- Fiat's designs on GM's Opel, based in
Germany, is the latest. And in the face of international calls for additional fiscal
stimulus, both governments and voters have been reluctant to borrow and spend their
way out of this recession.

Here in Portugal, for example, huge teacher demonstrations recently shut down the
capital but failed to derail Scrates's plan to require annual evaluations of instructors in
a public school system that has some of the highest costs, and lowest test results, in
Europe.

And Americans would do well to consider Portugal's plan to put its Social Security on a
more sustainable footing by linking the retirement age to life expectancy while still
giving people the choice to retire at 65 with slightly lower benefits.

Perhaps the best example of Portugal's market-based approach to its economic problems
is its big push toward renewable energy.

To harness the wind, Economy Minister Manuel Pinho set out to move the country
beyond small, subsidized wind farms to create an industry big enough to achieve
economies of scale, invest seriously in research and development, and attract billions of
dollars in capital. The incentive came in the form of huge long-term transmission
contracts that assured investors that there would be a market for the power at a
guaranteed price, determined in an open and competitive auction. The hitch was that
winners were required to manufacture a certain percentage of the windmills and the
turbines in Portugal. A number of big European companies have now set up shop here.

Pinho took a similar approach to hydroelectric power, putting up for competitive bid
long-term licenses to build and operate a dozen new or expanded dams. Bidders can
also extend the life of the licenses if they agree to enter long-term contracts to buy
nighttime power from the country's wind producers and use it to pump water from
reservoirs below the dams back up to the reservoirs above. Energy gets stored during
those hours when demand is low and used the next day when demand is at its peak.

What's noteworthy is that all this was done without a government subsidy and without
favoring the country's former electric monopoly, EDP, in which the government
continues to hold a minority stake. Indeed, EDP has been buying or building renewable-
energy assets across Europe, in Brazil and in the United States. The spinoff of its
renewable-energy division was the biggest IPO in Europe last year and is now the
world's fourth-largest renewable-energy producer.

Back in the days of Bill Clinton and Tony Blair, there was a lot of loose talk about a
"third way" that would combine the best features of Anglo-American capitalism with
the social and economic safety net prevalent in Europe. If Portugal is any indication,
Europe has been moving in fits and starts toward market capitalism ever since. Now that
Barack Obama has become the most popular politician in Europe and his administration
back home is intent on increasing the profile of a more-competent government in the
workings of the American economy, a convergence seems possible once again.