Down and out in Portugal

Down one of the narrow cobbled streets that lend Lisbon its antique flavor, a little piece of old Europe is feeling a modern pinch.

Some of Portugal’s most famous painters have shopped at the Casa Ferreira, a fine-arts supply store nestled for the last 80 years in a thick-walled, low-ceilinged building in the 16th century Bairro Alto quarter.

Despite its pedigree, the family-owned store is going through hard times as it fights cheaper Chinese rivals that have poured into Europe in recent years.

The Chinese crunch is being felt keenly in Portugal where it has exposed the weaknesses of a country that failed to wire itself for the 21st century.

“Times have changed,” says Jeronima Ferreira, the arts store’s 65-year-old manager with a shake of her head as she contemplates looming bankruptcy. “Portugal is down and out.”

With Portuguese unemployment at a 21-year high of 8.3% -- the third-highest in the EU -- cheaper Chinese goods are a way of making ends meet.

Europe has reeled under the Chinese surge. Its yawning trade gap with China widened by nearly 25% in the first seven months of this year. A lot is at stake for Portugal when EU and Chinese officials hold a summit Nov. 28 to address the issue, which has caused outrage among some Europeans.

Chinese shops offering a wide range of imported goods have sprung up all over the Portuguese capital. In the first half of this year, Chinese imports to Portugal were up 26.5% from the same period in 2006 and approached $1 billion.

In many ways, though, the Portuguese have been the architects of their own decline. Their unwillingness to adapt to a changing world is carrying a heavy price as the country of 10.6 million people weathers one of its toughest periods of modern times.

History has turned the tables on Portugal. The Chinese encroachment is vexing for a country that once was one of the world’s great maritime powers, pioneering European sea routes to the riches of the East 500 years ago.

The Ferreira family store’s declining fortunes coincided with a broad national downturn at the end of the last century. Portugal earned the moniker of “sick man of Europe” due to its sclerotic economy and bureaucracy.

Tourists marvel at the easygoing folksiness of Lisbon, at the lines of washing on verandas across from Parliament, the unhurried lunches. But 21st century economics don’t reward a laid-back attitude.

Gross domestic product per capita last year was just over 71% of the European Union average, down from a peak of 80% in 2000 as Portugal lost its momentum.

After two decades in the EU -- receiving close to $73 billion in development aid from Brussels -- the average monthly wage of a Portuguese worker remains below $1,415.

Some 2 million Portuguese are classified by the EU as living in poverty, on the minimum wage of about $587 a month. Only Poland and Lithuania, which joined the bloc three years ago, are worse off.

Portugal’s bedrock industries such as the garment and footwear sectors took a body blow with the surge of Chinese competition. Like many Portuguese businesses, they were doomed by their misguided belief that a low-wage, low-cost strategy was still feasible in Western Europe.

While more successful EU countries switched to sophisticated, technology-based service economies, the Portuguese dragged their feet.

The consequence: Between 2000 and last year, more than 65,000 companies closed their doors.

Portugal has had a hard time shaking off the burden of its recent history.

The 1974 army-led revolution that toppled Antonio Salazar’s four-decade rightist dictatorship brought democracy but also engendered years of political strife and military interference that endured into the following decade. Leftist-inspired legislation -- a backlash against the dictatorship -- installed new social rights and a broad sense of entitlement in areas such as welfare and job security.

Political leaders, mindful of abrupt changes that could ignite further confrontation, have long indulged noisy trade unions, institutional resistance and popular opposition.

Rui Ramos, a historian at Lisbon University’s Institute of Social Sciences, says that period is still too close for comfort and has made governments apprehensive about engineering the kind of makeovers that readied other EU nations, such as the Nordic countries, Britain or Ireland, for new times.

In neighboring Spain, modernization won popular support because it swept away the legacy of dictator Francisco Franco after his 1975 death; in Portugal, Ramos says, the leftist revolutionary gains were sacred.

“It’s difficult to get consensus [for change] in Portugal,” Ramos said. “The ghosts of the past jump back to life.”

The whopping aid from the EU also bred complacency, Ramos said, and vulnerable Portugal was ambushed by unexpected competition from Eastern European countries that joined the EU and then by globalization that opened the door to Chinese rivals.

Portugal is poorly equipped for global competition. Its education and industrial productivity levels remain among Europe’s lowest, leaving it without the high-tech tools and the skilled workforce it needs to flourish.

Late in the day, a makeover is finally afoot. The center-left Socialist government that took power two years ago is trying to put some pizazz back into Portugal, enacting a do-or-die raft of contested reforms.

There is good news. The textile sector, for example, is modernizing and its exports grew 4.1% in the first half of this year. Some stifling bureaucratic red tape has been stripped away, making it easier to do business.

Still, as one of the EU’s economic lightweights, the country remains at the mercy of international trends it can’t hope to influence.

The Casa Ferreira fine arts store has cut its staff from 34 to four. Other old grocery and hardware stores in the Bairro Alto quarter, where the owners chat with their customers in cool, dusky interiors, also struggle to compete, and there is a gathering sense of doom in the narrow streets.

“The future isn’t very rosy,” Jeronima Ferreira said.