On the eve of the Portuguese democratic revolution in December 1973, the Deutschmark traded for 9,5 Portuguese escudos (0.375 dollars or 37.5 cents at the exchange rate of the time); twenty years later, on the eve of fixing the definitive rate of exchange of Euro currencies, the Deutschmark was worth 102 Portuguese escudos (0.584 dollars or 58.4 cents at the exchange rate of the time).

Devaluation was the most obvious characteristic of a Portuguese macroeconomic situation made of high prices and public deficits. The situation was not substantially different in other countries of the Southern European belt. Indeed one could find this sort of situations in even more vivid colors in Latin America and elsewhere.

One can therefore naturally wonder what made European leaders think that such an odd gathering of countries could easily join together in a single currency zone. Other than political will – which is still the main reason the European Monetary Union exists – and with nearly twenty years of insight, two other explanations should be taken in consideration.

The first was a misunderstanding of the geopolitical consequences of the fall of the Berlin wall.

Germany embarked on a unification process of gigantic economic consequences that weighted heavily on its macroeconomic situation of the 1990’s, leading some observers to believe that Germany had become just a “normal” European country.

This illusion vanished in the aftermath of the Euro creation when Germany, helped by a rigorous reform program authored by Chancellor Schröder, recovered to full strength and accumulated a huge competitive advantage over his neighbors, and most of all, over its Southern neighbors.

Otherwise, the new European Member States from the East, enjoying a higher level of education, lower costs, a will to overcome the heritage of the communist past and a more strategic location in Europe rapidly outperformed Southern Europe, especially in the attraction of foreign investment.

The second and more important explanation for the Euro-zone was the belief by the group of bankers who were charged with setting the conditions for the Euro that once you would have reached three years of macroeconomic stability, all one had to do was to ensure that the members of the monetary union kept their public accounts under strict control. As for private accounts, they believed the “invisible hand” was capable of sorting out all existing imbalances, with no need for a visible hand to act.

External trade imbalances were therefore allowed to grow unchecked across Europe to unsustainable levels. Measured by “net international investment position” in percentage of GDP, the European periphery shows the biggest external debts in the world, with Portugal holding the record.

The notion that these competitive imbalances had to be tackled in order for the Euro to survive and that external accounts rather than public accounts should be the main concern of European economic and monetary policy, took far too a long time to flow into the European institutions and in fact is still has not fully apprehended.

Actually, the European Union is still engaged in the “austerity for all” principle which informs the recently agreed Treaty on Stability, Coordination and Governance (TSCG), as if nothing was learned with the present crisis.

As it was widely predicted by academics and even by foreign leaders, austerity efforts in the European periphery could not produce the expected results, as they were contradicted by the TSCG rules neutralizing them by forcing austerity measures in core European countries.

Portugal, as other countries in Europe, followed a tough austerity measures program, but the results are disappointing if not negative as measured in terms of employment, growth or public accounts and now even in external accounts too.

The Portuguese current accounts external balance remains negative, although it evolved positively up to September 2012, where a sharp decline in exports was registered, destroying existing hopes that this crucial factor for recovery was reacting well enough.

I believe there is still some domestic room for maneuver on two fundamental issues.

The first is the incestuous relationship between vested interests in sectors such as finance, communications and energy, and the state. This is an issue that has been addressed by the team of financial experts assisting the Portugal bailout but to no avail. Obligations from “public private partnerships” and financial institutions that constitute now the biggest budgetary concern need to to be thoroughly reviewed and renegotiated, if need be by opening inquiry procedures on the conditions on which they were established in the first place.

Secondly, the austerity measures have been disproportionately geared towards low income earners, the unemployed and those at lower levels of administration; cuts and ceilings for higher public retirement schemes and salaries, as well as administrative reforms at higher levels of administration are domains where much has still to be done.

But even if the best will be done by the Portuguese authorities, it will be impossible to find a solution, unless Europe takes resolute action in two fundamental domains.

The first has been repeatedly announced but not put into practice, and it consists of giving Member States under bailout programs conditional access to funds from the European Central Bank in the most favorable conditions provided to private borrowers. This is not only a question of justice but a practical question as well, as it is just impossible for Portugal to cope with a diving economy, deflation and paying interest rates that remain undisclosed but that can go as high as 6%.

The second is for Europe to find a way to grow and/or to inflate out its debt burden, even if those countries with the highest debt burden will pursue austerity measures and deflationary policies. These are the only alternatives to a bankruptcy that will inevitably cause a domino effect across the Euro region.

The debt problem can therefore be better described as a growth problem, in both real and nominal terms.

Paulo Casaca, founder and executive director of the Brussels-based NGO Alliance to Renew Co-operation among Humankind, has been a MEP from 1999 to 2009 and a Councillor of the Portuguese Permanent Representation from 1996 to 1999. He has taught economics at the University of the Azores and the University of Lisbon, and has served as an economics adviser to the Socialist Group in Portugal. Paulo was a member of the Portuguese National Parliament and the Azorean Regional Parliament. Read other articles by Paulo.