Portugal’s Economy
Portugal is situated in the western end of the Iberian Peninsula in Southern Europe and is renowned for its beautiful beaches and unique culture. It is a member of the European Union and the Eurozone, two economic and political unions of Europe. Despite some recent economic issues, including the debt crisis, the country remains an important international market, with a population of approximately 10 million people and a Gross Domestic Product (GDP) of $235 billion.
The Portuguese economy was one of the hardest hit during the eurozone debt crisis of 2009. A decade later and in 2020, the economy is slowly regaining its pre-crisis levels, battling high unemployment and affordability issues. Here, we will explore Portugal’s economy and look into the measures the government has taken and the strategies enacted to overcome the effects of the financial crisis, and to rebuild growth in the Portuguese economy once again.
Portugal’s Pre-crisis Economy
Before the global financial crisis, Portugal was the 7th wealthiest nation in the European Union in terms of Gross Domestic Product per capita (GDP/pc). The pre-crisis period was marked by a growth in Portuguese exports and the rising demand of its products in international markets, meaning manufacturers who supplied major brands had to grow their production capacities.
Moreover, before the crisis, the Portuguese economy was much less diversified and smaller compared to other higher-performing economies of the European Union. This meant that the country was not able to deal with the shock of the crisis when it hit the country.
The Impact of the Global Financial Crisis
The global financial crisis hit Portugal particularly hard, as austerity measures were put in place to limit public spending. This meant that unemployment and public debt both rose exponentially, while real estate values dropped and businesses closed. The impact of the financial crisis was much more severe in Portugal than in any other Western European country.
The country’s high level of public debt, fueled by costly bailouts of Portuguese banks and industries, meant that the International Monetary Fund (IMF) and European Union (EU) had to step in to put together an emergency aid package. This was in addition to the ‘’Fiscal Compact’’ designed to limit government borrowing and to promote economic growth. In exchange, the government implemented a number of austerity measures, aimed at cutting public spending, raising taxes, and limiting wages.
Reforms to Overcome the Debt Crisis in Portugal
After the structural reform package implemented in the wake of the global financial crisis, the country has made significant progress in overcoming the debt crisis. The effort has been praised by the IMF, the European Commission, and other international organisations.
The reforms have included numerous changes to the tax system, such as reducing the corporate tax rate and eliminating some taxes which were seen labour prohibitive.
In addition, reforms have increased access to lending for businesses, improved employment policies and generally reduced obstacles to natural growth in the economy. This has led to a much more business-friendly environment and created more jobs.
Finally, the Portuguese government has also taken measures to ensure more entrepreneurial opportunities for the people of Portugal, with incentives for foreign investment and growth opportunities for domestic equity investors.
Long-Term Positive Effects from the Reforms
The reforms that have been implemented in Portugal’s economy in response to the global financial crisis have resulted in long-term positive effects.
Firstly, the country’s public debt/GDP ratio saw a significant decrease as a result of the reforms. As of December 2019, the ratio has been brought to 113.1%, (down from 126.8% in 2013). This has allowed the country to finance its infrastructure projects and support growth without too much difficulty.
Secondly, the economic picture has significantly improved since the arrangement period. Unemployment formerly around 18.3% in 2013, is now almost halved at 8.3% according to the latest figures from the country’s statistics agency.
The financial situation of households has also improved significantly, with a decrease in the indebtedness levels of citizens and a growth in disposable incomes. This has been driven by an increase in wages, more favourable lending conditions for households, as well as an enhanced social benefits program.
Finally, some of the increased cost of borrowing has been offset by the positive impact of higher economic growth, since economic output enjoys a positive feedback as it grows. The country’s economy underwent an impressive growth spurt in 2017 and 2018, increasing by 2.72% and 2.4% respectively, according to the Institute of National Statistics.
While the global financial crisis hit the Portuguese economy hard, the country has been able to overcome the recession and has started the path of recovery and growth. Reforms in taxes, the labor market and access to financing, have resulted in a more vibrant financial landscape and have enabled the country to be in significantly better shape than it was during the recession.
It has been said that Portugal’s recovery plan is one of the most successful examples of the EU bailouts ever. The economy has seen improvements in its public debt/GDP ratio, has recorded an improvement in unemployment, and a growth in average wages and disposable incomes.
As a result, the strengthened financial condition of the nation makes the country a much more attractive prospect for investment. With increased investment comes the opportunity to foster strong economic growth and rediscover Portugal’s economic prowess.
