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Is Portugal a poster child for austerity?

Written by Jamie Jordan.

Austerity works. That’s the message of Pedro Passos Coelho, the Portuguese prime minister, to voters. After three years of recession, Portugal registered a return to growth of 0.9% in 2014, exited its three-year bailout and the economy is projected to expand a further 1.6% in 2015 and 1.8% in 2016.

Portugal’s growth figures have led to the country being labelled a “star pupil” of the eurozone crisis. Advocates say the country demonstrates how the formula of “expansionary austerity” can work if prescriptions are followed closely. And the current coalition argues that their successful implementation of austerity policies and structural reforms have moved the Portuguese economy from an import-led to an export-led model. Economic growth registered recently is considered a direct product of this.

But it is by no means clear that the formula of austerity and structural reform is responsible for Portugal’s return to growth. As the main opposition party points out, it was the return of domestic demand that brought the turnaround. And a longer view of Portugal’s economy shows that a shift in the structure of the economy has a longer history than the government recognises with important implications for future prospects.

The export argument …

In the government’s favour it is certainly true that the economy has witnessed a shift towards a greater share of exports during its time in office. In 2011, when it came to power the share of exports as a percentage of GDP stood at 34.3%. This has risen to 39.9% in 2014 – growth which compares favourably to the OECD average which stood at 28.6% in 2013 and 28.3% in 2011.

As the Banco de Portugal makes clear, this should continue “strengthening the recent trend of reallocation of productive resources to the economic sectors that are more exposed to international competition”, which are therefore more likely to export goods and services. This in turn will ensure that the “Portuguese economy’s net lending should remain stable and the reduction in external indebtedness should be sustained”. Considering it was a debt crisis that needed bailing out, this can only be a good thing and will play a larger role in GDP growth than had been the case in recent history.

… vs demand

Portugal’s opposition Socialist Party points out that the austerity policies that were implemented had a huge effect on domestic demand, as they removed people’s spending power. In 2010 domestic demand had grown by 1.9%. When the bailout was introduced in 2011, however, demand dropped by 5.7%, dropping another 7.3% in 2012 and then 2.5% in 2013.

The socialists argue that demand only improved after Portugal’s Constitutional Court ruled that a number of the most significant austerity measures were unconstitutional and overturned them in April 2013 and May 2014. These included cuts to state pensions and public sector wages. It was only then that the return to growth began as domestic demand grew by 2.1%.

This argument is convincing, as it is unlikely that an economy based largely on an import-led growth model would find itself altering the dominant foundation upon which growth is pursued in the midst of recession, growing unemployment, and international uncertainty.

The long view

A longer view of Portugal’s economy also does damage to the government’s claim to have found the magic formula for a sustainable economic path forward. Specifically, the government’s argument ignores the fact that Portugal had been experiencing steady growth in exports as a percentage of GDP from 26.7% in 2005 to 31% in 2007.

This has been unparalleled since the late 1980s. It was only with the financial crisis of 2007-08 that export growth stalled, falling to 27.1% in 2009. From this point the steady march back to recent highs continues unabated, a trajectory that would have likely continued had the financial crisis not taken place or been as severe.

The flags of the European Union and Portugal. Image credit: CC by Metropolico/Flickr
The flags of the European Union and Portugal. Image credit: CC by Metropolico/Flickr

In an important sense, then, we can state that the Portuguese economy has witnessed a shift in its structure. However, this can be dated back a decade earlier than claims made by the government.

This occurred at a time when a significant fall in domestic demand saw GDP growth quicklyfollow the same trajectory. In this stagnant domestic environment the need for Portuguese companies to refocus their activities towards external markets became imperative. However, factors such as China joining the World Trade Organisation in 2001 and the eastern enlargement of the European Union in 2004 have presented significant obstacles.

These changes to the global economy introduced much greater international competition for Portuguese companies, which produced products of a similar low value-added profile. While a structural shift in the economy may have taken place in this early period, this in turn did not lead to a sustainable trajectory of export-led growth. This difficult transition is ultimately what led to the debt crisis.

An uncertain future

There is therefore still plenty to be concerned about when discussing the future of the Portuguese economy. The government is wrong to claim that the thesis of “expansionary austerity” has produced a shift from an import-led to an export-led model of growth under its watch. This structural shift has been underway for some time but still seems to have yielded little in the way of a shift in prospects for the economy to sustainably grow.

And the damage inflicted by austerity policies is clear to see in Portugal when you look beyond the headline growth figures. Unemployment remains incredibly high at 13.9% (albeit down from its 16.2% peak in 2013) and long-term unemployment levels were at 60% in 2014, 30% higher than the OECD average. Portugal’s health service has faced severe cuts affecting frontline services, emigration levels among young people especially are soaring, and government debt levels remain at a worryingly high 130% of GDP.

And yet, the likely return to power of the current coalition will only add political weight to the failed logic of austerity. The damage done will take root and growth will ultimately stagnate in an uncertain international environment. In its search for a sustainable growth model Portugal may well be considered a star pupil, but this label has only been achieved by learning bad lessons.

Jamie Jordan is a ESRC PhD Candidate in International Relations at the University of Nottingham. This article first appeared on The Conversation and can be found here. Image credit: CC by David Stanley/Flickr.

Published inAusterityEuropean Politics

2 Comments

  1. nimh nimh

    Thank you for the very interesting economic analysis. But why did you write about “the likely return to power of the current coalition”? The last time the PSD/CDS coalition had been doing well enough in the polls to suggest a return to power was 2012. Even after the last-minute recovery in the polls during the campaign, the polling at the time this article was written were not showing a renewed PSD/CDS majority. And in the end it did fall quite a bit short; the PSD/CDS alliance got just 104 of the 226 seats.

    • nimh nimh

      Well, that teaches me for posting comments before making sure I really know what I’m talking about – I was ill-informed about Portugal’s electoral system. If I understand everything correctly now, the PSD-CDS can be returned to power as a minority government as long as the Socialists abstain instead of joining up with the radical left to block such a government. I guess that’s true for many countries actually. I just discounted the possibility of the Socialists choosing to abstain rather than either insisting on a grand coalition or forming an alternative left-wing government coalition. And it still doesn’t seem clear whether it is indeed “likely” that they will do so and allow the PSD-CDS to return to power. Costa seems to have said some contradictory things about it. We’ll see I guess! Also, there’s only 226 seats known now but 4 more should be coming in, so the PSD-CDS could still increase that current result of 104 seats by a bit.

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