Boom and a Long Slump in a Small Economy of the Eurozone: The Portuguese Case
33 Pages Posted: 26 Feb 2010 Last revised: 20 Apr 2010
Date Written: February 24, 2010
A case of success up until the 1990s, the Portuguese economy entered into a boom and a long slump with the adoption of the Euro. Entering with an overvalued exchange rate the country required an adjustment process based on deflation and productivity expansion. However, policies undertaken emphasized the expansion of Public Administration and inefficient infrastructure. As a result, the country has built up a large public sector and external debt. These explanations contrast with interpretations in the literature and exposed by national and international organizations. The Portuguese case also illustrates major weaknesses in Public Sector accounting and the analysis of macroeconomic impact of government decisions, since they do not take into account off-balance sheet items and the enlarged Public Sector. Moreover, it shows weaknesses in the solvability ratio of banks, prescribed by regulation, with a large incentive to allocate credit to public securities or government guaranteed loans. In conjunction with the preference of central banks to use that paper for financing commercial banks, it feeds deficits and build-up of public debt. We argue that reforms are required at global level to monitor and avoid the negative impact of those policies.
Keywords: Macroeconomics, Economic Development, Fiscal Policy, Monetary Policy, Monetary Union, European Union, Euro
JEL Classification: E30, E40, E50, E62, E41
Suggested Citation: Suggested Citation