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

See all articles by Abel M. Mateus

Abel M. Mateus

University College of London (UCL)

Date Written: February 24, 2010

Abstract

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

Mateus, Abel M., Boom and a Long Slump in a Small Economy of the Eurozone: The Portuguese Case (February 24, 2010). Available at SSRN: https://ssrn.com/abstract=1558305 or http://dx.doi.org/10.2139/ssrn.1558305

Abel M. Mateus (Contact Author)

University College of London (UCL) ( email )

Gower St
London WC1E OEG, WC1E 6BT
United Kingdom

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