RaboResearch - Economic Research

Eurozone (debt) crisis: Country Profile Portugal

Economic Comment


To the Eurzone (debt) crisis overview page 

  • Private and public sector debt were high prior to Portugal’s deep crisis, while the economic structure was weak
  • The economy has undergone an adjustment and economic growth has returned, but it remains to be seen whether Portugal’s low growthproblemhas been addressed
  • In any case, unemployment and public, private and external debt are still very high 


In Portugal, both (external) private and public sector debt were high prior to the crisis. Moreover, the economy experienced weak growth already in the pre-crisis decennia. All these factors are to blame for the country’s deep recession and public debt crisis.

In the pre-crisis years, economic growth in Portugal was already very low. Between 2000 and 2008 per capital GDP grew by just 5%. Portugal’s economic structure was weak and its large, low value added economic sectors such as apparel and footwear industries suffered from growing competition from China. The private sector used euro accession to increase foreign borrowing. However, this borrowing did not result in an improvement of the productivity of the economy and thus only increased the indebtedness of the business sector. Meanwhile, the government (over)invested heavily in infrastructure, but failed to improve the skill set of the population. Portugal did not have a big housing bubble, but did face a very large current account deficit (12% of GDP in 2008). Public debt was not extremely high prior to the crisis (69% of GDP in 2008), but still above the eurozone average at that time (52% of GDP). Moreover, the already sizeable fiscal deficit increased rapidly when the Great Recession started. When Greece ran into trouble in 2010, Portugal was hit by contagion, as investors also started to worry about Portugal’s capability to service its public debt. Financial market unrest was fuelled even more by the proposal of Merkel and Sarkozy late 2010 to accompany future financial assistance from the European Stability Mechanism with debt restructurings. Talks about and the restructuring of privately held sovereign debt in Greece in 2011/2012 also had an effect.

Crisis response

In the end, the crisis response consisted of the (promise of) large scale external assistance, austerity and reform. Portugal received a EUR 78bn Troika programme in the spring of 2011. Even more important was Mario Draghi’s promise in July 2012 to do “whatever it takes” to preserve the euro, and the subsequent announcement of Outright Monetary Transactions. In return for the financial assistance provided by the Troika, Portugal implemented a painful austerity package, consisting of spending cuts and tax increases. Unemployment increased strongly. The government also partly reformed the protected labour and product markets. Together with large recession driven internal devaluation this improved external cost competitiveness. The combination of rising exports and stark import contraction turned the current account deficit into a surplus. However, while the economy has undergone an adjustment and economic growth has returned, it remains to be seen whether Portugal’s low growth problem has been addressed and current account improvements are structural. Labour and product markets remain rather rigid. In any case, public, private and external debt are still very high and it will likely take a long time before debt positions have been substantially built down.


naar boven