In the depths of the financial crisis of 2008, Portugal’s economy faced a plethora of mounting problems. Unemployment increased to 17 per cent, the fiscal deficit was well above the 2.5 per cent mark stipulated by European authorities, and the economy was locked in a downward set of recessions.
Across the west, such macroeconomic decline was increasingly the norm. In response, many European countries, including the UK, turned to austerity as a means of growing the economy by cutting government spending and liberalising stifled labour markets. This was presented to the public by politicians across the continent as a common sense reaction. Indeed UK PM David Cameron empathetically declared that “we are not doing this because we want to…we are doing this because we have to.”
So when socialist candidate Antoniò Costa was elected leader of Portugal in 2015 with a leftist coalition that included the communists, alarm bells rang throughout Europe. Was this a return to boom and bust economics, filled with unchecked government spending and blatant economic inefficiencies?
Two years later and Costa has achieved the unthinkable. His antiausterity government has presided over a resurgence in the Portuguese economy. According to the OECD, unemployment has consistently fallen to its lowest level in 10 years to 10 per cent. The budget deficit is at the lowest it has been for 40 years at two per cent of GDP. All four quarters of 2016 experienced economic growth, with the third quarter outstripping the UK at 0.8 per cent. Economic budgets since Costa’s election have restored civil servant salaries, invested in social services while at the same time encouraging economic growth. All this in a country once branded by financial markets as one of the ‘PIGS’ of Europe, derided for its high government debt to GDP ratio and spending under the implementation of the Euro.
It is not just the macroeconomic signals that indicate a Portugal on the rise. The vibrant economy is starting to make a significant name for itself in the tech start-up industry. Portugal Ventures, a government investment initiative, has created a €450m access fund to promote innovative start-ups. This has had real effect, with Bloomberg describing Lisbon as the “New West Coast”, highlighting its similarities to San Francisco. The industry’s growth was underlined when Portugal hosted the 2016 Web Summit.
Portugal is identifying and promoting key new industries which will aid their short-term growth into the long term.
Portugal does however need to be realistic about its current position. Although on the right track, it is far from its desired destination, with government debt still a staggering 129 per cent of GDP.
This is then reflected in government bond yields at a high European level of 4 per cent. Although its tech industry certainly looks promising, it still lacks any substantial international firms of which to boast.
Overall though, Portugal shows that a different economic model is possible. That might be pleasing to hear for people in other European countries, tired of the seemingly relentless axe of austerity.