A store in Lisbon advertises a liquidation sale in December 2013. (PEDRO NUNES/AFP/Getty Images)
Summary
Portugal has had its share of highs and lows the past three years. Between 2011 and 2013, the country experienced a sovereign debt crisis; the collapse of the center-left government led by Prime Minister Jose Socrates and its replacement by a conservative government led by Prime Minister Pedro Passos Coelho; the signing of a 78 billion-euro ($106 billion) bailout deal with the European Union and the International Monetary Fund; the arrival of international inspectors in charge of scrutinizing the Portuguese economy; and most notably, the application of painful economic reforms and austerity measures like other countries dealing with the ongoing European economic crisis. With Lisbon expected to end its bailout program by mid-May, 2014 promises to be as turbulent as every year since the start of the Portuguese crisis.
Analysis
As part of its bailout deal, Lisbon is expected to cut its budget deficit from 9.8 percent of gross domestic product in 2010 to 3 percent in 2015. The deadline to reach this goal has already been extended (it was originally 2013), but even with more time Lisbon will struggle to keep its deficit within the EU targets; the Portuguese government approved several reductions in public spending and increases in taxes that hurt the economy. Portugal's GDP contracted 1.3 percent in 2011, 3.2 percent in 2012 and an estimated 1.8 percent in 2013. More important, unemployment skyrocketed from 10.6 percent to 17.4 percent between 2009 and 2013, making it the third highest in Europe at the time (behind Greece and Spain, though Portugal has recently been surpassed by Cyprus and Croatia).
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During this time, the traditionally quiet Portuguese society progressively started to express unease with the government. Protests became larger and more frequent, straining the coalition between Coelho's Social Democratic Party and the smaller Democratic and Social Center-People's Party due to differences over economic measures.
Things seemed like they were beginning to change in the past year. After 10 quarters of contraction, the Portuguese economy grew 1.1 percent in the second quarter of 2013. In December, Eurostat announced that Portuguese unemployment had fallen to 15.5 percent, the lowest figure since May 2012. In addition, the promise of intervention in financial markets by the European Central Bank put Portuguese bond yields at their lowest level since receiving financial assistance. This latter fact is particularly important because Lisbon hopes to have a soft transition back to financial markets once its bailout program ends. (In 2013, Portugal sporadically sold some debt to gauge interest and had a successful sale in early January 2014.)
Austerity Measures Strain the Portuguese Government
Portuguese exports are also up. According to the World Bank, exports of goods and services were the equivalent of 39 percent of Portugal's GDP in 2012, up from 28 percent in 2009. Exports grew by 7 percent between September and November 2013 compared to the same period in 2012, according to the Portuguese National Institute of Statistics.
The European Union still accounts for 70 percent of Portugal's exports, but exports outside the continental bloc have been growing. Between September and November, exports to the European Union grew 5.9 percent, while exports outside the union grew 9.7 percent when compared to the same period in 2012. The country is still heavily dependent on exports to neighboring Spain and, to a lesser extent, Germany and France. But the Iberian nation also has strong ties outside the eurozone (most notably with the United Kingdom) and with former colonies such as Angola.
The Portuguese tourism industry is also doing well. Between July and September -- peak season for tourism in the country -- Portuguese hotels received 5.1 million visitors, a 4.7 percent increase from the same period in 2012. Over the same period, the tourism sector's revenue grew 6.4 percent. In a trend that has also been registered in Spain, foreign tourism is becoming increasingly important because the crisis has severely hampered domestic tourism. Like other destinations in southern Europe, Portugal benefited this year from the political crises in competing tourism destinations such as Egypt and Turkey.
Negative Signs
In mid-2012, Portugal approved labor reform applying caps on severance payments, overtime payments and unemployment benefits. The government also applied several packages of austerity measures that froze public sector salaries, lowered pensions and put state-owned companies up for sale. Although the Portuguese Constitutional Court blocked some of these reforms, their effect was felt in 2013. According to a report by the Organisation for Economic Co-operation and Development, unit labor costs fell 0.4 percent in Portugal in the third quarter of 2013 after falling 2.9 percent in the first quarter and 1.9 percent in the second quarter.
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These reforms partly explain Portugal's recent rise in exports but also mean that the country is reaching a point where macroeconomic indicators improve without being reflected in overall quality of life. Eurostat says one in four Portuguese are at risk of poverty, meaning they struggle or fail to pay their bills or struggle or fail to reach a minimum level of consumption of food and basic services. The troika (comprising the European Commission, the European Central Bank and the International Monetary Fund) has criticized Lisbon's planned 3 percent increase of the minimum wage, which has been frozen at 485 euros since 2011. The minimum wage can be expected to become a contentious issue in 2014.
The economic crisis has also led to rising emigration. Between 2011 and 2012, some 200,000 people left Portugal, a country of 10.5 million. In the short term, this eases the economic crisis because there are fewer people competing for jobs and more people sending remittances home. However, in the long run it hurts Lisbon's coffers because a shrinking workforce means fewer people paying taxes. Portugal's active population (those who are either employed or actively seeking employment) dropped 4.3 percent between 2009 and 2013, according to Eurostat. Among other things, this means that people have emigrated or stopped looking for jobs in the formal economy. Unions and left-wing political parties also accuse Lisbon of hiding real unemployment figures, arguing that most of the newly created jobs are precarious or part-time.
A Critical Year
2014 will mark a milestone in the Portuguese crisis because the country's bailout program will formally end in mid-May. During his New Year's Day public speech, President Anibal Cavaco Silva said that 2014 would be a "successful" year for the country but added that Lisbon could request a precautionary credit line to ensure a soft transition back to debt markets.
This puts Portugal in a similar dilemma to the one Ireland faced in late 2013 when its bailout agreement ended. On the one hand, Lisbon expects that a credit line from the European Union and the International Monetary Fund (such a line would not be automatically disbursed but available only if necessary) would enhance Portugal's image in the eyes of financial markets.
On the other hand, Lisbon wants to avoid the kinds of conditionality attached to those types of loans, especially when Passos Coelho's government has to deal with opposition from left-wing parties, unions and, most notably, a very assertive Constitutional Court that often blocks the government's economic reforms. If Lisbon decides to request a precautionary credit line, Portugal's lenders will probably provide it.
Even if Portugal manages to successfully end its bailout this year, some challenges remain. Portugal's debt is around 128 percent of GDP, among the highest in the eurozone. Lisbon is also struggling to reduce its deficit, which is at around 5.5 percent, meaning that further austerity measures will be needed to reach the 3 percent limit set by the European Union. Like all the bailout countries, Portugal's main challenge for the coming years will be to find a balance between the pressure from its lenders and the demands of its citizens, most of whom have seen their quality of life deteriorate since the beginning of the crisis.
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