In taxes (IMF 2011). Evidently these measures

In my paper I am
going to give a brief overview of Portugal’s economy. I will concentrate mainly
on the period between 2008 and 2017 when Portugal experienced a debt crisis. I
will also elaborate on Portugal’s affiliation to multilateral banks.

 The economy of Portugal is historically known
for its agriculture and manufacturing (Angloinfo, n.d). Since the end of the
dictatorship in the 1970 the economy of Portugal has diversified (Angloinfo,
n.d). “Portugal joined the European Union in 1986 and the European Monetary
Union in 1999” (Angloinfo, n.d). Up until the Euro-crisis the economy of
Portugal did well.

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 Debt and
deficit. After the crisis in 2008 Portugal’s
debt started to increase immensely. The global crisis hit the economy of
Portugal. However the main problem arose because of high current account
imbalance. In 2011 IMF and EU issued a loan to Portugal of 78 billion euros of
which IMF gave a loan of SDR 23.742 billion which is equivalent to 26 billion
euro to Portugal under the condition that the budget deficit will be reduced to
3% of GDP (IMF, 2011). The bailout was given under the terms of the Memorandum
of Understanding on Specific Economic Policy Conditionality (MoU) (Campos Lima and
Manuel Abrantes, 2015). It was signed “by
the Troika institutions – the European Commission (EC), the European Central
Bank (ECB) and the International Monetary Fund (IMF)” (Campos Lima and Manuel Abrantes, 2015). IMF required that Portugal needs to implement austerity measures (IMF,
2011). When Portugal got the bailout from IMF and EU the debt/GDP ratio was
107% (IMF 2011). The measures to reduce the debt were implemented. Government
cut spending, pensions and wages, and increased the taxes (IMF 2011). Evidently
these measures reduced the output and the economy decreased by 1.5%in 2011
(Thomas 2012). The domestic demand
decreased, imports decreased but exports increased when government decreased
its spending (IMF 2011). The debt to GDP ratio has been decreasing
gradually, though it still remains at a high level (European Commission, 2017). Therefore together with high deficit
level and lower growth “makes Portugal vulnerable to changing economic
conditions and rising financing costs” (European
Commission, 2017).

 Labor
market. The head of government Antonio Costa claims that anti-austerity
measures are keys to economic growth because Portugal needs an increase in
private consumption (Amaro, 2017). The crisis displaced workers to low
productivity jobs (Amaro, 2017). With austerity measures the unemployment went
up (IMF 2011).  In 2011 the unemployment
reached 18% and among younger generation it increased to 40% (Amaro, 2017).  Several labor market reforms were made since
2008 (Campos Lima and Manuel Abrantes,
2015). The reforms reduced “the protection against individual and collective
dismissals” and reinforced “the protection of temporary contracts” (Pedroso,
2014) in (Campos Lima and Manuel
Abrantes, 2015). Thus the flexicurity model was affected because the
flexibility of dismissals increased (Campos Lima and Naumann, 2011) in (Campos Lima and Manuel Abrantes, 2015). In 2009 and 2010 the government implemented
measures to reduce the unemployment by decreasing the “eligibility requirements
and extending the period during which claimants were entitled to receive
unemployment benefits” (Campos Lima and
Manuel Abrantes, 2015). However with the introduction of austerity measures in
2011 the policy to reduce the unemployment was suspended (Campos Lima and Manuel Abrantes, 2015). The
government cut the wages in public sector by 3.5%-10% for those who received
more than 1500 Euros (Campos Lima and
Manuel Abrantes, 2015). Some of the measures were deemed as unconstitutional
and they had to be suspended (Campos Lima
and Manuel Abrantes, 2015). For example, the decision to increase the working
hours from 35 hours to 40 hours per week was overturned (Campos Lima and Manuel Abrantes, 2015). Between 2008 and 2015
“and especially since 2011 employer confederations” strengthened their
positions while union confederations lacked the power (Campos Lima and Manuel Abrantes, 2015). As a result two main
trade union confederations initiated five general strikes during the period of
2010-2013, “as many as during the 35 years before (1974-2009)” (Campos Lima and Manuel Abrantes, 2015).
However the influence of employer confederations on the economic growth was not
taken into consideration (Campos Lima and
Manuel Abrantes, 2015). Unfortunately, “none of the goals of the labour market
reforms as set out in the MoU have been achieved” (Campos
Lima and Manuel Abrantes, 2015). The segmentation of labor market did not
decrease despite the fact that dismissals were facilitated (Campos Lima and Manuel Abrantes, 2015). The
measures such as “The reduction of the amount and duration of unemployment
benefits” did not decrease the long-term unemployment rate, which, in fact,
achieved groundbreaking levels and “remained high at around 60 % of total
unemployment in 2016” (European Commission, 2017). “The changes in the
collective bargaining legal framework did not promote organized
decentralization, but rather a dramatic erosion of sector bargaining and
collective agreements coverage”(Campos
Lima and Manuel Abrantes, 2015). The
reforms implemented by Portuguese government to reduce the deficit by reducing
wages and deregulating “social legislation” (Degryse, 2012; Pochet and Degryse,
2013) destroyed “the institutional foundations of inclusiveness in four ways”
in (Campos Lima and Manuel Abrantes,
2015). First, they decreased the employment protection (Campos Lima and Manuel Abrantes, 2015). Second, they lowered the
“unemployment benefits protection” (Campos
Lima and Manuel Abrantes, 2015). Third, they undermined “sector collective
bargaining and collective agreements coverage” (Campos
Lima and Manuel Abrantes, 2015). Fourth, they limited “the effectiveness of
minimum wage provisions” (Campos Lima and
Manuel Abrantes, 2015). “The changes in these four domains represented a
reconfiguration of the Portuguese employment regime towards the liberal
employment regime” (Gallie, 2013; Campos Lima, 2015) in (Campos Lima and Manuel Abrantes, 2015).          

 Current
Account. Since 2008 when the current account deficit was at its peak, it
has been declining gradually (IMF 2011). The current account
balance has been improved though the labor cost has risen which lowers the
competiveness of the goods (European Commission,
2017).  The economic recovery of Portugal was possible
because European Central Bank bought the bonds of Portugal (Amaro, 2017).
Moreover ECB kept the euro low in order to increase the exports (Amaro, 2017). However
higher domestic demand will increase the imports which will negatively affect
the current account balance (European
Commission, 2017).

 Banks.
“In the financial sector, limited progress has been made in tackling the
high level of non-performing loans” (European
Commission, 2017). Credits to both
households and firms declined in 2011 (IMF 2011). Banks’ loan to deposit ratio
has decreased from 167% to 149% in 2011 (IMF 2011). The banking sector
suffers from the problem of non-performing loans which are common especially in
corporate sector (European Commission, 2017).
However, according to IMF, in 2017 Portugal made
a great progress in improving the stability of banking system (IMF.

 Tourism. The decrease of
“unemployment between 2014 and 2016 was about 4.5%” which is considered to be
the most drastic among EU members (European
Commission, 2017). This achievement was due to the expansion of tourism (European Commission, 2017).  Portugal’s
tourism has improved recently (Amaro, 2017). The reductions in value added
taxes from 23% to 13% have bolstered private business (Amaro, 2017). “Data from
the Portuguese statistical office (INE) showed in June that in the first four
months of 2017, Portugal received more than 5.3 million tourists, a 10.9
percent increase in comparison with last year and twice as much growth as seen
in Spain” (Amaro, 2017).

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