Portugal Economic Crisis


Between 2009-16 the Portugal economic experienced a severe economic crisis – characterised by falling GDP, high unemployment, rising government debt and high bond yields. This was caused by a combination of the global recession, lack of competitiveness and limitations of being in the Euro. What caused the Portuguese economic crisis? In the period Q4 2o10 …

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How to Measure Success in the Eurozone?

Earlier in the year, many were speculating the Euro was a risk of breaking up. Up step Mario Draghi with his promise to ‘save the Euro whatever it takes’

Under Mario Draghi, the ECB have done two things to help reassure bond markets:

  1. Long term refinancing for banks – helping to avoid liquidity crisis in banks spilling over into sovereign debt crisis.
  2. Outright monetary transactions – the willingness to buy an unlimited amount of  bonds (in exchange for a country implementing strict fiscal rules)

These policies have helped see bond yield differentials narrow, and there is now more optimism the Euro will survive.



However, it’s curious in the FT article on the Euro crisis FT Person of the year – Mario Draghi , that there is not a single mention of the word ‘unemployment’ or ‘recession’. Just a repetition that Mr Draghi insists austerity can work.

“To give up now, as some suggest, would be tantamount to waste the great sacrifices made by the citizens of Europe,” he says. He also has no time for suggestions that surplus countries such as Germany should inflate away some of their competitive edge. “Inflation is not a policy tool; one does not toy with inflation.”

 It does leave you wondering, how exactly do European policy makers judge success?

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Improvements in Eurozone Competitiveness

In the lead up to the Euro debt crisis, there was a marked divergence in competitiveness within the Eurozone. In fact, some economists suggested that the currency imbalances were the root cause of the Eurozone fiscal crisis. (VOX article)

However, recent evidence suggests some restoration of competitiveness within the Eurozone.

We can examine competitiveness in a couple of ways. To see the divergence in competitiveness,  we can look at unit labour costs. Relative to Germany, unit costs tended to rise much faster in southern Europe.  The graph below shows the divergence of southern European economies compared to Germany. Remember in the Eurozone, this decline in competitiveness could not be offset by devaluation.

Decline in competitiveness in Eurozone

europe's competitiveness crisis
Source: lessons in Europe

Competitiveness and Current Account deficits

This decline in competitiveness was reflected in substantial current account deficits in the south, and current account surpluses in the north.


By 2008/09, countries such as Portugal, Greece, Ireland and Spain had achieved record current account deficits.

To What Extent is Eurozone Competitiveness being Restored?

Unit Labour Costs 2009-2014

unit labour costs
source: OECD Economic Outlook, Volume 2012 Issue 2 – No. 92 – © OECD 2012

This research from the OECD suggests a significant restoration of competitiveness. Note, it includes forecasts for 2013 and 2014. This change in relative competitiveness would explain, at least, part of the fall in current account deficits in southern Europe.

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Is the French Economy at Risk?

The French are not too happy. The rating agency Moody have stripped France of their triple AAA rating – downgrading French debt to AA. [link] It probably wouldn’t be so bad, but their English neighbours still retain a AAA rating, despite having a much higher budget deficit. As the English would say, that’s just not cricket. To rub salt into the wounds, the Economist recently ran a cover with several baguettes wrapped around with a lit fuse ready to explode – The French economy on slow road to Crisis at Economist.com.

Is the French economy really at risk? or is the Economist just indulging in the traditional game of baiting the French?

Positive Signs for the French Economy

1. Bond yields.

french bond yields

So far, the French have been able to weather the Euro crisis. Markets have been reassured that the French economy is strong enough to deal with the twin problems of debt levels and sluggish growth.  Furthermore, if you take the optimistic point of view, there are some signs that Eurozone bond yields have fallen from their previous peaks. The Spanish premier has recently claimed the worst of the Euro crisis is now over.

  • However, as the crisis drags on, the debt to GDP ratio show little sign of immediate improvement, The Eurozone economy is getting dragged into a recession, and  the French look more vulnerable at their exposure to other countries debt, and the growing possibility of years of economic stagnation. Optimism is a good thing, but in the context of the Eurzone, optimistic forecasts for recovery have shown a depressingly regular habit of proving to be wrong. You are hardly reassured when the Spanish Premier claims the worst of the crisis is over.
  • For France, low bond yields are good and they have enabled them to borrow at low rates, but should the economy deteriorate, the markets could quickly turn.

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