Portugal isn’t Greece. In many ways it is far better off than Greece.
The Economist highlights how Portugal has a smaller budget deficit, less debt relative to GDP, and has actually had a pretty-reform-minded government for some time already.
The government has already been working on fixing the country’s pension system and opposition to spending cuts is far less severe than in Greece.
So why are some such as Nouriel Roubini, and debt markets, worried about the nation’s finances?
One answer is that Portugal’s biggest problem is not primarily fiscal. It concerns growth—or the lack of it. Real GDP growth over the decade since Portugal joined the euro has been the slowest in the zone, despite a boom in Spain, its main trading partner. The country avoided a property bubble of the kind that burst so disastrously in Spain and Ireland. Though it doesn’t help much, Portugal’s already slow growth also made it less vulnerable to the global recession. “Spain was the wild tiger of Europe and had much further to fall when the recession came,” says João Talone, a private-equity manager. “Portuguese companies were already used to extracting value in a difficult climate.”
Low growth reflects a disastrous loss of competitiveness since the country joined the euro. Portugal has lost export-market share to emerging economies (including those of eastern Europe) that churn out similar low-value products. This is largely due to a steady rise in unit labour costs, as wage increases outstripped productivity growth (see chart). One consequence is that the Portuguese, once exemplary savers, have been borrowing heavily abroad. Household debt is now the equivalent of almost 100% of GDP and the debt of non-financial companies is nearly 140%.
So Portugal is still in deep trouble, just for different reasons.
Business Insider Emails & Alerts
Site highlights each day to your inbox.