Reforming the economic and monetary union:

The case of Portugal

Marie Velkoborská
Helena Žáková
Pavel Rýgl
Content

 Brief description of the EU Member State

 Economic development before the crisis
 Impact of financial crisis
 Impact of sovereign debt crisis
 Impact of economical crisis
 Impact of fiscal crisis + Implementation of new EU measures in the monetary
and fiscal policies at the national level
Introduction of Portugal
 Official name: República Portuguesa
 Population: 10 278 000 (2018)
 Capital: Lisbon
 The president of Portugal: Marcelo
Rebelo de Sousa.
 Official language: Portuguese
 Area: 92,090 km²
 2,8% of European Union
 Includes: Porto & North, Coimbra &
Central, Lisbon, Alentejo, Algarve,
Madeira, Azores

Pixabay.com
Introduction of Portugal
 Currency: Euro
 The balance of trade: permanently passive
 GDP per capita to EU average: 23700.00 USD by the end of this quarter

(37400.00 USD in EU)

 Year of EU entry: 1986 (European Community)
 Year of Eurozone entry: 1999

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Economic development before the crisis

 Portugal – agrarian state until 1970s

 Portugal applied for the membership in European community in 1977, finally
joined in 1986
 Since that time Portugal has used Cohesion and Structural Funds represented
2 - 3% of the country's annual GDP
Economic development before the crisis: GDP
 Between 1995 and 2000: GDP increased by more than 4% and even exceeded
5% in 1998.
 1999: Entry to the Eurozone - affects on wage growth, the cost of euro
introduction, a fall in labor productivity, a decline in domestic demand
 2003: first recession during the monitoring period
 2007: first increase

GDP: Year on year growth in %

oecd.org
Economic development before the crisis: inflation

 Between 1988 and 1991: inflation had two-digit values

 1990s in Portugal:
 increasing of prices
 Portuguese economy began to slow down
 long-term decline in inflation
 February 1998 – inflation reached only 1.3%
 One-off effect influening the price level in 2006: increase of VAT
 2008: the value declined again under 1 %

VAT = Value Added Tax (consumption tax placed on a product)

Economic development before the crisis:
unemployment
 In a period of significant GDP growth at levels of 4 % or more, especially
between 1996 and 1998, unemployment declined by more than 2%.
 Between 1998 and 2000: the decline continued
 2000: lowest value in the period under review
 2003: when the country faced recession, it deepened further
 2007: the rate of unemployment increased by 8 %

The rate of unemployment in %

oecd.org
Economic development before the crisis: operation
of monetary policy

 Portugal transferred the monetary policy decisions to the ECB – the exchange
rate depreciation assistance to exporters was depreciated
 the monetary policy of the euro-paying countries is controlled by the ECB →
interest rates at very low to negative levels before 2006
Economic development before the crisis: degree of
openess

 increased substantially over the last four decades

 Through emigration, trade, tourism and foreign investment → changing
patterns of production and consumption, bringing about a structural
transformation
 Portugal became a more open economy since the sixties
 The Portuguese openness ratio measured at current prices grew less than at
constant prices.
Economic development before the crisis: housing
market

 Slowing down of residential investments since the end of the 90’s.

 The house price boom missed Portugal
 Except in 2003, house price growth in Portugal has been generally lacklustre
 Significant house price falls since late 2007
 Beginning of the financial crisis, house prices saw a zero annual growth in
Portugal
 In mid-2009, low interest rates and increased government spending boosted
the housing market
Impact of financial crisis
The Portuguese economy grew before 1999, exceeding the European average

Relevant indicators of financial crisis:

 lack of structural reforms in the labor market
 low levels of human capital productivity
 unpreparedness of Portugal for the Eastern enlargement of the European
Union and China's accession to WTO
 high level of public and private debt
 lack of accountability and lack of transparency of government and public
finances
Impact of financial crisis
The problems and threats faced by the Portuguese banking sector begun to
emerge between 2000 and 2008.

Summary of most serious problems:

 Huge capital inflows (irregular)
 High share of speculative capital held in balance sheets of banks
 The high proportion of Portuguese government debt held by Portuguese banks
 The bursting of the housing bubble in Spain

→ worsening of the expansion of the Portuguese banks

Impact of sovereign debt crisis
European Sovereign Debt Crisis – 2009 (Greece, Ireland, Portugal, …)

Relevant indicators of sovereign debt crisis:

 Long term debt
 Low economic growth
 Loss of competitivness after the introduction of the Euro (2002)

Impacts:
 Government budget deficit
 Government debt
Financial Assistance to Portugal
 Financial aid in 2011 – EUR 78 billion
 Loans of EUR 26 billion between 2011 and 2014
 EFSM
 EFSF
 IMF

 EFSF - European Financial Stability Facility = institution

 EFSM - European Financial Stabilization Mechanism = funding programme

Impact of sovereign debt crisis:
Portugal Government Budget (2000 - 2017)

Source: https://tradingeconomics.com/portugal/government-budget

Maastricht criterion:
The ratio of the annual general government deficit relative to GDP must not exceed 3%.
Impact of sovereign debt crisis:
Portugal Government Debt to GDP (2000 – 2017)

Source: https://tradingeconomics.com/portugal/government-debt-to-gdp
Impact of economical crisis
2009 – 2016
Relevant indicators of economical crisis:
 Falling GDP
 High unemployment
 Rising government debt
 High bond yields

Reasons behind that:

 Global recession
 Lack of competitiveness
 Limitations of being in the Euro
Impact of economical crisis
Portugal GDP growth rate

Source: https://tradingeconomics.com/portugal/gdp-growth
Impact of economical crisis
Portugal unemployment rate

Source: https://tradingeconomics.com/portugal/unemployment-rate
Impact of Fiscal Crisis
 One of the causes
 Intertwined states with same currency and different fiscal policy
 Interconnection – weakening Greece – weakening other states of the union
New EU measuers and Fiscal Crisis
Main measures were set after 2008 by the European Parliament::

Austerity measures: Problems with Austerity measures:

Paying back more debt Do not balance budget (goverments

collect taxes bassed on people
earnings – reduce their earning
means collect less in taxes)

Cutting spendings Cutting spending – cuts earning of

many of its citizens (lose jobs)
Borrowing less So bad pain – politically impossible to
accomplish (big cultural differences
within the euro area)
Impact of Fiscal Crisis
2008 - 2011
 1) Bond emission
 High prices
 Long-term, high interest rates
 Debt is not sustainable
 2) Cuts
 Interventions
 Taxes
 Earnings
 3) Rescue loan 2011
 IMF
 € 78 billion
Impact of Fiscal Crisis

GDP Grow Rate

 Impact of Fiscal Crisis
2013
 Lower salary: Pensions and public employees by 25%
 Cuts 4.8 Billion
 Bill out program
 Angry people
 Success of government = failure for Portuguese people

 Ministerial resignation
 Meet the conditions of creditor institutions
Local stock exchange weakened
 Opposition

PSI's stock index -6%
Demanding early elections
2016
 Procedures from 2009 extended twice
 Unable to meet obligations within deadline

 ECOFIC 12 July 2016

 Deficit more then 3% GDP
 Fiscal effort behind recommendation
 Public deficit 4,4 % GDP in 2015

 Not easy decision

 Not even Symbolic level – Pact would lose credibility
 Still difficult – Brexit,populist political, threats of terrorism
 Already reforming economy
 Recommended new fiscal trajectories
 Elimination of the excessive deficit
Impact of Fiscal Crisis
2018
 Deficit 2018 0,7% of GDP
 Reduction of endowment
 Economic growth accelerated
 Direct foreign invesment,(8%)
 Exports (11%)
 Sustainable growth

Premier Costa
 Deficit for next year 0,2% of GDP

 Repay the IMF loan

 High interest
Conclusion
 EU measurres - a single fiscal policy that could interfere with all Member
States to reduce their spending and loans and raise taxes.
 Fiskal union - unpopular, surrender of authority (surrendering sovereignty to a
higher power in essence of United States of Europe)
 Without this countries will continue to run deficits accumulate debt, degrade
the value of the Euro and threaten stability of Europe
 Can Europe take the necessary steps and create a fiscal union along side of
monetary union?
 Or will the monetary union break up and the Euro disappear
Obrigada pela sua atenção!
Sources
 http://www.oecd.org/
 https://pixabay.com/cs/
 https://www.cnbc.com/2017/08/02/how-portugal-came-back-from-the-brink.html
 https://voxeu.org/article/turnaround-portuguese-economy
 https://youtu.be/q_-K3cuYH1U
 https://www.irozhlas.cz/ekonomika/podle-eu-bude-muset-portugalsko-brzy-pozadat-o-financni
-pomoc_201102181600_lmanouro
2011
 https://www.tyden.cz/rubriky/zahranici/evropa/premierovi-portugalska-se-kvuli-krizi-rozpada-
vlada-pod-rukama_275419.html
2013
 https://www.youtube.com/watch?time_continue=22&v=3IF4loIeZMA
 https://www.youtube.com/watch?v=sQ5BPPeKvxA
 https://www.tyden.cz/rubriky/byznys/portugalsko-do-konce-roku-splati-zachranny-uver-od-mm
f_505003.html
2018
 https://www.zavedenieura.cz/cs/narodni-koordinacni-skupina/tiskove-centrum/aktuality/2016
/portugalsko-a-spanelsko-bez-pokut-za-nad-2686
2016
 https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.26.3.49
Extra

 Germany agreed to repay the bill but only if the debtor countries agreed to
implement strict austerity measures to ensure that it would never happen
again
Impact of Fiscal Crisis
 How much money government collects in taxes and how much it spends + how
much it borrow (deficit spending)
 Before the euro countries had a big rates (about 18%), could now borrow same
as germany (bound by common currency). huge spending programs primarily
for politicians to get elected: More jobs and generous pensions.
 Huge debt – repay with more borrowed money. More borrowing, more
spending – unbalanced fiscal policies. Tighly intertwined. Everything was
working together when the credit was available until 2008 . They couldn´t
borrow money, couldn´t pay people and coulnd´t pay old debts. It started
with Greece and could continued. It needed to be stopped. Everyone looked
to Germany – Austerity measueres
Implementation of new EU measures in the
a) Monetary policies at the national level

 Controls money supply and the interest rates for borrowing money
 Euro area – discontinued their own currencies and their monetary policies
giving control to the European Central Bank (ECB)
Implementation of new EU measures in the b) Fiscal
policies at the national level

 Many different fical policies Key reason for the current debt crisis