«Greece gets all the attention, but Portugal’s disastrous decade might hold more lessons for other countries. In a new Heritage Foundation report on budget austerity and fiscal policies, I and colleagues examined those lessons.
The Portuguese government expanded entitlements and raised wages far beyond the country’s productivity. The result was persistently high unemployment, large deficits, tax increases and, finally, major cuts in government services. Columbia University’s Ricardo Reis traces Portugal’s low productivity to an underdeveloped financial sector that failed to fund the growth of productive and profitable firms and, instead, protected many small, inefficient firms.
Even before the global financial crisis took hold in 2008, Portugal had endured a miserable economic period. Far from catching up with the wealthier parts of Europe, it was falling further behind. In 2006, economist Olivier Blanchard warned of a difficult road ahead: “the most likely scenario is … a period of sustained high unemployment until competitiveness has been reestablished.” Unless Portugal’s workers could somehow become more productive, he wrote, they would face “a large decrease in the nominal wage.”
Portugal’s bruises since 2008–recessions, bailouts, austerity bills and high-court vetoes of austerity bills–are the gritty outworking of the diagnosis by Mr. Reis and Mr. Blanchard. At some point, Portugal was going to have to grapple with its too-high wages and too-low productivity. But by waiting until the global recession forced the hard decisions, Portugal’s leaders hurt their chances for a successful adjustment.
Growth returned to Portugal in 2013, but the country’s low productivity and budget woes are still unresolved. Most recently, the country’s highest court blocked an attempt to lower public-sector pay–exactly the type of reform that is necessary for Portugal to escape its decade-long slump.»
«Portugal’s Lost Decade», Salim Furth, senior policy analyst in macroeconomics, Heritage Foundation’s Center for Data Analysis