The evolution of the Portuguese economy in the first decade of the 21st century demonstrates that excess demand does not lead to sustainable growth. Moreover, the judgment that the developments of 2008, 2009 and 2010 were caused by a shortage of demand motivated expansionary fiscal policy. That error in judgment proved to be fatal as it eventually led to a sudden stop in international private financing.
Overall, it is now clear that Portugal did not adapt its institutions to fit the requirements of euro area participation. Better financing conditions should have triggered real convergence to the core countries in the European Union. Instead, the final result was the accumulation of macroeconomic and financial imbalances. The postponement of their correction led to vulnerability which revealed itself in the context of the global crisis. In April 2011, the request for international financial assistance was unavoidable. This time, adjustment was not only urgent – it was compulsory.
In the early stages of the Economic Adjustment Program, the priority was to correct the most pressing imbalances. Budgetary consolidation was of the utmost importance as it allowed for the accumulation of confidence and credibility at an international level and for the reverse in the long run trend of external deficits. Important progress was also achieved in the two other dimensions of the Program. In the financial sector, the main objective was to preserve stability in the banking system. As for the structural transformation agenda, the main reforms were launched and the privatization program was set in motion. Halfway into the Program, progress has been recorded. As the balance between internal demand and supply was restored in 2012, a new stage in the adjustment process can begin. It is now crucial to consider the transition to economic recovery, so as to successfully complete the Program. The priority is to lay the ground for sustainable growth leading to substantial job creation.
In Portugal, adjustment has come at high social cost. That is clear from the rise in the unemployment rate much above original forecasts. According to the initial projections in May 2011, the unemployment rate would reach 12.1% in 2011 and 13.4% in 2012, initiating a downward trend already in 2013. However, the unemployment rate in 2012 averaged 15.7%. In the fourth quarter of the year, 923 thousand people were unemployed. The unemployment rate stood at the unprecedented level of 16.9%.
Unemployment is the most pressing concern in Portugal. The social and economic repercussions are dramatic. Hence, the main priority in this new stage of the Economic Adjustment Program is to create conditions for private investment to contribute to growth. Only productive investment will allow for economic recovery and subsequently job creation. These are the foundations for sustainable growth and successful adjustment in the euro area. They will pave the way for an open, stable and competitive Portuguese economy.
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