Austerity works. That’s the message of Pedro Passos Coelho, the Portuguese prime minister, to voters. After three years of recession, Portugal registered a return to growth of 0.9 percent in 2014, exited its three-year bailout and the economy is projected to expand a further 1.6 percent in 2015 and 1.8 percent in 2016.
Portugal’s growth figures have led to the country being labeled a “star pupil“ of the eurozone crisis. Advocates say the country demonstrates how the formula of ”expansionary austerity“ can work if prescriptions are followed closely. And the current coalition argues that their successful implementation of austerity policies and structural reforms have moved the Portuguese economy from an import-led to an export-led model. Economic growth registered recently is considered a direct product of this.
But it is by no means clear that the formula of austerity and structural reform is responsible for Portugal’s return to growth. As the main opposition party points out, it was the return of domestic demand that brought the turnaround. And a longer view of Portugal’s economy shows that a shift in the structure of the economy has a longer history than the government recognizes with important implications for future prospects.
The Export Argument …
In the government’s favor it is certainly true that the economy has witnessed a shift towards a greater share of exports during its time in office. In 2011, when it came to power the share of exports as a percentage of GDP stood at 34.3 percent. This has risen to 39.9 percent in 2014—growth which compares favorably to the OECD average which stood at 28.6 percent in 2013 and 28.3 percent in 2011.
As the Banco de Portugal makes clear, this should continue “strengthening the recent trend of reallocation of productive resources to the economic sectors that are more exposed to international competition,” which are therefore more likely to export goods and services. This in turn will ensure that the “Portuguese economy’s net lending should remain stable and the reduction in external indebtedness should be sustained.” Considering it was a debt crisis that needed bailing out, this can only be a good thing and will play a larger role in GDP growth than had been the case in recent history.
… Vs. Demand
Portugal’s opposition Socialist Party points out that the austerity policies that were implemented had a huge effect on domestic demand, as they removed people’s spending power. In 2010 domestic demand had grown by 1.9 percent. When the bailout was introduced in 2011, however, demand dropped by 5.7 percent, dropping another 7.3 percent in 2012 and then 2.5 percent in 2013.
