Portugal’s Austerity Bailout: Lessons of a Dangerous Experiment

Abstract

In May 2011, a liquidity crisis affecting both the banks and the Treasury triggered the intervention of the Troika in Portugal. Three years later, in May 2014, the Portuguese authorities performed what was then called a clean exit from the ‘adjustment’ programme. Meanwhile, the Portuguese sovereign debt, which amounted to 98 per cent of GDP in 2011, escalated to 132 per cent in 2014. Immediately after the supposedly clean exit of the program a new banking crisis surfaced. For the public, the fact that an adjustment programme that was justified by a large public debt and financial fragility has produced an even larger debt and a new banking crisis stands out as paradoxical. The public’s perplexity is justified. The Portuguese people have learned from experience that fiscal consolidation and internal devaluation in the context of a general economic downturn are unable to deliver a sustainable trajectory of the public debt or a recovery of the banking sector. It has further learned that the short-term recessive effects of fiscal consolidation and internal devaluation may be lasting and may hinder recovery. The active and overall population decreased, long-term unemployment and low investment depleted human capabilities and the capital stock. With the bailout experiment Portugal became a poorer country that must serve a much larger debt. In spite of a positive reorientation of government policies away from austerity, in the present framework of the euro, and absent debt restructuring, the prospects for recovery are bleak.