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Portugal must rebalance its economy and improve education to continue its economic recovery

Franco, F. (2015) “Portugal must rebalance its economy and improve education to continue its economic recovery“, LSE EUROPP, 12 February.


Portugal was one of the worst hit countries by the Eurozone crisis, but emerged from its bailout programme in 2014. As part of our ‘economies of Europe’ series, Francesco Franco provides an account of the development of the Portuguese economy since the crisis, including some of the key challenges it now faces. He notes that Portugal has only posted a current account surplus twice since 1960, and requires a rebalancing of its economy from non-tradable to tradable sectors. He argues Portugal should also aim to increase the education and skills of the existing labour force, given the country currently lags behind other EU states in this area.

Portugal faces two main economic challenges. The first is to rebalance the economy from the non-tradable to the tradable sector. The second is to improve the education and skills of the existing labour force.

The spill-overs of the financial crisis had dire economic consequences in countries with sizable external imbalances and more dysfunctional internal markets. Portugal fared poorly on both and had to ask for international assistance in 2011. On the eve of the emergency loan granted under conditionality by the Troika – the IMF, the ECB and the EU – the current account deficit had averaged 10 per cent of GDP for at least a decade.

The massive capital inflows that started when financial markets became certain of the event of the single currency, somewhere around 1996 or 1997, can be explained by the convergence of nominal interest rates toward German levels. A similar phenomenon occurred in other peripheral European countries and we now know that for most of those countries the inflow of capital did not translate into higher productivity.

There is, however, an idiosyncrasy in the Portuguese case: Portugal has run a current account deficit at least since the balance of payments statistics exist. The only exception here is a small current account surplus in 1969 and last year. Figure 1 below illustrates this picture since the first balance of payments statistics in 1960 until 2014.


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