This European Country Is Cutting the Deficit

March 31st 2017

Like many countries, Portugal was hit hard by the European debt crisis of 2010. But after a period of economic turmoil, it now boasts a more stabilized economy with shrinking deficits— which many highlight as a result of the public sector investment promoted by Socialist Prime Minister, Antonio Costa.

It just goes to show what you can do with a little public spending.

Austerity, or cutting services like pensions and social services, has been the norm in trying to get the damaged economies of European countries back on track. The idea is to use the savings to pay off debt and stabilize the country's finances. 

But in Portugal, the government has rolled back the austerity restrictions on social spending and raising wages. Instead, it has spent more on public services— and the nation has seen an economic boom from an increase in wages and restarting of pension and social service payments. Unemployment has dropped over 2 percent in the year-and-a-half since Costa came to power and instituted his reforms and the deficit has halved.

According to The Economist, Mr. Costa's government "cut the budget deficit by more than half to just under 2.1% of GDP [….] the lowest since Portugal’s transition to democracy in 1974."

Even Fox News reports that the country's economy is slated to grow steadily over the next three years due to high exports and productivity.

Not that this was expected.

As Antonio Barroso, a senior analyst with global advisory firm Teneo Intelligence, told The Economist, “Mr Costa has certainly defied expectations."

Costa's government is a minority government, dependent on a coalition of communists, socialists, and left-leaning parties. Due to the fractious nature of his coalition, he was never meant to make it even this far. As the Financial Times noted wryly in January, "the prime minister has already defied most critics merely by surviving into a second year in office."

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Meanwhile in Greece, a different drama is playing out.  

Greece's economy was another casualty of the 2010 debt crisis that ravaged Europe. And the solutions offered by its creditors, led by Germany, have strings attached.

Each bailout for the Mediterranean nation has come with ever more restrictive austerity measures, tightening the noose around an already "strangled" economy.

 As an IMF report from last year confirmed, the austerity measures have not been effective. Economists from the agency said that austerity leads to economic decline— not the savings it touts as its reason to exist.

“Increased inequality in turn hurts the level and sustainability of growth," the economists wrote in their report. "Even if growth is the sole or main purpose of the neoliberal agenda, advocates of that agenda still need to pay attention to the distributional effects.­”

Greece may leave the E.U.— a "Grexit," if you will— as talks over the latest rounds of bailouts are beginning to collapse amidst increasing economic crisis over debt.

Debt is a problem for Portugal too.

Costa's government still hasn't dealt with the albatross of financial obligations created over the past two decades.

“The country’s high debt levels remain the elephant in the room,” Barroso told The Economist.

But at the moment, the country is financially healthy— and offering a strong example of an alternative path for economic recovery. 

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