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Boom, Slump, Sudden Stops, Recovery, and Policy Options: Portugal and the Euro

Author

Listed:
  • Blanchard, Olivier

    () (MIT)

  • Portugal, Pedro

    () (Banco de Portugal)

Abstract

Over the past 20 years, Portugal has gone through a boom, a slump, a sudden stop, and now a timid recovery. Unemployment has decreased, but remains high, and output is still far below potential. Competitiveness has improved, but more is needed to keep the current account in check as the economy recovers. Private and public debt are high, both legacies of the boom, the slump and the sudden stop. Productivity growth remains low. Because of high debt and low growth, the recovery remains fragile. We review the history and the main mechanisms at work. We then review a number of policy options, from fiscal consolidation to fiscal expansion, cleaning up of non-performing loans, labor market reforms, product market reforms, and euro exit. We argue that at this point, the main focus of macroeconomic policy should be twofold. The first is the treatment of non- performing loans, which would allow for an increase in demand in the short run and an increase in supply in the medium run. We argue that, to the extent that such treatment requires recapitalization, it makes sense to finance it through an increased fiscal deficit, even in the face of high public debt. The second is product market reforms, and reforms aimed at increasing micro-flexibility in the labor market. Symmetrically, we also argue that at this point, some policies would be undesirable, among them faster fiscal consolidation, measures aimed at decreasing nominal wages and prices, and euro exit.

Suggested Citation

  • Blanchard, Olivier & Portugal, Pedro, 2017. "Boom, Slump, Sudden Stops, Recovery, and Policy Options: Portugal and the Euro," IZA Policy Papers 131, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izapps:pp131
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    References listed on IDEAS

    as
    1. Ricardo Reis, 2015. "Looking for a Success in the Euro Crisis Adjustment Programs: The Case of Portugal," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 433-458.
    2. Carneiro, Anabela & Portugal, Pedro & Varejão, José, 2014. "Catastrophic job Destruction during the Portuguese Economic Crisis," Journal of Macroeconomics, Elsevier, vol. 39(PB), pages 444-457.
    3. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
    4. Vansteenkiste, Isabel, 2017. "Did the crisis permanently scar the Portuguese labour market? Evidence from a Markov-switching Beveridge curve analysis," Working Paper Series 2043, European Central Bank.
    5. Olivier Blanchard & Florence Jaumotte & Prakash Loungani, 2014. "Labor market policies and IMF advice in advanced economies during the Great Recession," IZA Journal of Labor Policy, Springer;Forschungsinstitut zur Zukunft der Arbeit GmbH (IZA), vol. 3(1), pages 1-23, December.
    6. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, September.
    7. Andrea Bassanini & Stefano Scarpetta & Philip Hemmings, 2001. "Economic Growth: The Role of Policies and Institutions: Panel Data. Evidence from OECD Countries," OECD Economics Department Working Papers 283, OECD Publishing.
    8. Ricardo Reis, 2013. "The Portugese Slump and Crash and the Euro Crisis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 44(1 (Spring), pages 143-210.
    9. Reis, Ricardo, 2015. "Looking for a success: the euro crisis adjustment programs," LSE Research Online Documents on Economics 65868, London School of Economics and Political Science, LSE Library.
    10. Olivier Blanchard, 2007. "Adjustment within the euro. The difficult case of Portugal," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 6(1), pages 1-21, April.
    11. Mário Centeno & Cláudia Duarte & Álvaro A. Novo, 2011. "The impact of the minimum wage on low-wage earners," Economic Bulletin and Financial Stability Report Articles and Banco de Portugal Economic Studies, Banco de Portugal, Economics and Research Department.
    12. Paulo Esteves & António Rua, 2015. "Is there a role for domestic demand pressure on export performance?," Empirical Economics, Springer, vol. 49(4), pages 1173-1189, December.
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    Cited by:

    1. Juan Carlos Cuestas & Karsten Staehr & Javier Ordóñez, 2018. "Unit Labour Costs and the Dynamics of Output and Unemployment in the Southern European Crisis Countries," TUT Economic Research Series 41, Department of Finance and Economics, Tallinn University of Technology.

    More about this item

    Keywords

    competitiveness; debt; productivity growth; structural reforms;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • J30 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - General
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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