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How Portugal spent its way to recovery

How Portugal spent its way to recovery

At a time of mounting uncertainty in Europe, Portugal has defied critics who have insisted on austerity as the answer to the Continent’s economic and financial crisis. While countries from Greece to Ireland — and for a stretch, Portugal itself — toed the line, Lisbon resisted, helping to stoke a revival that drove economic growth last year to its highest level in a decade.

The city of Porto, in Portugal. Portugal has defied critics who insisted on austerity as the way out of economic and financial crisis.

The city of Porto, in Portugal. Portugal has defied critics who insisted on austerity as the way out of economic and financial crisis.

Photo: New York Times

The renewal is visible just about everywhere. Hotels, restaurants and shops have opened in droves, fuelled by a tourism surge that has helped cut unemployment in half. In the Beato district of Lisbon, a mega-campus for startups rises from the rubble of a derelict military factory. Bosch, Google and Mercedes-Benz recently opened offices and digital research centres, collectively employing thousands.

Foreign investment in aerospace, construction and other sectors is at a record high. And traditional Portuguese industries, including textiles and paper mills, are putting money into innovation, driving a boom in exports.

“What happened in Portugal shows that too much austerity deepens a recession, and creates a vicious circle,” Prime Minister António Costa said in an interview. “We devised an alternative to austerity, focusing on higher growth, and more and better jobs.”

Voters ushered Costa, a centre-left leader, into power in late 2015 after he promised to reverse cuts to their income, which the previous government had approved to reduce Portugal’s high deficit under the terms of an international bailout of €78 billion euros ($123 billion). Costa formed an unusual alliance with Communist and radical-left parties, which had been shut out of power since the end of Portugal’s dictatorship in 1974. They united with the goal of beating back austerity, while balancing the books to meet eurozone rules.

Storefronts in the city of Porto, Portugal. Hotels, restaurants and shops have opened in droves, fuelled by a tourism surge.

Storefronts in the city of Porto, Portugal. Hotels, restaurants and shops have opened in droves, fuelled by a tourism surge.

Photo: New York Times

The government raised public sector salaries, the minimum wage and pensions and even restored the amount of vacation days to pre-bailout levels over objections from creditors like Germany and the International Monetary Fund. Incentives to stimulate business included development subsidies, tax credits and funding for small and midsize companies.

Costa made up for the give-backs with cuts in infrastructure and other spending, whittling the annual budget deficit to less than 1 per cent of its gross domestic product, compared with 4.4 per cent when he took office. The government is on track to achieve a surplus by 2020, a year ahead of schedule, ending a quarter-century of deficits.

European officials are now admitting that Portugal may have found a better response to the crisis. Recently, they rewarded Lisbon by elevating the country’s finance minister, Mário Centeno, who helped engineer the changes, to president of the Eurogroup, the influential collective of eurozone finance ministers.

The economic about-face had a remarkable effect on Portugal’s collective psyche. While discouragement lingers in Greece after a decade of spending cuts, Portugal’s recovery has pivoted around restoring confidence to get people and businesses motivated again.

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“The actual stimulus spending was very small,” said João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics. “But the country’s mindset became completely different, and from an economic perspective, that’s more impactful than the actual change in policy.”

Yet Portugal’s success is still vulnerable.

Growth is cooling from 2.7 per cent last year, as Costa keeps public investment at a 40-year low to cut the deficit. While he restored public sector salaries to previous levels, they have barely budged since before the crisis. Social precariousness lingers, worsened by the spread of low-paying part-time contracts. And the minimum wage of €580 euros a month, although up, remains one of the lowest in the eurozone.

Portugal’s unions are now threatening strikes to press the government to increase wages and unlock more public spending to reduce inequality.

No place for triumphalism: the Praça do Comércio arch in Lisbon, Portugal. Portugal's recovery is real but fragile as growth is stalling and wages are stagnant.

No place for triumphalism: the Praça do Comércio arch in Lisbon, Portugal. Portugal’s recovery is real but fragile as growth is stalling and wages are stagnant.

Photo: New York Times

Costa insists that the government must keep cutting the deficit to offset the biggest threat to Portugal: its enormous debt, still one of the eurozone’s largest. Portuguese banks are saddled with bad loans from the earlier crisis, and the country remains vulnerable to any financial market turmoil that might be stirred up by problems in nearby Italy.

“We didn’t go from the dark side to the bright side of the moon,” the prime minister said. “There’s still a lot to do.”

“But when we started this process, a lot of people said that what we wanted to achieve was impossible,” he added. “We showed that there is an alternative.”

To cement the growth cycle, the government is putting what little investment it makes into targeted initiatives like tax breaks for foreign companies and training for the unemployed.

An hour and a half east of Lisbon, in Évora, a 2-hectare factory built by the French airplane-parts maker Mecachrome rises from rolling plains fringed with cork trees. Lured in 2016 by government incentives and European Union loans, it invested €30 million euros in a vast aerospace park where bulldozers are flattening fields to make way for roads and businesses.

A Mecachrome aeronautics factory in Évora, Portugal.

A Mecachrome aeronautics factory in Évora, Portugal.

Photo: New York Times

Robots forge precision parts for Airbus, Boeing and other industry giants. Most of the 150 technicians were recruited nearby by an unemployment agency that started an intensive retraining program with the government.

Christian Santos, Mecachrome’s director in Portugal, said he plans to hire 150 more workers and to make millions in additional investments in the next three years.

“Things are happening in Portugal,” he said. “There’s an enthusiastic mojo here.”

New York Times

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