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Eurozone structural reforms: a follow up


    Portuguese austerity measures are ticking all of the right boxes: real GDP growth is forecast to be 1.5% for 2015 and 1.7% a year 2016-2019, the Government are repaying their loans ahead of schedule and the authorities’ short-term macroeconomic projections are in keeping with The European Commission’s 2015 spring forecast. Domestic demand has been given traction by low interest rates and lower income tax and more flexible labour laws are making Portuguese products more competitive. Favourable exchange rates are providing a boost to exports. However, an asphyxiating public and private debt ratio of over 360% of GDP (the highest in the Eurozone), falling job creation and bad loans still plague the economy a year after it exited its bail-out programme. Many of Portugal’s 10 million people feel disillusioned and following the government’s failed attempt to sell Novo Banco – a bank created after the collapse of the country's second-biggest lender –the success of years of harsh austerity measures is now being questioned. And yet, Wolfgang Schäuble, the German Finance Minister, has hailed Portugal the poster child for the Eurozone’s austerity measures.

    The IMF have set a mandated budget deficit target of 2.7% this year that will only be met if the Portuguese Government increases their debt-reducing efforts two-fold. Should Lisbon fall short of this target, the deficit is forecast to swell to 3.2% of economic output. The unemployment rate dropped to 11.9% in the second quarter of 2015 from a peak of 17.5% in the first quarter of 2013 but it is still approximately 3% higher than its pre-crisis levels. This does not take into consideration the 20% of the Portuguese population who have moved abroad, many in search of work: excess of 200,000 people have left the country permanently since 2011. In addition, political turmoil could also throw its fragile recovery off track. It is believed that the general election in October this year will result in a change in governing party from the EU-compliant centre-right government to the anti-austerity Socialist Party. Antonio Costa, the Socialist Party leader, has pledged to roll back the Troika’s reforms and end the country’s “obsession with austerity”. Fiscal structural reforms are advancing, but implementation needs to continue. A sudden politic shift away from its economic reforms could well make the Portuguese economy more of a problem child than a poster child.


    Following a 1.4% growth in its economy in the first quarter of 2015, Ireland is on track to become the fastest growing European economy for the second consecutive year. The €189bn Irish economy expanded by 5.2% last year, its best performance since 2007 and its falling unemployment rate hit a six year low of 9.5% this year. But there are some caveats. Over €30bn (15% of GDP) worth of public spending cuts and tax increases have been introduced but, reportedly, for every €3 of austerity measures, the deficit was cut by only €1. Approximately half of the population report a low level of financial satisfaction despite the fact that their poverty risks are below the EU average. More than 30% of Ireland’s population live in deprivation according to the Central Statistics Office, 40% of which are children and one-in-ten people are at risk of food poverty (i.e. hunger).

    A surging GDP and shrinking unemployment would normally be indicative of an economy on track for recovery. But in Ireland this might not be the case. It is host to a large number of multinational corporations whose sizeable contributions to economic output inflate GDP to a level that is perhaps less representative of the country’s welfare than the EU would have us believe. The profits made by the aforementioned multinational corporations are included in Ireland’s GDP despite them not staying in the country. Alternative indicators of the economy’s health which aims to remove the influence of foreign multinational corporations suggest the Irish recovery is more subdued and that its public debt is 125% of GDP. Moreover, in the last three years, two people of working age have emigrated for everyone one person that is employed. One-in-seven young people has left the country.


    The Dutch economy is strengthening but still facing uncertain recovery. Growth is forecast to be 2% in 2015 and 2.2% in 2016. Statistics Netherlands (CVS) found household spending rose 2.2% in June and business investment has been resilient to the crisis despite its share of GDP being modest compared to other EU countries. Exports are steadily growing due to recovery in the EU and the low value of the euro.

    Since 2008, exports in the Netherlands have grown but private investment and private consumption have declined. Investment is approximately 20% lower than pre-crisis levels, a by-product of the severe contraction in residential investment which is still 30% lower than at the start of 2008. However, there are more job vacancies and more jobs are being created, unemployment is slowly falling and the number of dismissals is decreasing. There is more flexible working: 1 in 5 of the working population are on temporary contracts. Moreover, the PMI index grew 56.2% in June – a promising sign for Dutch entrepreneurs.


    In 2014 GDP grew by 0.9%, the budget deficit was 3.2% of GDP and the unemployment rate stabilised at 8.5%. In the wake of the eurozone crisis, investment has been stronger than in many of its European counterparts whilst public investment remains relatively low. Belgium has few natural resources and thus it imports large quantities of raw materials and predominantly exports manufactures. Its economic recovery is expected to gradually gain traction with rising exports and business investment as other EU economies move towards recovery. In the meantime, Prime Minister Charles Michel’s government has promised to further cut the country’s deficit following pressure from the EU to reduce its public debt of 101% of GDP. He pledges to do so by implementing reforms to stimulate Belgium’s competitiveness via changes to tax policy, labour markets and welfare benefits. Which, in conjunction with constrained public spending and low wage growth, could aggravate already volatile relations with trade unions and suppress much-needed economic growth.

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