Europeanisation of Public Policy in Southern Europe: Comparative Political Economy From the 2000s to the Crisis by Canan Balkir & H Tolga Bolukbasi & Ebru Ertugal

Author:Canan Balkir & H Tolga Bolukbasi & Ebru Ertugal [Balkir, Canan & Bolukbasi, H Tolga & Ertugal, Ebru]
Language: eng
Format: epub
Tags: Political Science, Comparative Politics, Political Economy, Public Policy, General
ISBN: 9780415742931
Google: OFT3nQEACAAJ
Goodreads: 20605017
Publisher: Routledge
Published: 2014-03-04T00:00:00+00:00

The Europeanisation of Portugal’s Fiscal Policies

Portugal’s economic performance was remarkable in the 1990s. Between 1994 and 2000, real GDP growth (export led, but also boosted by private consumption and fixed investment) averaged more than three per cent annually and economic expansion continued for seven years. In 1996, the fifth year of expansion, GDP growth reached almost four per cent. The unemployment rate fell, reaching a record low of around four per cent in 2000 (one of the lowest in Europe), and inflation was brought down to just over two per cent in 1999. Portugal was also able to meet the Maastricht criteria for fiscal deficit following the consolidation efforts prior to 1997, which brought the deficit down to 2.5 per cent of GDP. One of the important factors that contributed to this performance was the transformation of the financial sector, largely spurred by EU directives in interest rate deregulation, liberalisation of the regulatory framework, privatisation, and freeing of international capital movements (Organisation for Economic Cooperation and Development [OECD] 1999, p. 13). The privatisation programme, one of the most ambitious in Europe at the time (more than 100 firms were sold), was also a contributing factor because it increased competition, enhanced productivity gains, and generated revenues that averaged more than two per cent of GDP per year.

However, starting in 1998, this performance started to deteriorate. The disinflation process was halted and inflation increased 2.8 per cent by the end of that year; the trade deficit deteriorated from 5.4 per cent of GDP in 1997 to 6.6 per cent in 1999. The harmonised consumer price index (CPI) reached over four per cent in early 2001 (above the EU average), pushed by higher oil prices and a weaker euro. Furthermore, economic growth also started to slow, dragged down by the ending of major infrastructure projects and Expo 98. The outset of EMU membership led to a progressive easing of monetary conditions and a sharp decline of interest rates. This happened at a time of high consumer demand in which domestic credit was also booming and the current account deficit was widening (it remained at around ten per cent of GDP up to 2002). EMU entry in 1999 did not alleviate the situation because Portugal was in a more advanced position in the cycle than the other EMU member states (the country was experiencing a credit boom and signs of overheating were starting to emerge), but now monetary policy was in the hands of the ECB and it was making decisions based on developments in the entire EMU area, hence the cut in interest rates in April 1999 (OECD 1999, pp. 10–11). Yet, the tightening of monetary policy, when the ECB started to gradually raise rates from November 1999 on, led to a change of conditions.

Furthermore, the end of the decade, which coincided with the country’s accession to the EMU (meaning the pressure to fulfil the Maastricht criteria was no longer a powerful incentive), also witnessed a slowdown in the fiscal consolidation efforts, which led to the successful reduction of the fiscal deficit between 1994 and 1997.

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