In case you were wondering about the Portuguese economy a recent OECD survey tries to steer you in the direction and although the OECD are undobtedly right in many of their observations the case of Portugal also mirrors how being a member of the Euro does not necessarily help you to achieve those honourful demands of convergence.
Let us see what OECD has to say about Portugal’s economy.
Apparently the data and conclusions are dire;
Following a period of convergence to EU average living standards, the catching-up process has stalled since 2000. Real GDP growth averaged less than 1% between 2000 and 2005 and the on-going recovery remains fragile, with annual growth expected to remain below 2% in 2006 07.
Thus, Portugal did not take full advantage of the opportunities created by membership in the EU and the euro area to enhance growth on a sustainable basis. Losses in export market shares have been aggravated by the appreciation of the real exchange rate (as measured by Portuguese unit labour costs relative to those in its trading partners), while a real depreciation through greater wage restraint could have been expected (and would have been desirable) in a period of large slack in demand. As a result of economic weakness and lax policies in the past, the fiscal deficit reached close to 6% of GDP in 2005, an unsustainably high level.
Now now, allow me to put my foot down; at least just a bit. The analysis by OECD clearly touches some important points and the solutions offered are probably also admirable in their own right. However, let us scrutinize the argument about Portugal not taking advantage of being a member of the Euro. In a time of economic problems the Euro is not an opportunity for Portugal (or for Italy for that matter) but a major ball and chain on macroeconomic policy choices. OECD highlights this issue by pointing out that the only macroeconomic tool at Portugal’s disposel is to keep wages from rising to increase its relative productivity. I hardly think this would be the solution for Portugal or for Italy for that matter … do you? In the end Portugal is an example of where the Euro has not worked and in this light the demands of convergence and more generally the aspiration and idea that for example Portugal should converge to the rest of Europe becomes a contradiction because the very institutional framework of the Eurozone is a part of the problem.
Clearly, the OECD survey can used to a lot more than a rant about the Euro but this perspective is particularly important in this case I believe. On a more formal note, this is my last post as a guest poster here at AFOE and I should take the occasion to thank the AFOE-team for letting me in for the last couple of weeks. If you want to hear more from me I can be found at my own blog Alpha.Sources, and two collaborative blogs Cultunomics and Demography.Matters.