The Portuguese Economic Crisis: Policies and Outcomes Pedro Portugal Banco de Portugal and NOVA SBE DISCLAIMER: The views expressed are my own, and not necessarily the ones of the Bank of Portugal or the Eurosystem. Berlin, 2015 Pedro Portugal (2015) The Portuguese Economic Crisis Bertelsmann Stiftung 1 / 9
Introduction Portugal is in serious trouble. Productivity growth is anemic. Growth is very low. The budget deficit is large. The current account deficit is very large. In the absence of policy changes, the most likely scenario is one of competitive disinflation, a period of sustained high unemployment until competitiveness has been reestablished. Olivier Blanchard, Portuguese Economic Journal, 2007 Pedro Portugal (2015) The Portuguese Economic Crisis Bertelsmann Stiftung 2 / 9
Portuguese macroeconomic imbalances 0 5 10 15-5 0 5 1995q1 2000q1 2005q1 2010q1 2015q1 1995q1 2000q1 2005q1 2010q1 2015q1 (1) Yield on Government Bonds (2) Real GDP growth -15-10 -5 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 vis-a-vis EZ 80 85 90 95 100 1995q1 2000q1 2005q1 2010q1 2015q1 (3) Current account (4) Unit Labour Costs (vis-a-vis EZ) Pedro Portugal (2015) The Portuguese Economic Crisis Bertelsmann Stiftung 3 / 9
A dysfunctional labor market Poorly designed labor market institutions, in face of severe economic shocks, can lead to disastrous labor market outcomes Extreme employment protection. Near-extreme unemployment protection. Extreme nominal wage rigidity. A wage setting system disconnected from firm specific economic conditions. Generated A sclerotic labor market. A chronic productivity problem in the economy. A fragmented labor market (insiders and outsiders). Pedro Portugal (2015) The Portuguese Economic Crisis Bertelsmann Stiftung 4 / 9
The Portuguese Adjustment Program The Memorandum of Understanding (MoU) Challenging budgetary targets were set. A significant recapitalization of the banking system was initiated. Accompanied by a demanding deleverage of the financial institutions. A long and detailed list of structural reforms across all government areas was crafted. A substantial fiscal devaluation was agreed. The program was successful in a number of dimensions The economic recession is over. Public finances visibly improved. Financial conditions stabilized. External competitiveness has been gradually reestablished. Unemployment rates are finally decreasing. But the negative labor market consequences of the crisis will persist for some time. Pedro Portugal (2015) The Portuguese Economic Crisis Bertelsmann Stiftung 5 / 9
Labor Market Outcomes Labour market outcomes 5 10 15 20 unemployment duration (months) 15 20 25 1995q1 2000q1 2005q1 2010q1 2015q1 1998 2000 2002 2004 2006 2008 2010 2012 2014 (1) Unemployment rate (2) Average unemployment duration 12 104 10 102 100 Cummulated increase since quarter t (percentage points) 8 6 4 2 0 1984 1993 2003 2009 98 96 94 92 90 88 86 1984 1993 2003 2009-2 t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 t+20 t+22 t+24 t+26 Quarters from the first quarter when the unemployment rate started to increase 84 t t+2 t+4 t+6 t+8 t+10 t+12 t+14 t+16 t+18 t+20 t+22 t+24 Quarters from the first quarter (t) when employment started to decline Source: INE and Banco de Portugal estimates. Source: INE and Banco de Portugal estimates. (3) Unemployment rate recovery (4) Employment rate recovery Pedro Portugal (2015) The Portuguese Economic Crisis Bertelsmann Stiftung 6 / 9
Job destruction was exacerbated by the credit crunch The Credit Channel of Job Destruction Portuguese non-financial firms faced severe credit restrictions. Interest rate fragmentation across the Euro-zone is also worrying. There is suggestive evidence that, during this period, more stringent credit constraints were associated with a higher incidence of firm closures and lower net job creation rates. -.15 -.1 -.05 0.05.1.15 Credit Flow Growth to Non-Financial Corporations 2008q1 2009q3 2011q1 2012q3 2014q1 Nominal GDP Total credit Pedro Portugal (2015) The Portuguese Economic Crisis Bertelsmann Stiftung 7 / 9
Job destruction was exacerbated by wage rigidity Wage rigidity channel Downward Nominal Wage Rigidity in High and Low Inflation Regimes (a) Wage Change Distribution, 1984 (inflation rate = 27.1) (b) Wage Change Distribution, 2012 (inflation rate = 2.1) Percent 0 5 10 15 -.2 0.2.4.6.8 Base Wage Change (in log points) Percent 0 20 40 60 80 -.2 0.2.4.6.8 Base Wage Change (in log points) Source: Quadros de Pessoal 1984, Relatorio Único 2012. Pedro Portugal (2015) The Portuguese Economic Crisis Bertelsmann Stiftung 8 / 9
Some Lessons Concluding A recovery program must include jobs The adjustment program, while successful in other dimensions, was disappointing in terms of employment outcomes. The labor market reforms approximated only modestly the Portuguese framework closer to EU mainstream practices. Wage-setting systems still need to be reformed The praised German experience favoring decentralized mechanisms of wage bargaining should be given serious consideration. However, the Portuguese system of industrial relations is firmly rooted in legislation and overwhelmingly governed by the political process. Tax cuts on labor inputs could benefit workers The debate on wage adjustments has not valued enough the possibility that labor cost savings can be achieved through means other than nominal wage cuts. In a low inflation environment, fiscal credits on (labor) earned income may prove to be instrumental reducing structural unemployment. More support for low wage workers A European program subsidizing low wage earners, which also has merits in terms of its desirable cyclical and redistribution properties (e.g., reducing poverty), would make an effective complement of a basic European system of unemployment insurance. Pedro Portugal (2015) The Portuguese Economic Crisis Bertelsmann Stiftung 9 / 9