Portugal's adjustment program: the run-up to the sovereign debt crisis, program design, implementation and legacy

This chapter reviews the design and implementation of Portugal’s adjustment program. It also analyzes the program’s main achievements, failures and social costs. The program emphasized fiscal consolidation, structural reforms in the labor and product markets, and deleveraging of the banking sector, with fiscal adjustment being front loaded. It can be qualified as a success in terms of addressing Portugal’s main macroeconomic imbalances and financial risks within EMU. However, expenditure repression dominated expenditure reduction. Progress on structural reforms was also mixed. The recessionary impact of the program was aggravated by the European recession and by limited access to external finance which, together with revenue shortages and legal setbacks, forced the government to go for alternative and lower-quality fiscal measures that in turn contributed to eroding public support for the program and to slowing down the pace of reform. The chapter furthermore discusses how the loss of political ownership and reform fatigue came about in the implementation phase (2011–2014) and how, after exiting the program in 2014, the remaining reform impetus was lost. Finally, it assesses the post-program period (2014–2018), characterized by a low reform effort while Portugal abided (by and large) by its fiscal commitments. Yet, the strategy of avoiding political unrest by favoring current expenditures at the expense of growth-enhancing reforms carries a potentially high cost in terms of future growth and, consequently, for the opportunities of the poorest.